UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to          
Commission file number 1-3507
ROHM AND HAAS COMPANY
(Exact name of registrant as specified in its charter)
     
DELAWARE   23-1028370
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
100 INDEPENDENCE MALL WEST, PHILADELPHIA, PA   19106
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (215) 592-3000
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of each exchange on which registered
     
Common Stock of $2.50 par value   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ       No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o     No þ
The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2008 was: $5,984,956,521.
The number of shares outstanding of the registrant’s common stock as of February 23, 2009 was 195,267,722.
 
 

 


 

DOCUMENTS INCORPORATED BY REFERENCE
Part III — Definitive Proxy Statement to be filed with the Securities and Exchange Commission, except the Report of the Executive Compensation Committee and Audit Committee Report included therein.

 


 

Rohm and Haas Company 2008 Form 10-K
Table of Contents
         
Item   Page  
PART I
       
Item 1 Business
    1  
Item 1A Cautionary Statements and Risk Factors
    19  
Item 1B Unresolved Staff Comments
    21  
Item 2 Properties
    22  
Item 3 Legal Proceedings
    24  
Item 4 Submission of Matters to a Vote of Security Holders
    24  
 
       
PART II
       
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    25  
Item 6 Selected Financial Data
    28  
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
    29  
Item 7A Quantitative and Qualitative Disclosures about Market Risk
    61  
Item 8 Financial Statements and Supplementary Data
    64  
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    129  
Item 9A Controls and Procedures
    129  
Item 9B Other Information
    129  
 
       
PART III
       
Item 10 Directors, Executive Officers and Corporate Governance
    130  
Item 11 Executive Compensation
    133  
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    133  
Item 13 Certain Relationships and Related Transactions, and Director Independence
    133  
Item 14 Principal Accountant Fees and Services
    133  
 
       
PART IV
       
Item 15 Exhibits and Financial Statement Schedules
    134  
 
       
SIGNATURES
    138  

 


 

PART I
Item 1. Business
The Company
Rohm and Haas Company was incorporated in 1917 under the laws of the State of Delaware. Our shares are traded on the New York Stock Exchange under the symbol “ROH”.
We are a global specialty materials company that began approximately 100 years ago when a chemist, Otto Rohm, and a businessman, Otto Haas, decided to form a partnership to make a unique chemical product for the leather industry. That once tiny firm, now known as Rohm and Haas Company, reported sales of $9.6 billion in 2008 on a portfolio of global businesses including electronic materials, specialty materials and salt. Our products enable the creation of leading-edge consumer goods and other products found in a broad segment of dynamic markets, the largest of which include: building and construction, electronics, packaging and paper, industrial and other, transportation, household and personal care, water and food. To serve these markets, we have significant operations with approximately 98 manufacturing and 33 research facilities in 30 countries with approximately 15,490 employees.
Net Sales (in millions)
(GRAPH)

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Annual Net Sales by Region (in millions)
(GRAPH)
Throughout our history, Rohm and Haas has remained true to the original vision of its founders: to be a high-quality and innovative supplier of highly specialized materials that improve quality of life. In the late 1990’s, we began to diversify our portfolio of product offerings to enhance our specialty chemical business by acquiring Morton International Inc. We also expanded our electronic materials business through the acquisitions of LeaRonal and Rodel, as well as the formation of a joint venture with SKC in 2007 and the acquisition of Gracel Display, Inc. in 2008. To expand our global footprint, we acquired FINNDISP, a paint emulsions operation supporting Northern Europe and the Commonwealth of Independent States (former Soviet Union) in April 2008. During the same period, we have repositioned our portfolio to divest non-strategic businesses including the divestiture of our Automotive Coatings business in 2006. As a result of this activity, we have significantly increased our sales, improved the balance of our portfolio, expanded our geographic reach and product opportunities to meet market needs, and enhanced our cash generating capabilities, while delivering enhanced value for our stockholders.
The businesses within our electronic materials, as well as our specialty chemical portfolio and salt businesses will be discussed in more detail later in this section.
Our Strategic Focus
In September 2006, the Rohm and Haas Board of Directors approved a strategic plan, referred to as Vision 2010, which was designed to create a more focused, more profitable, faster growing company, and which was presented to investors in October 2006. The key elements of Vision 2010 are:
    Position Our Portfolio For Accelerated Growth — by leveraging our integrated acrylic monomer and polymer chain; accelerating investment in Electronic Materials; creating or expanding platforms that address the growing needs in food, health, water, energy, and other areas in the developed and developing worlds; and supplementing our organic growth with highly selective acquisitions which bring a growth platform technology or geographic supplement to our core businesses.
    Build Value-Creating Business Models in Rapidly Developing Economies — by tailoring products to specific local or regional needs; finding solutions that are affordable and meet local requirements; organizing in a manner that enables rapid decision-making; investing in local talent; and building plant facilities that can compete effectively with local and regional players as well as multinational players.

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    Innovate with a Market / Customer Focus — by increasingly shifting the focus and delivery of technology programs closer to the customer, driving to faster and more tailored output.
    Operational Excellence / Continuous Improvement - by maintaining flat conversion costs over the next three years; building more capital-efficient plants in emerging markets; continuing to optimize our global footprint; and increasing global sourcing, especially from low-cost countries.
    Deploy Right Talent in Right Places - by ensuring that leadership talent with the right depth and breadth is in place to drive the profitable growth of our businesses through shifting deployment of more key leaders to locations outside the U.S.; and continuing to drive the nurturing and development of our global workforce.
As more fully described in our definitive proxy statement, filed with the Securities and Exchange Commission on September 29, 2008, for the Special Meeting of Stockholders held on October 29, 2008, we entered into a definitive merger agreement with The Dow Chemical Company on July 10, 2008.
In the period following the signing of the definitive merger agreement with Dow, Rohm and Haas has allocated substantial managerial and other resources to a broad-based effort to plan, within the appropriate legal and regulatory boundaries, for the post-close integration of Rohm and Haas into Dow. Rohm and Haas’ primary strategic focus in the period following entering the definitive merger agreement with Dow has been preparing for the closing of the transaction, and operating in compliance with the interim covenants in the merger agreement.
Cash Generation
We generated $1,040 million, $963 million and $840 million in cash from operating activities during 2008, 2007 and 2006, respectively. During this period, we deployed this cash to enhance stockholder value through strategic investments in our core businesses and technologies, higher dividends, and stock repurchases. In light of the current global recession, we intend to conserve cash while supporting essential business investments through our capital expenditure program and through very selective, small acquisitions.
Corporate Governance
Our company was built upon a strong foundation of core values, which continue today. These values are the bedrock of our success. We strive to operate at the highest levels of integrity and ethics and, in support of this, require that all employees, as well as all the members of our Board of Directors, receive compliance training and annually certify their compliance with our internal Code of Business Conduct and Ethics. Our core values are best summarized as:
    Ethical and legal behavior at all times;
    Integrity in all business interactions; and
    Trust by doing what we promise.
Our Board of Directors devotes substantial time to reviewing our business practices with regard to the norms of institutional integrity. Our Board is comprised of 12 directors, of which 11 are non-employees. The Audit, Nominating and Governance, and Executive Compensation committees of the Board are all entirely composed of independent directors.

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Our Businesses
Our portfolio of businesses is strong, seasonally diverse and well positioned for future growth. Effective January 1, 2007, we realigned our reporting segments and managerial organization as a part of the implementation of our Vision 2010 strategy. The chart below summarizes sales recorded by our seven reportable segments in 2008, 2007, and 2006.
Net Sales by Business Segment (in millions)
(PAI CHART)
ELECTRONIC MATERIALS GROUP
The Electronic Materials group is comprised of two reportable segments: Electronic Technologies and Display Technologies, which are managed under one executive. This group develops, manufactures and delivers materials for use in applications such as telecommunications, consumer electronics and household appliances.
The Display Technologies segment was created in the fourth quarter of 2007 as a result of the significant allocation of resources to our flat panel display business. Previously, the results of our flat panel display business were included in Semiconductor Technologies. The Electronic Technologies segment is an aggregation of our Circuit Board Technologies, Packaging and Finishing Technologies and Semiconductor Technologies businesses.

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ELECTRONIC TECHNOLOGIES
Net Sales (in millions)
()
Net Sales by Business Unit (in millions)
()
Our Electronic Technologies are sold globally, with approximately 23% of sales in North America, 13% in Europe, and 64% in Asia-Pacific.

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Circuit Board Technologies develops, manufactures and delivers the technology, materials and fabrication services for increasingly powerful, high-density printed circuit boards in computers, cell phones, automobiles and many other electronic devices. We are a leading global supplier of specialty chemicals and materials used in the fabrication of printed circuit boards, and are focused on the development of metallization and imaging technologies.
                         
           
Business   Markets   Products   End Uses
 
Circuit Board Technologies
    Electronic devices     Enabling technology for all     Cellular phones
 
    Communication       aspects of the manufacture     Personal computers
 
    Computers       of printed circuit boards     Cars and trucks
 
    Transportation     Products such as:     Electronic games
 
    Recreation       photoresists, solder mask, electroless and electrolytic copper        
Packaging and Finishing Technologies develops, manufactures and delivers innovative materials and processes that boost the performance of a diverse range of electronic, optoelectronic and industrial finishing applications. We supply integrated metallization processes critical for interconnection, corrosion resistance, metal finishing, and decorative applications.
                         
           
Business   Markets   Products   End Uses
 
Packaging and Finishing
    Electronic devices     Materials and technology for     Cellular phones
Technologies
    Connector finishing       integrated circuit packaging,     Personal computers
 
    Semiconductor packaging       connectors and industrial     Cars and trucks
 
            finishing     Home appliances
 
    Surface finishing             Office equipment
 
                    Electronic games
Semiconductor Technologies develops, manufactures and supplies integrated products and technologies on a global basis. We enable our customers to drive leading edge semiconductor design, and to boost performance of semiconductor devices powered by smaller and faster chips. This business also develops and delivers materials used for chemical mechanical planarization (CMP), a process that creates the flawless surfaces required to make faster and more powerful integrated circuits and electronic substrates.
                         
           
Business   Markets   Products   End Uses
 
Semiconductor Technologies
    Electronics and communication     Essential technology for     Cellular phones
      devices       creating state-of-the-art     Personal computers
 
            integrated circuits:     Cars and trucks
 
    Transportation       photoresists, developers,     Home appliances
 
    Home and office goods       removers, anti-reflective     Office equipment
 
    Recreation       coatings, chemical mechanical planarization (CMP) pads and slurries     Electronic games

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DISPLAY TECHNOLOGIES
Net Sales (in millions)
()
*   Includes nine months of sales from the Gracel acquisition.
** Includes six months of sales from acquisition of Kodak light management film technologies and one month of sales from the SKC Haas Display Films joint venture.
Our Display Technologies products are sold mainly in Asia-Pacific with 93% of sales, 6% of sales in Europe and 1% of our sales in North America.
Display Technologies develops, manufactures and sells materials used in the production of electronic displays. This business includes the consolidated results of our joint venture with SKC Corporation of Korea formed on November 30, 2007, SKC Haas Display Films, which develops, manufactures, and sells advanced specialty films and materials used in LCD and plasma displays. These include light diffuser films, micro lens films, optical protection films, release protection films, reflectors, technology for touch panels, Plasma Display Panel filters, and process chemicals used to manufacture LCD color filters. This business also includes leading-edge light management film technology acquired from Eastman Kodak on June 15, 2007, as well as process chemicals used in LCD production originally developed by Rohm and Haas. In April 2008, we acquired Gracel Display, Inc., a leading developer and manufacturer of Organic Light Emitting Diode (OLED) materials. OLED technology offers many performance benefits to improve the brightness, clarity and efficiency of display.
             
             
Business   Markets   Products   End Uses
 
Display Technologies
 
     Electronics and communication devices
 
     Films for LCD displays
     Films for plasma displays
     Process chemicals for LCD displays
     OLED materials
 
     Television monitors
     Computer monitors
     Electronic device displays
SPECIALTY MATERIALS BUSINESS GROUP
The Specialty Materials Business Group encompasses three reportable segments: Paint and Coatings Materials, Packaging and Building Materials, and Primary Materials.
The key driver underlying the creation of this business group was a desire to more clearly align our core Acrylic monomer-polymer chain. By placing all of our Acrylic-based businesses in one coordinated operating group, we have simplified management of this highly integrated set of businesses. Further, we believe that the true economic power of these businesses is better understood by looking at the integrated business as one unit.
We believe we are the largest and most broadly based supplier of acrylic polymers in the markets we serve, and also the largest combined supplier of the key raw materials to make these acrylic polymers, namely methacrylate and acrylate monomers. The largest consumers of the acrylic monomers we produce are our downstream polymer

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businesses — Paint and Coatings Materials and Packaging and Building Materials. We also have a strong third party monomer business in Europe and the Americas.
We have critical mass with the combination of our upstream monomer capacity combined with the breadth of our acrylic polymer product offerings. We believe this gives us a unique competitive advantage in the many markets that we serve globally. Our monomer and polymer supply chains are integrated globally, and we have a strong track record of manufacturing excellence in our many facilities around the world. This integration gives us the reliability, scale, and low cost position that drive our sustainable competitive advantage.
Finally, our integration benefits extend to the technical arena where our expertise in monomers complements our acknowledged leadership in acrylic polymer development for value-added applications.
PAINT AND COATINGS MATERIALS
Net Sales (in millions)
()
Our Paint and Coatings Materials products are sold globally, with approximately 56% of sales in North America, 20% in Europe, 17% in Asia-Pacific and 7% in Latin America. As the building and construction markets are a core focus of this business (in particular the architectural coatings markets), sales for this segment have seasonal fluctuations.
Paint and Coatings Materials is the continuation of our 1953 pioneering acrylic waterborne chemistry. This initial innovation has evolved into our current high quality, technologically advanced product offerings of binders and additives for paint and coatings. Our technology improves the durability, tint retention, adhesion, stain resistance and opacity of paint. Our customer base includes well-known, high-quality paint suppliers. In addition to offering products for the architectural and decorative coatings markets, this business also offers products used in the manufacture of industrial coatings (for use on wood, metal, and in traffic paint); construction materials (for use in roofing materials, insulation, and cement modification); and floor care products.
Our track record of emulsions innovation is fueled by a world-class supply chain with 35 plants around the world and direct sales into approximately 100 countries. This breadth of coverage and the associated market understanding sets us apart from all other suppliers and allows the Paint and Coatings Materials business to map the next generation of advances in a wide array of end use segments, centered in the building and construction markets. The business continues to be the leader in the conversion of solvent to water-based technologies which enables our customers to offer more environmentally friendly products including low-VOC paints, formaldehyde-free insulation and energy efficient reflective roof coatings.
Paint and Coatings Materials continues to invest in advanced technical service programs, pursue targeted research and development in select markets, and establish long-term investments in emerging markets such as China, India and Eastern Europe, allowing us to continue to build our close customer relationships. In April 2008, we acquired FINNDISP, a water-based emulsions operation used in Northern Europe and the Commonwealth of Independent States (former Soviet Union).

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Business   Markets   Products   End Uses
 
Paint and Coatings Materials
 
     Building and construction
     Home improvement
     Industrial coatings
 
     An array of versatile acrylic emulsion polymers and other technologies
     A range of additives, such as thickeners, extenders and opacifiers
 
     House paints
     Traffic paints
     Metal coatings
     Concrete
     Roof coatings
     Insulation
PACKAGING AND BUILDING MATERIALS
Net Sales (in millions)
()
Our Packaging and Building Materials business offers a range of polymers, additives, and formulated value-added products (which utilize a broad range of chemistries and technologies, including our world-class acrylic technology). Packaging and Building Materials’ products are supported with market recognized best-in-class technical support and end-use applications knowledge. Products from this business are sold globally, with approximately 38% in Europe, 36% in North America, 19% in Asia-Pacific and 7% in Latin America.
Packaging and Building Materials has a very broad product line, which includes:
    Formulated adhesives and adhesive polymers used in flexible packaging, tape and label, transportation, and other applications
    Performance enhancing additives for plastics used in a broad array of applications, especially construction materials (e.g. vinyl siding, vinyl windows, vinyl fencing) and packaging
    Processing aids for plastic production
    Specialty polymers and coatings for use in leather, textile, graphic arts, paper, and packaging applications
                         
Business   Markets   Products   End Uses
 
Packaging and Building Materials
    Packaging     Packaging adhesives     Flexible and rigid
    Paper     Plastic additives       packaging
 
    Construction     Pressure sensitive adhesives     Vinyl construction materials
 
    Durables     Specialty polymers       (siding, windows,fencing,
 
    Transporation     Specialty coatings       decks)
 
    Graphic arts     Rubber-to-metal bonding     Paper and film labels and
 
    Leather       adhesives       decals
 
    Textiles     Flocking agents     Consumer, industrial and specialty tapes
 
                    Anti-vibration components
 
                    PVC pipe
 
                    Appliances and business machines

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PRIMARY MATERIALS
Net Sales (in millions)
()
Internal and External Net Sales (in millions)
()
Our Primary Materials business produces methyl methacrylate, acrylic acid and associated esters as well as specialty monomer products which are building blocks used in our downstream polymer businesses and which are also sold externally. Internal consumption of Primary Materials products is principally in the Paint and Coatings Materials and Packaging and Building Materials businesses. Primary Materials also provides polyacrylic acid (PAA) dispersants, opacifiers and rheology modifiers/thickeners to the global household and industrial markets. Our Primary Materials products are sold globally, with approximately 44% of external sales in North America, 43% in Europe, 8% in Latin America and approximately 5% in Asia-Pacific.
                         
Business   Markets   Products   End Uses
 
Primary Materials
    Building and construction     Methyl methacrylate     Adhesives
 
    Personal care     Acrylic acid     Paints and coatings
 
    Packaging     Associated esters     Floor polishes
 
    Household products     Specialty monomers     Hair sprays
 
    Chemicals     Polyacrylic acid
dispersants
    Laundry and dishwasher detergents
 
                    Super absorbent products

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PERFORMANCE MATERIALS GROUP
This reportable segment includes the sales and operating results of our other businesses including Process Chemicals and Biocides, Powder Coatings, and other smaller business units.
Net Sales (in millions)
()
Net Sales by Business Unit (in millions)
()
Regionally, 44% of our Performance Materials Group products are sold in Europe, 32% in North America, 18% in Asia-Pacific and 6% in Latin America.
Process Chemicals and Biocides includes our technology platforms in ion exchange resins and biocides. These technologies continue to be adapted to more advanced applications, such as bioprocessing, advanced water treatment (e.g. ultrapure water for the electronics industry), and microbial protection for both building materials and personal care. In addition to this strong technology capability, this business has global reach and adaptable business models, such as our Viance joint venture for wood preservation.

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Business   Markets   Products   End Uses
 
Process Chemicals and Biocides
 
    Paper
 
    Anion and cation ion exchange resins
 
    Newspaper
 
 
    Industrial and chemical processing
 
    Sodium borohydride and related technologies
 
    Corrosion inhibitors
 
 
    Lubricants and fuels
 
    Salt-forming bases
 
    Pharmaceutical processes
 
 
    Water processing
 
    Adsorbents
 
    Dyes
 
 
    Food processing
 
    Antimicrobials
 
    Soft drinks and juices
 
 
    Electronics
     
    Ultra pure water
 
 
    Bioprocessing
     
    Catalysis
 
 
    Household products
     
    Electricity production
 
 
    Personal care
     
    Paints
 
 
    Building and construction
     
    Wood preservation
 
 
    Biofuels
     
    Biodiesel catalysis and purification
 
Powder Coatings produces a comprehensive line of powder coatings that are sprayed onto consumer and industrial products in a solid form. During the powder coating process, tiny particles receive an electrostatic charge as they pass through a sprayer, which causes them to adhere to the product. The product is later cured at a high temperature, where the particles melt onto the product to form the final coating. Powder coatings are often more cost-effective than liquid coatings, while providing similar or enhanced benefits, including increased durability such as temperature and wear resistance. Our powder coatings are used on a wide variety of products, ranging from door handles to patio and deck furniture, to windshield wipers, televisions and industrial shelving.
             
Business   Markets   Products   End Uses
 
Powder Coatings
 
    Home and office goods
 
    Epoxy, polyester, silicone and acrylic powder coatings
 
    Architectural aluminum
 
 
    Recreation
 
    Lamineer – a low temperature curing coating
 
    Shelving
 
 
    Lawn and garden
     
    Tables and chairs
 
 
    Transportation
     
    Office furniture
 
 
    Building and construction
     
    Cabinetry
 
         
    Machinery
 
         
    Gas grills
 
Also included in the results of our Performance Materials Segment are several small businesses that are building positions based on technology areas outside of the core of the company’s operations. For example, our AgroFresh subsidiary is a global leader in maintaining the freshness of fruits, vegetables and flowers with a portfolio of products and services based on proprietary 1-MCP technology. Significant growth opportunities exist in this business as new global markets and uses are commercialized. AgroFresh is now expanding the use of 1-MCP technology to the protection of field crops from heat and drought stress. InvinsaTM crop stress protection technology is being further developed and commercialized in partnership with Syngenta AB as announced in early 2008.

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SALT

With the acquisition of Morton International, Inc. in 1999, we obtained the rights to some of the most recognized consumer brand names and product symbols in the United States and in Canada. Our well-recognized “little Salt Girl” is the trademark of Morton International, Inc. and one of our most valuable intangible assets. We also acquired the leading brand in Canada, Windsor Salt TM. In 2008, we purchased the Season-All® brand seasoned salt product line from McCormick & Company for $15 million in cash, primarily comprised of $14 million of intangible assets, including $12 million of trade name and $2 million of customer lists. This purchase supports the Salt segment’s strategy of expanding its specialty salt portfolio.
Net Sales (in millions)
()
Salt is produced through vacuum pan production, solar evaporation or mining. Even though the consumer salt business is best known, this segment extends well beyond table and specialty salts and includes salt used for water conditioning, ice control, food processing and chemical/industrial use. Highway ice control sales are driven by the effects of winter weather. This seasonality has balanced our total portfolio of businesses, complementing stronger sales in the spring and summer from many of our Paint and Coatings businesses. Products from this business are sold exclusively in North America.
                         
Business   Markets   Product   End Uses
 
Salt
    Consumer     Salt     Table salt
 
    Food processing             Home and industrial water conditioning salt
 
    Industrial processing             Ice control salt (highway de-icing and consumer)
 
    Chemical processing             Chemical/industrial processing salt
 
    Water conditioning             Industrial food processing
 
    Agricultural                

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Raw Materials

We use a broad range of raw materials across our operations, and the raw materials used vary widely among many of our businesses. In most cases, these raw materials are purchased from multiple sources under short-term and long-term supply contracts. For 2009, we anticipate supply and demand to be balanced, and as such, anticipate the supply of raw materials to be adequate to meet our requirements.
We purchase approximately 3.5 billion pounds annually of a variety of commodity, petrochemical-based chemicals as raw materials for our Paint and Coatings Materials, Packaging and Building Materials, Primary Materials, and Performance Materials Group. The largest consumer of these raw materials is our Primary Materials business which uses raw materials such as propylene (the largest single raw material purchased annually), acetone, ammonia, butanol, ethanol, and methanol to produce acrylate and methacrylate monomers. These monomers are used primarily by our Paint and Coatings Materials, Packaging and Building Materials and Performance Materials Group along with other commodity chemicals such as styrene, vinyl acetate monomer and butadiene to produce their end-use products. The Primary Materials business also sells these monomer products to third parties. We also purchase approximately 22 million British Thermal Units (mmbtu’s) of natural gas for use in our operations. Petroleum-based raw material prices have been volatile, trending upwards and can fluctuate significantly over a relatively short period of time. Raw material prices had a material impact on our consolidated results of operations in 2007 and 2008. Availability of these materials can also vary due to seasonality, supplier capacity and customer demand. We have a procurement plan for 2009 which we believe will meet our requirements.
Our Salt segment relies on rock salt and brine well reserves. Our salt reserves vary, but all salt production locations have sufficient reserves to satisfy anticipated production requirements for the foreseeable future. Salt reserves for solar evaporation facilities are generally regarded as unlimited. With respect to the Salt segment, total salt production in North America in 2008 was approximately 14 million tons.
Competition and Seasonality

We experience vigorous competition in each of our segments. Our competitors include many large, multinational chemical firms based in Europe, Asia and the United States, as well as a number of regional and local competitors. In some cases, we compete against firms that produce commodity chemicals that we purchase as raw materials to make our specialty products. However, we do not believe this places us at any significant competitive disadvantage because most of our products have unique performance characteristics that are required by customers who demand a high-level of customer service and technical expertise from our sales force and scientists. Our Salt segment is considerably impacted by weather related to our sales of highway ice-control salt. To a much lesser extent, sales in the Paint and Coatings Materials segment that are used in the architectural coatings market are also affected by weather, particularly during the spring and summer outdoor painting seasons.
Environmental

A discussion of environmental related factors can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 26: Contingent Liabilities, Guarantees and Commitments in the accompanying Notes to Consolidated Financial Statements.
Research and Development

We believe that one of the keys to our success is product innovation. We are committed to ongoing investment in research and development as a way to differentiate our existing products, while bringing new technologies and innovative, high-value products to market. A few examples of meaningful results from our investment are:
    Silvadur ETTM for protecting non-woven textiles from microbial attack
 
    BD50 and BD19, our latest catalysts for the bio-diesel market
 
    HydrotechTM , an advanced polymer emulsion launched in Europe for use in high gloss coatings
 
    EZ-100TM, an innovative polymer emulsion launched in China for improved stain resistant coatings
 
    Several new products for use in low VOC paint formulations, including a new line of urethane rheology modifiers, RM-895, and a new binder, Rhoplex VSR-2015
 
    New state-of-the-art 193 immersion lithography tool, enabling continued materials innovation for our semiconductor customers
 
    ACuPLANE™ Copper (Cu) Barrier CMP Solution for advanced Cu/low-k interconnect applications
 
    A new line of EnLight™ products for photovoltaic manufacturing, which improve traditional solar cell processing by increasing cell efficiency and increasing manufacturing yields

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We believe that our many intellectual properties, both existing and in development, are of substantial value in the manufacturing, marketing and application of our various products. As such, we allocate a significant amount of our operating budget to research and development. Historically, we have increased our annual spend from year to year. In 2008, total spending increased to $327 million from $296 million in 2007 and $286 million in 2006 to support current growth projects. In 2009, we expect to spend approximately $330 million. Almost 70% of our research and development efforts are currently focused in the Electronic Materials Group and Paint and Coatings Materials segments and our niche businesses. On a consolidated basis, we are not dependent, to a material extent, upon any one trademark, patent or license; however, certain of our businesses may be so dependent.
We employ more than 2,000 technologists around the globe and a list of our technical and research centers throughout the world can be found in Item 2. Properties.
Directors and Executive Officers of the Registrant
DIRECTORS
William J. Avery, formerly, Chairman, Chief Executive Officer and Director, Crown, Cork & Seal Company, Inc., from 1990 until his retirement in 2001. Mr. Avery, 68, has been a director since 1997. Mr. Avery also is a director of the Lincoln Financial Group (Committees: 1, 4)
Raj L. Gupta, Director, Chairman and Chief Executive Officer, Rohm and Haas Company, since May 2008; previously, Chairman, President and Chief Executive Officer, Rohm and Haas Company, from 2005 to 2008; Chairman and Chief Executive Officer, Rohm and Haas Company, from 1999 to 2005; Vice-Chairman, Rohm and Haas Company, from 1998 to 1999. Mr. Gupta, 63, has been a director since 1999. Mr. Gupta also is a director of the Hewlett-Packard Co., Vanguard Group, and Tyco International Ltd. (Committee: 2 (Chair))
David W. Haas, Chairman of the Board and Director, The William Penn Foundation, since 1998; previously, Vice-Chairman, The William Penn Foundation, from 1996 to 1998. Mr. Haas, 53, has been a director since 1999. He is a cousin of Thomas W. Haas. (Committees: 3, 4)
Thomas W. Haas, Chairman of the Corporation and Director, The William Penn Foundation; pilot and flight instructor. Mr. Haas, 53, has been a director since 1999. He is a cousin of David W. Haas. (Committees: 4, 5)
Richard L. Keyser, Chairman and Chief Executive Officer, W.W. Grainger, Inc., since 1997. Mr. Keyser, 66, has been a director since 1999. Mr. Keyser also is a director of W.W. Grainger, Inc., Zebra Technologies Corporation, and Principal Financial Group. (Committees: 2, 4, 5 (Chair))
Rick J. Mills, formerly Vice-President and President — Components Group, Cummins, Inc., from 2005 until his retirement in 2008; previously, Vice-President and Group President — Filtrations, Cummins, Inc., from 2000 to 2005. Mr. Mills, 61, has been a director since 2005. Mr. Mills also is a director of Flowserve Corporation and Gerdau Ameristeel. (Committees: 1, 4)
Sandra O. Moose, President, Strategic Advisory Services, since 2004, and Senior Advisor, The Boston Consulting Group, since 2004; formerly, Senior Vice-President and Director, The Boston Consulting Group, Inc., from 1989 until her retirement in 2003 (Dr. Moose had been employed by The Boston Consulting Group since 1968). Dr. Moose, 67, has been a director since 1981. Dr. Moose is the independent chair of the Natixis Advisor and Loomis Sayles Funds, and also is a director of The AES Corporation and Verizon Communications. (Committees: 2, 3, 4 (Chair))
Gilbert S. Omenn, Director of the Center for Computational Medicine and Bioinformatics, University of Michigan, since 2005; Professor of Internal Medicine, Human Genetics and Public Health, University of Michigan, since 1997; and Chief Executive Officer, The University of Michigan Health System, from 1997 to 2002. Dr. Omenn, 67, has been a director since 1987. Dr. Omenn also is a director of Amgen, Inc. (Committees: 1, 4)
Gary L. Rogers, formerly Vice-Chairman, Executive Officer and Director, General Electric Company, from 2001 until his retirement in 2003; previously, Senior Vice-President, General Electric Company, and President and Chief Executive Officer, GE Plastic, from 1992 to 2001(Mr. Rogers had been employed by General Electric Company in positions of increasing responsibility since 1966). Mr. Rogers, 64, has been a director since 2004. Mr. Rogers also is a director of W.W. Grainger, Inc. and Wyeth. (Committees: 3, 4)

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Ronaldo H. Schmitz, formerly, Member of the Board of Managing Directors, Deutsche Bank AG, from 1991 until his retirement in 2000. Dr. Schmitz, 70, has been a director since 1992. Dr. Schmitz also is a director of Cabot Corporation, GlaxoSmithKline Plc. and the Legal and General Group Plc. (Committees: 1 (Chair), 2, 4)
George M. Whitesides, Woodford L. and Ann A. Flowers Professor of Chemistry and Chemical Biology, Harvard University, since 2004; previously, Mallinckrodt Professor of Chemistry, Harvard University, from 1982 to 2004, and Chairman of the Chemistry Department, Harvard University, from 1986 to 1989. Dr. Whitesides, 69, has been a director since 2005. Dr. Whitesides also is a director of Theravance Inc.
(Committees: 4, 5)
Marna C. Whittington, President and Chief Executive Officer, Nicholas-Applegate a subsidiary of Alliance Global Investors, since 2001, and Chief Operating Officer, Allianz Global Investors AG, since 2002; formerly, Chief Operating Officer, Morgan Stanley Investment Management, from 1996 until her retirement in 2001. Dr. Whittington, 61, has been a director since 1989. Dr. Whittington also is a director of Macy’s, Inc. (Committees: 2, 3 (Chair), 4)
Committees:
1.      Audit
2.       Executive
3.       Executive Compensation
4.      Nominating
5.       Sustainable Development
EXECUTIVE OFFICERS
Our executive officers along with their present position, offices held and activities during the past five years are presented below. All officers normally are elected annually and serve at the pleasure of the Board of Directors.
Patrice Barthelmes, 51, Vice President and Business Group Director, Packaging and Building Materials, since 2007; previously, Vice President and Business Unit Director, Plastics Additives, from 2005 to 2007; Vice President and President, Circuit Board Technologies, Electronic Materials, Europe from 2001 to 2005.
Pierre R. Brondeau, 51, President and Chief Operating Officer, since 2008; previously, Executive Vice President and Business Group Executive, Electronic Materials and Specialty Materials from 2007 to 2008; Vice President and Business Group Executive, Electronic Materials, from 2003 to 2006; President and Chief Executive Officer, Rohm and Haas Electronic Materials LLC and Regional Director, Europe, from 2003 to 2006.
Ruby R. Chandy, 47, Vice President and Chief Marketing Officer, since 2007; previously Vice President, Marketing Scientific Corp., Thermo Fisher from 2005 to 2007; President, Bioscience Technologies Division Scientific Corp., Thermo Fisher from 2003 to 2004.
Jacques M. Croisetiere, 55, Executive Vice President, Chief Financial Officer and Chief Strategy Officer since 2008; previously, Executive Vice President and Chief Financial Officer, 2007; Vice President and Chief Financial Officer, from 2003 to 2006.
Mark Douglas, 46, Vice President and Regional Director, Asia-Pacific, since 2007; previously, Vice President and Director, Procurement and Logistics from 2006 to 2007; Vice President and Director, Procurement from 2005 to 2006; General Manager, Adhesives and Sealants, North America from 2001 to 2005.
Carol S. Eicher, 50, Vice President and Business Unit Director, Primary Materials, since 2007; previously, Vice President and General Manager, Packaging and Building Materials, North America 2007; Vice President and Business Unit Director, Process Chemicals from 2003 to 2006.
Luis Fernandez-Moreno, 46, Vice President and Business Group Director, Paint and Coatings Materials, since 2007; previously, Vice President and Business Director, Architectural and Functional Coatings from 2005 to 2006; Vice President and Business Director, Plastics Additives from 2004 to 2005; Vice President and Regional Director, Latin American Region from 2002 to 2004.
Raj L. Gupta, 63, Director, Chairman and Chief Executive Officer, since 2008, previously, Chairman, President and Chief Executive Officer, from 2005 to 2008; Chairman and Chief Executive Officer, from 1999 to 2005.

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Robert A. Lonergan, 63, Executive Vice President, General Counsel and Corporate Secretary, since 2007; previously, Vice President, General Counsel and Corporate Secretary, from 2002 to 2006.
Richard R. Lovely, 49, Executive Vice President and Director of Human Resources, since 2008; previously, Vice President and Director of Human Resources, from 2007 to 2008; Vice President, Human Resources, Tyco Fire & Security, Tyco International, Inc., from 2004 to 2007.
Guillermo Novo, 46, Vice President and Business Unit Director, Process Chemicals and Biocides, since 2007; previously, Vice President and Business Unit Director, Consumer and Industrial Specialties from 2002 to 2006.
Yi Hyon Paik, 53, Vice President and Business Group Director, Electronic Materials, since 2007; previously, Vice President and President, Microelectronic Technologies, Electronic Materials from 2004 to 2006.
Anne M. Wilms, 51, Executive Vice President and Chief Information Officer, since 2007; previously, Vice President, Chief Information Officer and Director of Human Resources, from 2005 to 2006; Vice President, Chief Information Officer, from 1999 to 2005.

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Where Can You Find More Information About Rohm and Haas Company?

Corporate Office:
100 Independence Mall West
Philadelphia, Pennsylvania 19106-2399
Phone Numbers:
Main line:(215) 592-3000
Investors’ line:1-800-ROH-0466
Website: www.rohmhaas.com (intended to be an inactive textual reference only)
Copies of our corporate governance policies, charters of the Board of Directors and the Board committees and our Code of Business Conduct and Ethics can be obtained free of charge by accessing the Governance section of our website or by writing to the address listed below:
Address:
Rohm and Haas Company
Public Relations Department
100 Independence Mall West
Philadelphia, PA USA 19106-2399

Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with the U.S. Securities and Exchange Commission (SEC) can be obtained free of charge, by accessing the Investors page on our website. Hard copies may be obtained free of charge, excluding exhibits, by writing to the address listed below:
Address:
Rohm and Haas Company
Public Relations Department
100 Independence Mall West
Philadelphia, PA USA 19106-2399
You may also read and copy any materials we file with the U.S. Securities and Exchange Commission (SEC) at the SEC’s Public Reference Room that is located at 100 F St, NE, Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. You can also access our filings through the SEC’s internet site: www.sec.gov (intended to be an inactive textual reference only).

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Item 1A. Risk Factors
The factors described below represent principal risks to our business. While we have programs in place to manage these risks we face, our results could be adversely affected by the occurrence of one or more of these factors.
Ø   Changes in global economic, political and social conditions may adversely affect our financial results.
 
    We are active participants in the markets of North America, Europe, Asia-Pacific, and Latin America. Economic and political conditions and social unrest can cause fluctuations in demand and volatility in the price of raw materials and other costs that can adversely affect our financial results. In addition, economic conditions affecting the building and construction, electronics, packaging and paper, industrial and other, transportation, household and personal care, water and food markets could adversely affect our financial results.
 
Ø   Changes in foreign currencies may adversely affect our financial results.
 
    Approximately 59% of our sales are derived from outside the United States, a significant portion of which are denominated in foreign currencies. We have significant production facilities which are located outside of the United States. Our financial results therefore will be affected by changes in foreign currency rates. We use certain financial instruments to mitigate these effects, but it is not cost effective to hedge our foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our earnings, cash flows and fair values of assets and liabilities. Accordingly, reported sales, net earnings, cash flows and fair values have been and in the future will be affected by changes in foreign exchange rates.
 
Ø   As a multinational company, changes in foreign laws and regulatory requirements, export controls or international tax treaties could adversely affect our financial results.
 
    We may have to comply with unexpected changes in foreign laws and regulatory requirements which could negatively impact our operations and ability to manage our global resources. Export controls or other regulatory restrictions could prevent us from shipping our products into and from some markets. Changes in tax regulation and international tax treaties could reduce the financial performance of our foreign operations.
 
Ø   Deliberate, malicious acts, including terrorism, could damage our facilities, disrupt our operations or injure employees, contractors, customers or the public and adversely affect our financial results.
 
    Intentional acts of destruction could hinder our sales or production and disrupt our supply chain. Our facilities could be damaged or destroyed, reducing our operational production capacity and requiring us to repair or replace our facilities at a substantial cost. Employees, contractors and the public could suffer substantial physical injury for which we could be liable. Governmental authorities may impose security or other requirements that could make our operations more difficult or costly. The consequences of any such actions could adversely affect our financial results.
 
Ø   Actions by our competitors may adversely affect our financial results.
 
    Our products are sold in a competitive, global economy. Competitors include many large multinational chemical firms based in Europe, Asia and the United States. New competitive products or pricing policies of our competitors can materially affect demand for and pricing of our products.
 
Ø   Changes in demand may adversely affect our financial results.
 
    Our financial results are subject to fluctuations in demand, the effective forecasting of customer demand, the seasonal activity of certain of our businesses and weather conditions, particularly for the Salt segment. We also manufacture and sell our products to customers in industries and countries that are experiencing periods of rapid change, most notably countries in Central and Eastern Europe, Turkey, Russia, Latin America and the Asia-Pacific region. These factors can affect demand for our products and therefore may have a significant impact on financial results.
 
Ø   Restrictions on, and increased costs of, raw material supplies and energy may adversely affect our financial results.
 
    We purchase large amounts of raw materials and energy for our businesses. The costs of these materials and energy, in the aggregate, represent a substantial portion of our operating expenses. From time to time, certain raw materials we require become limited. It is likely this will occur again in the future. Should such limitations arise, disruptions of our supply chain may lead to higher prices and/or shortages. Also, the costs of these raw materials and energy vary with market conditions and may be highly volatile. While we try to increase the prices of our products to cover increases in our costs, we may not be able to raise our prices as quickly as the costs rise, if at all, as our customers may not accept these increases. Ultimately, our ability to pass on increases in the cost of raw materials or energy to customers is greatly dependent upon market conditions and raising prices could result in a loss of sales volume. Further, increases in energy prices may increase our shipping

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    costs. These limitations and increased costs could adversely affect our financial results. (See additional discussion of raw materials in Item 1.)
 
Ø   Production facilities are subject to operating risks and capacity limitations that may adversely affect our financial condition or results of operations.
 
    We are dependent on the continued operation of our production facilities. Production facilities are subject to hazards associated with the manufacturing, handling, storage, and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, and environmental risks. Further, from time to time, we may experience capacity limitations in our manufacturing operations. In addition, if we are unable to effectively forecast our customers’ demand, it could affect our ability to successfully manage operating capacity limitations. These hazards, limitations, disruptions in supply and capacity constraints could adversely affect financial results.
 
Ø   An incident affecting the Houston ship channel area may adversely affect our financial results.
 
    An incident affecting the Houston ship channel area could materially impact our financial results as it could significantly affect both our operations because our largest plant is located there; and our sources of supply, as a large portion of our petrochemical supply is from this area.
 
Ø   Failure to develop new technology or the development and successful implementation of new, competing technologies by our competitors could adversely affect future financial results.
 
    If we fail to develop new technology or if our competitors successfully develop and implement new, competing technologies in the market place, our future financial results could be significantly impacted.
 
Ø   Failure of our intellectual property protections could adversely affect future financial results.
 
    We have invested significant resources in intellectual properties such as patents, trademarks, copyrights and trade secrets. Since we depend on these intellectual resources for our financial stability and future growth, we rely on the protection that these intellectual property rights provide. With a significant portion of our operations outside the U.S., we could face challenges in protecting our intellectual property and we may not be able to adequately protect our trademarks and other intellectual property overseas due to uncertainty of laws and enforcement in a number of countries relating to the protection of intellectual property rights. A loss of intellectual property protections could enhance the ability of our competitors to develop competitive products, thereby adversely affecting our financial results.
 
    We also rely on unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position. While it is our policy to enter into confidentiality agreements with our employees and third parties to restrict the use and disclosure of our trade secrets and proprietary know-how, those confidentiality agreements may be breached. In addition, adequate remedies may not be available in the event of an unauthorized use or disclosure of such trade secrets and know-how, and others could obtain knowledge of such trade secrets through independent development or other access by legal means. A breach of these trade secrets and know-how could adversely affect our financial results.
 
Ø   Failure to realize benefits from joint ventures, alliances or acquisitions could adversely affect future financial results.
 
    We have entered, and in the future may enter, into arrangements with other companies to expand product offerings and to enhance our own capabilities. We may continue to make strategic acquisitions and divestitures. In certain of these ventures, we share control with third parties and run the risk of encountering differences of opinion or having difficulty in reaching consensus with respect to certain business issues. In addition, the success of acquisitions of new technologies, companies and products, or arrangements with third parties, is not predictable and there can be no assurance that we will be successful in realizing our objectives, or that realization may not take longer than anticipated, or that there will not be unintended adverse consequences from these actions. These complications and issues arising from our participation in joint ventures, alliances and acquisitions could adversely affect our financial results.
 
Ø   Environmental costs could adversely affect our financial results.
 
    We are subject to extensive federal, state, local and foreign environmental, safety and health laws, and regulations concerning, among other things, emissions in the air, discharges to land and water, and the generation, handling, treatment, and disposal of hazardous waste and other materials. We take our environmental responsibilities very seriously, but there is a risk of environmental impact inherent in chemical manufacturing operations. Future developments and more stringent environmental regulations may require us to make additional unforeseen environmental expenditures. In addition, laws and regulations require significant

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    expenditures for environmental protection equipment, compliance and remediation. These additional costs may adversely affect our financial results.
 
Ø   Litigation results could adversely affect our financial results.
 
    We are subject to litigation in the normal course of business. In addition, we could become subject to additional claims in the future. An adverse outcome of one or more of these litigation matters, both current and those that may affect us in the future, could adversely affect our financial results.
 
Ø   Inability to attract, develop or retain quality employees could adversely impact our ability to achieve our objectives.
 
    We have objectives in our businesses and regions to sustain and grow the company. Continued success in achieving the objectives of the company depends on the recruitment, development and retention of qualified employees. Without these employees, we may not be able to achieve these objectives.
 
Ø   Any damage to our reputation could adversely affect our financial results.
 
    Maintaining a good reputation globally is critical to selling our branded products. If we fail to maintain high standards for product quality, safety and integrity, our reputation could be jeopardized. Adverse publicity, whether or not valid, may reduce demand for our products or cause production and delivery disruptions. Damage to our reputation or loss of confidence in our products for any of these reasons could adversely affect our financial results.
 
Ø   Uncertainty related to our pending merger and contractual restrictions while the merger is pending could adversely affect our business.
 
    As previously disclosed, on July 10, 2008, we entered into a definitive merger agreement with The Dow Chemical Company and Ramses Acquisition Corporation (Dow). Uncertainty about when and whether the merger will be completed and about the effects of the merger may have a material adverse effect on our business. In addition, the merger agreement restricts us from taking specified actions without Dow’s approval. These restrictions could prevent us from pursing attractive business opportunities that may arise prior to the completion of the merger and could otherwise have a material adverse impact on our company.
 
Ø   Failure to complete the transaction with Dow could negatively impact our stock price, future business and financial results.
 
    As previously disclosed, on January 26, 2009, we filed suit in the Delaware Court of Chancery against Dow alleging that, even though all conditions to Dow’s obligation to close the merger have been satisfied, Dow, in breach of its obligations under the Merger Agreement, has refused to consummate the transaction. The suit seeks an order of specific performance requiring Dow to close the merger immediately. If we do not obtain the relief we are seeking in the law suit, there is possibility that the merger will not be completed in a timely manner or at all. If the merger is not completed, we will be subject to certain risks including the following:
    because the current price of our common stock may reflect a market assumption that we will complete the merger, a failure to complete the merger could result in a decline in the price of our common stock; and
 
    the pending merger and related matters may distract our employees from day-to-day operations and require substantial commitments of time and resources, and may also impair our relations with our employees, customers, suppliers and other constituencies.
Item 1B. Unresolved Staff Comments

Rohm and Haas Company has no unresolved staff comments.

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Item 2. Properties
We have significant operations in approximately 98 manufacturing and 34 research facilities in 30 countries. The facilities and the segment to which they relate are detailed in the tables below:
                         
                        Research and
            Reportable   Manufacturing   Technical
    Country   Location   Segment   Locations   Facilities
Non-U.S.
  Argentina   Zarate     (3,4,5 )   X    
 
  Australia   Geelong     (3,4 )   X   X
 
  Bahamas   Inagua     (7 )   X    
 
  Brazil   Jacarei     (3,4,5,6 )   X   X
 
  Canada   Iles-De-La-Madeleine     (7 )   X    
 
      Lindbergh     (7 )   X    
 
      Ojibway     (7 )   X    
 
      Pugwash     (7 )   X    
 
      Regina     (7 )   X    
 
      West Hill     (3,4 )   X    
 
      Windsor     (7 )   X    
 
  China   Beijing     (3,4 )   X    
 
      DongGuan     (1 )   X   X
 
      Hong Kong     (1 )   X   X
 
      Sanshui     (3,4,5 )   X    
 
      Shanghai     (1,3,4,6 )   X   X
 
      Suzhou     (2 )   X    
 
      Weihai     (4 )   X    
 
  Colombia   Barranquilla     (3,4,5 )   X    
 
  Finland   Hanko     (3 )   X    
 
  France   Chauny     (6 )   X    
 
      Lauterbourg     (1,3,4,6 )   X    
 
      Semoy     (4 )   X    
 
      Valbonne     (3,4,6 )       X
 
      Villers-Saint-Paul     (3,5,6 )   X    
 
  Germany   Arnsberg     (6 )   X   X
 
      Bremen     (4 )       X
 
      Frankfurt     (4 )       X
 
  India   Taloja     (3,4 )   X   X
 
      Chennai     (3 )   X    
 
  Indonesia   Cilegon     (3,4,5 )   X    
 
  Italy   Mozzanica     (3,4 )   X    
 
      Mozzate     (4 )   X   X
 
      Parona     (4 )   X    
 
      Romano d’Ezzelino     (6 )   X   X
 
  Japan   Kyoto     (1 )   X    
 
      Mie     (1 )   X    
 
      Nagoya     (3,4 )   X    
 
      Ohmiya     (1 )       X
 
      Sasakami     (1,2 )   X   X
 
      Soma     (6 )   X    
 
  Mexico   Queretaro     (3,4,5,6 )   X    
 
      Toluca     (4 )   X    
 
  Netherlands   Delfzijl     (6 )   X    
 
  New Zealand   Auckland     (3,4 )   X    
 
  Philippines   Las Pinas     (3,4 )   X    
 
  Russia   Ramenskoye     (3 )   X    
 
  Singapore   Singapore     (3,4,6 )   X   X
 
  South Africa   New Germany     (3,4,6 )   X    
 
  South Korea   Cheonan     (1,2 )   X   X
 
  Spain   Castellón     (6 )   X   X
 
  Sweden   Landskrona     (3,4 )   X    
 
  Switzerland   Littau/Lucerne     (1 )   X   X
 
      Buchs/Acima     (6 )   X   X
 
  Taiwan   Chunan     (1 )   X   X
 
      Min-Hsiung     (3,4,5,6 )   X    
 
      Taoyuan Hsien     (1 )   X   X
 
  Thailand   Maptaphut     (3,4,5 )   X    
 
  Turkey   Gebze     (4 )   X    

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                        Research and
            Reportable   Manufacturing   Technical
    Country   Location   Segment   Locations   Facilities
Non-U.S.
  United Kingdom   Coventry     (1 )   X    
      Dewsbury     (3,4 )   X    
 
      Grangemouth     (4 )   X    
 
      Jarrow     (6 )   X    
                         
            Reportable   Manufacturing   Research and
    State   Location   Segment   Locations   Technical Facilities
U.S.
  Arizona   Glendale     (7 )   X    
 
  California   Davis     (6 )       X
 
      Hayward     (3,4 )   X    
 
      La Mirada     (3,4 )   X    
 
      Long Beach     (7 )   X    
 
      Newark     (7 )   X    
 
  Delaware   Newark     (1 )   X   X
 
  Florida   Cape Canaveral     (7 )   X    
 
  Illinois   Kilbourn     (6 )   X    
 
      Elston Dock     (7 )   X    
 
      Elgin     (4,7 )       X
 
      Elk Grove     (4 )   X    
 
      Kankakee     (3,4 )   X    
 
      Ringwood     (3,4 )   X    
 
  Indiana   Warsaw     (6 )   X    
 
  Kansas   Hutchinson     (7 )   X    
 
  Kentucky   Louisville     (3,4,5 )   X    
 
  Louisiana   Weeks Island     (6,7 )   X    
 
  Massachusetts   Marlborough     (1 )   X   X
 
      North Andover     (1 )   X   X
 
      Woburn     (6 )   X   X
 
  Michigan   Manistee     (7 )   X    
 
  New Jersey   Perth Amboy     (7 )   X    
 
  New York   Freeport     (1 )   X   X
 
      Rochester     (2 )   X   X
 
      Silver Springs     (7 )   X    
 
  North Carolina   Charlotte     (3,4 )   X   X
 
  Ohio   Cincinnati     (4,6 )   X    
 
      Fairport     (7 )   X    
 
      Rittman     (7 )   X    
 
      West Alexandria     (4 )   X   X
 
  Pennsylvania   Bristol     (3,4,5,6 )   X    
 
      Philadelphia     (6 )   X    
 
      Reading     (6 )   X   X
 
      Spring House     (3,4,5,6 )       X
 
  Tennessee   Knoxville     (3,4,5,6 )   X    
 
  Texas   Bayport     (5,6 )   X    
 
      Deer Park     (5,6 )   X   X
 
      Lone Star     (3,4 )   X    
 
      Grand Saline     (7 )   X    
 
  Utah   Grantsville     (7 )   X    
 
  Washington   Elma     (6 )   X    
 
(1)   Electronic Technologies
 
(2)   Display Technologies
 
(3)   Paint and Coatings Materials
 
(4)   Packaging and Building Materials
 
(5)   Primary Materials
 
(6)   Performance Materials Group
 
(7)   Salt, including mines and evaporation facilities

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We consider our facilities to be well maintained and suitably equipped to meet the production requirements of each of our business segments.
Safety is a key focus, and the overall corporate safety record improved to a rate of 0.76 injuries for every 200,000 hours worked in 2008 from 0.81 injuries for every 200,000 hours worked in 2007 and 0.94 injuries for every 200,000 hours worked in 2006.
Item 3. Legal Proceedings
     A discussion of legal proceedings is incorporated herein by reference to Item 7. Management’s Discussion and Analysis and Note 26 to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
On October 29, 2008, we held a special meeting of stockholders to adopt the merger agreement under which Rohm and Haas would be acquired by The Dow Chemical Company. The vote was 170,146,218 for the merger, 785,635 against and 294,115 abstentions.

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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “ROH.” On February 23, 2009, there were 7,769 registered stockholders of our common stock. Below is a summary of the New York Stock Exchange Composite high and low closing prices of Rohm and Haas Company’s stock as well as the cash dividend paid per share for each quarter of 2006, 2007 and 2008. On February 23, 2009, the last sales price of our common stock was $53.50.
                         
Period   High   Low   Cash Dividend
2006
                       
1st Quarter
  $ 51.56     $ 49.96     $ 0.29  
2nd Quarter
    52.60       45.24       0.33  
3rd Quarter
    50.56       42.77       0.33  
4th Quarter
    53.86       46.71       0.33  
 
                       
2007
                       
1st Quarter
  $ 57.54     $ 49.68     $ 0.33  
2nd Quarter
    55.59       49.81       0.37  
3rd Quarter
    62.68       52.15       0.37  
4th Quarter
    57.85       47.05       0.37  
 
                       
2008
                       
1st Quarter
  $ 55.52     $ 47.81     $ 0.37  
2nd Quarter
    60.60       46.44       0.41  
3rd Quarter
    75.68       44.83       0.41  
4th Quarter
    73.75       53.34       0.41  
Stock Price Highs and Lows
(LINE CHART)

25


 

The following table provides information relating to our purchases of our common stock during the quarter ended December 31, 2008:
                                 
                    Total Number of Shares   Approximate Dollar Value
    Total Number   Average Price   Purchased as Part of   of Shares that May Yet Be
    of Shares   Paid per   Publicly Announced   Purchased Under the Plans or
Period   Purchased(1)   Share   Plans or Programs(2)   Programs(2)
October 1, 2008 - October 31, 2008
    10,183       68.33           $ 1,000,000,000  
November 1, 2008 - November 30, 2008
    43       70.18             1,000,000,000  
December 1, 2008 - December 31, 2008
    2,162       59.03             1,000,000,000  
Total
    12,388       66.71           $ 1,000,000,000  
 
Notes:
 
(1)   Zero shares were purchased as a result of employee stock option exercises (stock swaps) and 12,388 shares were acquired as a result of employees electing to withhold shares to cover taxes for the vesting of restricted stock.
 
(2)   On July 16, 2007, our Board of Directors authorized the repurchase of up to $2 billion of our common stock, the first $1 billion of which was financed with debt. For the debt financed portion of this authorization, we entered into an accelerated share repurchase agreement (“ASR”) with Goldman, Sachs & Co. (“Goldman Sachs”) on September 10, 2007. Under the ASR, we paid $1 billion to Goldman Sachs and initially received approximately 16.2 million of shares of our common stock on September 11, 2007. In June 2008, upon closing of the ASR, we received an additional 3.1 million shares. The average share price for the 19.3 million total shares repurchased was $51.56, approximately 3% below the average market price of our stock during the repurchase period. We have discontinued repurchasing our shares.

26


 

FIVE-YEAR CUMULATIVE TOTAL RETURN TO STOCKHOLDERS
Rohm and Haas, S&P 500 Composite Index, S&P 500 Chemicals Index and
S&P 500 Specialty Chemicals Index
% Return to Shareholders 2004 to 2008
(LINE CHART)
Source: Bloomberg
This comparison above reflects the five-year cumulative total return of an investment made on December 31, 2003 in Rohm and Haas common stock, the S&P 500 Composite Index, the S&P 500 Chemicals Index and the S&P 500 Specialty Chemicals Index and the reinvestment of dividends.

27


 

Item 6. Selected Financial Data
The following sets forth selected consolidated financial data for the years presented below as derived from our historical financial statements. Also see Consolidated Results of Operations for the years ended December 31, 2006 through December 31, 2008 in Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information (see Item 7.).
Five-Year Summary of Selected Financial Data
(in millions, except per share, stockholders and employees)
                                         
    For the Year Ended December 31,
See notes   2008   2007   2006   2005(1)   2004(1)
 
Statement of Operating Information
                                       
Net sales
  $ 9,575     $ 8,897     $ 8,230     $ 7,885     $ 7,186  
Gross profit (4)
    2,410       2,467       2,483       2,373       2,116  
Earnings from continuing operations before income taxes and minority interest  
    561       880       1,042       868        698  
Earnings from continuing operations
    480       660       755       616       484  
Discontinued operations:
                                       
Income (loss) from discontinued line of business, net of income tax
    2       1       (4 )     22       12  
 
                                       
(Loss) gain on disposal of discontinued line of business, net of income tax
                (16 )     (1 )     1  
Net earnings
  $ 482     $ 661         735     $ 637     $ 497  
 
                                       
As a % of Net Sales (4)
                                       
Gross profit
    25.2 %     27.7 %     30.2 %     30.1 %     29.4 %
Selling and administrative expense
    11.9 %     12.3 %     12.6 %     12.8 %     13.9 %
Research and development expense
    3.4 %     3.3 %     3.5 %     3.3 %     3.5 %
 
 
                                       
Earnings from continuing operations
                                       
Basic
  $ 2.48     $ 3.17     $ 3.45     $ 2.78     $ 2.17  
Diluted
    2.44       3.12       3.41       2.75       2.16  
 
                                       
Cash dividends per common share
  $ 1.60     $ 1.44     $ 1.28     $ 1.12     $ 0.97  
Common stock price:
                                       
High
  $ 75.68     $ 62.68     $ 53.86     $ 50.00     $ 45.41  
Low
    44.83       47.05       42.77       39.47       35.90  
Year-end close
    61.79       53.07       51.12       48.42       44.23  
Weighted average number of common shares outstanding — basic
    193.6       207.8       218.9       221.9       222.9  
 
                                       
Weighted average number of common shares outstanding — diluted
    196.5       211.0       221.2       223.9       224.2  
 
 
                                       
Balance Sheet Data (4)
                                       
Land, buildings and equipment, gross
  $ 8,893     $ 8,779     $ 8,150     $ 7,850     $ 7,940  
Total assets
    9,909       10,107       9,553       9,695       10,095  
Current portion of long-term debt
    38       8       281       11       11  
Other short-term borrowings
    139       150       112       110       66  
Long-term debt
    3,210       3,139       1,688       2,074       2,563  
Total debt
    3,387       3,297       2,081       2,195       2,640  
Stockholders’ equity(2), (3)
    2,976       3,146       4,031       3,917       3,697  
Number of registered stockholders
    7,891       8,584       8,957       8,406       8,726  
Number of employees
    15,490       15,710       15,815       15,924       16,067  
 
Notes:
 
(1)   The results of the years ended December 31, 2004 and 2005 have been reclassified to reflect Automotive Coatings as a discontinued operation (see Note 2 to the Consolidated Financial Statements).
 
(2)   As a result of the implementation of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” we recorded a $245 million charge to stockholders’ equity in 2006.
 
(3)   The primary reason for the reduction in Stockholders’ equity in 2007 is due to a $1 billion accelerated share repurchase (see Consolidated Statements of Stockholders’ Equity and Note 22 Stockholder’s Equity).
 
(4)   Reclassified to conform to current year presentation.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
The statements in this Form 10-K and in reports subsequently filed by Rohm and Haas Company with the Securities and Exchange Commission on Forms 10-Q and 8-K, and related comments by management which are not historical facts or information and contain words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “will” and similar expressions are forward-looking statements. These forward-looking statements involve risks and uncertainties that may cause the actual outcome to be materially different. Such risks and uncertainties include, but are not limited to:
Ø    Global Economic and Political Climate:
    Changes in foreign currency rates
 
    Changes in worldwide economic conditions
 
    Changes in trade policies or tariffs
 
    Changes in interest rates
 
    Changes in stock prices
 
    Changes in discount rates affecting the measurement of our pension and retiree medical liabilities
 
    Political unrest
 
    Possible disruption in commercial activities due to terrorist activity or armed conflict
Ø    Competition and Demand:
    Introduction of new products/technologies by competitors
 
    Changes in the pricing policies of our competitors
 
    Fluctuations in demand
 
    Ability to maintain sales volume in the event of increased selling prices
 
    Seasonal activity of certain of our businesses and weather conditions, particularly for the Salt segment
Ø    Raw Material Supplies and Energy:
    Limited resources for raw materials, potential for shortage
 
    Volatility in raw material and energy prices
 
    Ability to obtain increases in selling prices to offset increases in raw material and energy costs
Ø    Capacity Limitations:
    Capacity limitations in our manufacturing operations
 
    Inefficiencies in the running of our manufacturing facilities
 
    An incident affecting the Houston ship channel area, as it could significantly affect both our operations and our sources of supply
 
    Disruptions in supply and capacity constraints
Ø    Intellectual Property and Other Technology Issues:
    Ability to protect intellectual properties such as patents, trademarks, copyrights and trade secrets, especially in regions where intellectual property rights are not as strong as in the U.S.
 
    Changes in customer requirements
 
    Ability to develop new technology
 
    Acceptance of new products/technologies in the marketplace
Ø    Joint Ventures, Acquisitions, and other Alliances:
    Ability to realize expected benefits from joint ventures, acquisitions or alliances

29


 

Ø    The Dow Transaction:
    The results of our court action against The Dow Chemical Company seeking specific performance of the merger agreement
 
    Uncertainty about when and whether the Dow transaction will be completed
Ø    Environmental Costs and Litigation Results:
    Future developments and new environmental regulations
 
    Litigation outcomes
Ø    Cost Savings:
    Ability to realize expected savings related to restructurings and other cost saving initiatives
Ø    Talent:
    Ability to attract, develop or retain quality employees
Ø    Other risks and uncertainties detailed in Item 1A. Risk Factors or in our filings with the SEC
The following commentary should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements for the years ended December 31, 2008, 2007 and 2006.
We are a global specialty materials company that brings technology and innovation to the market to enhance the performance of end-use consumer products made by our customers. Our products are sold primarily for use in the building and construction, electronics, packaging and paper, industrial and other, transportation, household and personal care, water and food markets. Our Salt business has one of the most recognizable brand names in the world. We operate seven reportable segments: Electronic Materials Group (Electronic Technologies and Display Technologies), Specialty Materials Group (Paint and Coatings Materials, Packaging and Building Materials and Primary Materials), Performance Materials Group, and Salt.
2008 — A Year in Review
2008 was a challenging year. The soft economic conditions experienced in 2007 in North America continued in 2008 with a higher degree of severity and expanded worldwide. We experienced unprecedented volatility in raw materials costs and deteriorating macroeconomic conditions. Despite lower demand in most businesses, we increased sales — driven by aggressive pricing actions to recoup higher raw material costs, acquisitions, and the impact of favorable currencies. Rapidly Developing Economies continued to provide substantial growth for the company, with solid demand growth supported by investments in new facilities, acquisitions, and joint ventures.
During 2008, we took proactive steps to align our manufacturing with demand and to address the market declines affecting our businesses. Despite the challenges faced during the year, we continued to invest in growth initiatives and maintained our dividend.
In 2008, we reported sales of $9,575 million, an 8% increase over 2007, with reported earnings from continuing operations in 2008 of $480 million, or $2.44 per share, as compared to 2007 earnings from continuing operations of $660 million or $3.12 per share. The increase in sales was due to aggressive pricing actions, favorable performance of Salt’s effective product line management, favorable currencies, as well as demand growth in Rapidly Developing Economies for most of 2008 and the impact of acquisitions. The earnings decline largely resulted from decreased overall demand coupled with higher raw material costs which more than offset pricing actions and favorable currencies.
As market conditions continue to weaken, we continue to implement additional actions to navigate these difficult times, while remaining focused on positioning our businesses for success when the markets recover.

30


 

Critical Accounting Estimates
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses, assets, liabilities and equity and the disclosure of contingent assets and liabilities. Management considers an accounting estimate to be critical to the preparation of our financial statements when:
    the estimate is complex in nature or requires a high degree of judgment; and
 
    the use of different estimates and assumptions could have a material impact on the Consolidated Financial Statements.
Management has discussed the development and selection of our critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. Those estimates critical to the preparation of our Consolidated Financial Statements are listed below.
Ø   Litigation and Environmental Reserves
We are involved in litigation in the ordinary course of business involving employee, personal injury, property damage and environmental matters. Additionally, we are involved in environmental remediation and spend significant amounts for both company-owned and third-party locations. In accordance with GAAP, we are required to assess these matters to: 1) determine if a liability is probable; and 2) record such a liability when the financial exposure can be reasonably estimated. The determination and estimation of these liabilities are critical to the preparation of our financial statements. Accruals for estimated losses from environmental remediation obligations generally are recognized at the point during the remedial feasibility study when costs become probable and estimable. We do not accrue for legal costs expected to be incurred with a loss contingency.
In reviewing such matters, we consider a broad range of information, including the claims, demands, settlement offers received from governmental authorities or private parties, identification of other responsible parties and an assessment of their ability to contribute as well as our prior experience, to determine if a liability is probable and if the value is estimable. If both of these conditions are met, we record a reserve. These reserves include liabilities expected to be paid out within the next 10 years. If we believe that no best estimate exists, we accrue the minimum in a range of possible losses, and disclose any material, reasonably possible, additional losses. If we determine a liability to be only reasonably possible, we consider the same information to estimate the possible exposure and disclose any material potential liability. In addition, estimates for liabilities to be incurred between 11 to 30 years in the future are considered only reasonably possible because the chance of a future event occurring is more than remote but less than probable. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment.
Our most significant reserves are those that have been established for remediation and restoration costs associated with environmental issues. As of December 31, 2008, we have $160 million reserved for environmental-related costs. We conduct studies and site surveys to determine the extent of environmental contamination and necessary remediation. With the expertise of our environmental engineers and legal counsel, we determine our best estimates for remediation and restoration costs. These estimates are based on forecasts of future costs for remediation and change periodically as additional and better information becomes available. Changes to assumptions and considerations used to calculate remediation reserves could materially affect our results of operations or financial position. If we determine that the scope of remediation is broader than originally planned, discover new contamination, discover previously unknown sites or become subject to related personal injury or property damage claims, our estimates and assumptions could materially change.
We believe the current assumptions and other considerations used to estimate reserves for both our environmental and other legal liabilities are appropriate. These estimates are based in large part on information currently available and the current laws and regulations governing these matters. If additional information becomes available or there are changes to the laws or regulations or actual experience differs from the assumptions and considerations used in estimating our reserves, the resulting change could have a material impact on the results of our operations, financial position or cash flows.

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Ø   Income Taxes
Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.
In the determination of our tax provision, we have recorded deferred income taxes on income from foreign subsidiaries which have not been reinvested abroad permanently, as upon remittance to the United States such earnings are taxable. For foreign subsidiaries where earnings are permanently reinvested outside the United States, no additional United States income taxes have been provided.
We are subject to income taxes in both the United States and numerous foreign jurisdictions and are subject to audit within these jurisdictions. As a result, in the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record accruals for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. We adjust these accruals, if necessary, upon the completion of tax audits or changes in tax law.
Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, the ultimate resolution of these events could result in adjustments to our financial statements and such adjustments could be material. Therefore, we consider such estimates to be critical to the preparation of our financial statements.
We believe that the current assumptions and other considerations used to estimate the current year accrued and deferred tax positions are appropriate. However, if the actual outcome of future tax consequences differs from our estimates and assumptions due to changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, the resulting change to the provision for income taxes could have a material impact on our results of operations, financial position or cash flows.
Ø   Restructuring
When appropriate, we record charges relating to efforts to strategically reposition our manufacturing footprint and support service functions. To the extent that exact amounts are not determinable, we have established reserves for such initiatives by calculating our best estimate of employee termination costs utilizing detailed restructuring plans approved by management. Reserve calculations are based upon various factors including an employee’s length of service, contract provisions, salary level and health care benefit choices. We believe the estimates and assumptions used to calculate these restructuring provisions are appropriate, and although significant changes are not anticipated, actual costs could differ from the assumptions and considerations used in estimating reserves should changes be made in the nature or timing of our restructuring plans. The resulting change could have a material impact on our results of operations, financial position or cash flows.
Ø   Long-Lived Assets
Our long-lived assets include land, buildings and equipment, long-term investments, goodwill, indefinite-lived intangible assets and other intangible assets. Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable. Such circumstances would include a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner in which the asset is being used or in its physical condition, or a history of operating or cash flow losses

32


 

associated with the use of the asset. In addition, changes in the expected useful life of these long-lived assets may also be an impairment indicator. As a result, future decisions to change our manufacturing footprint or exit certain businesses could result in material impairment charges.
When such events or changes occur, we estimate the future undiscounted cash flows expected to result from the assets use and, if applicable, the eventual disposition of the assets. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent, generally the plant level. The key variables that we must estimate include assumptions regarding sales volume, selling prices, raw material prices, labor and other employee benefit costs, capital additions and other economic factors. These variables require significant management judgment and include inherent uncertainties since they are forecasting future events. If such assets are considered impaired, they are written down to fair value as appropriate.
Goodwill and indefinite-lived intangible assets are reviewed annually or more frequently if changes in circumstances indicate the carrying value may not be recoverable. To test for recoverability, we typically utilize discounted estimated future cash flows to measure fair value for each reporting unit. This calculation is highly sensitive to both the estimated future cash flows of each reporting unit and the discount rate assumed in these calculations. These components are discussed below:
    Estimated future cash flows
 
      The key variables that we must estimate to determine future cash flows include assumptions for sales volume, selling prices, raw material prices, labor and other employee benefit costs, capital additions and other economic or market-related factors. Significant management judgment is involved in estimating these variables, and they include inherent uncertainties since they are forecasting future events. For example, unanticipated changes in competition, customer sourcing requirements and product maturity would all have a significant impact on these estimates.
 
    Discount rate
 
      We employ a Weighted Average Cost of Capital (“WACC”) approach to determine our discount rate for goodwill recoverability testing. Our WACC calculation includes factors such as the risk-free rate of return, cost of debt and expected equity premiums. The factors in this calculation are largely external to our company, and therefore are beyond our control. The average WACC utilized in our annual test of goodwill recoverability as of May 31, 2008 was 9.32%, which was based upon average business enterprise values. A 1% increase in the WACC will result in an approximate 13% decrease in the computed fair value of our reporting units. A 1% decrease in the WACC will result in an approximate 18% increase in the computed fair value of our reporting units. The following table summarizes the major factors that influenced the rate:
                 
    2008   2007
 
Risk free rate of return
    4.7 %     5.1 %
Cost of debt
    7.6 %     6.7 %
Market risk premium
    4.0 %     4.0 %
The decrease in the risk-free rate of return is due to the overall decrease in U.S. long-term interest rates between the dates of our annual impairment testing as of May 31, 2008 and 2007. The increase in the cost of debt is attributable to the change in rates of 20-year U.S. industrial bonds (rated BB or better by S&P) year-over-year.
In the second quarter of 2008 and 2007, we completed our annual SFAS 142 impairment review and determined that goodwill and indefinite-lived intangible assets were not impaired as of May 31, 2008 and 2007. We believe assumptions and other considerations used in the above estimates were reasonable and appropriate. In light of the current global recession, we will continue to monitor cash flows and other factors that may trigger a future impairment. If economic conditions continue to deteriorate, it may result in a decline in our estimated future cash flows. A material decline in the estimated future cash flows of our reporting units or significant increases in the WACC rate could result in the fair value falling below the book value of its net assets. This could result in a material impairment charge.

33


 

The fair values of our long-term investments are dependent on the financial performance and solvency of the entities in which we invest, as well as the volatility inherent in their external markets. In assessing potential impairment for these investments, we will consider these factors as well as the forecasted financial performance of these investment entities. If these forecasts are not met, we may have to record impairment charges.
Ø  Pension and Other Employee Benefits
Certain assumptions are used to measure the plan obligations of company-sponsored defined benefit pension plans, postretirement benefits, postemployment benefits (e.g., medical, disability) and other employee liabilities. Plan obligations and annual expense calculations are based on a number of key assumptions. These assumptions include the weighted-average discount rate at which obligations can be effectively settled, the anticipated rate of future increases in compensation levels, the expected long-term rate of return on assets, increases or trends in health care costs, and certain employee-related factors, such as turnover, retirement age and mortality. Management reviews these assumptions at least annually and updates the assumptions as appropriate to reflect our actual experience and expectations on a plan specific basis.
The discount rates for our defined benefit and postretirement benefit plans are determined by projecting the plans’ expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a zero-coupon spot yield curve derived from a universe of high-quality bonds (rated Aa or better by Moody’s Investor Services) as of the measurement date, and solving for the single equivalent discount rate that results in the same projected benefit obligation. Our calculation excludes bonds with explicit call schedules and bonds which are not frequently traded.
The expected return on plan assets is based on our estimates of long-term returns on major asset categories, such as fixed income and equity securities, and our actual allocation of pension investments among these asset classes. In determining our long-term expected rate of return, we take into account long-term historical returns, historical performance of plan assets, the expected value of active investment management, and the expected interest rate environment.
In determining annual expense for the U.S., Canada, and UK pension plans, we use a market-related value of assets rather than the fair value. The market-related value of assets is a smoothed actuarial value of assets equal to a moving average of market values in which investment income or loss is recognized over a five-year period. Accordingly, changes in the fair market value of assets are not immediately reflected in our calculation of net periodic pension cost. For our other plans, net periodic pension expense is determined using the fair value of assets.
We believe that the current assumptions used to estimate plan obligations and annual expense are appropriate in the current economic environment. However, if economic conditions change, we may be inclined to change some of our assumptions, and the resulting change could have a material impact on the Consolidated Statements of Operations and on the Balance Sheet. At each measurement date, gains and losses from actual experience differing from our assumptions and from changes in our assumptions are calculated. If this net accumulated gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion of the net gain or loss is included in pension expense for the following year.
                                 
Weighted-average assumptions        
used to determine benefit        
obligation for years ended        
December 31,   2008   2007
    U.S.   Non-U.S.   U.S.   Non-U.S.
 
Discount rate
    6.50 %     5.83 %     6.21 %     5.66 %
Rate of compensation increase
    4.00 %     3.94 %     4.00 %     4.24 %
The weighted-average discount rate, the rate of compensation increase and the estimated return on plan assets used in our determination of pension expense are as follows:

34


 

                                                 
Weighted-average assumptions            
used to determine net pension            
expense for years ended            
December 31,   2008   2007   2006
    U.S.   Non-U.S.   U.S.   Non-U.S.   U.S.   Non-U.S.
 
Discount rate
    6.21 %     5.66 %     5.90 %     5.05 %     5.70 %     4.77 %
Estimated return on plan assets
    8.50 %     6.68 %     8.50 %     6.72 %     8.50 %     6.97 %
Rate of compensation increase
    4.00 %     4.24 %     4.00 %     3.91 %     4.00 %     3.88 %
The following illustrates the annual impact on pension expense of a 100 basis point increase or decrease from the assumptions used to determine the net cost for the year ended December 31, 2008.
                                                 
                                    Combined      
    Weighted-Average   Estimated Return on   Increase/(Decrease)
    Discount Rate   Plan Assets         Pension Expense
(in millions)   U.S.   Non-U.S.   U.S.   Non-U.S.   U.S.   Non-U.S.
 
100 basis point increase
  $ (10 )   $ (9 )   $ (18 )   $ (7 )   $ (28 )   $ (16 )
100 basis point decrease
    25       10       18       7       43       17  
The following illustrates the annual impact on postretirement benefit expense of a 100 basis point increase or decrease from the discount rate used to determine the net cost for the year ended December 31, 2008.
                 
    Weighted-Average Discount Rate
 
(in millions)   U.S.   Non-U.S.
 
100 basis point increase
  $ 1     $ (1 )
100 basis point decrease
    (2 )     1  
Ø Share-Based Compensation
We account for share-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R, “Share-Based Payments.” Under the fair value recognition provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimation of the expected term of stock options, the expected volatility of our stock, expected dividends, and risk-free interest rates. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted.

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Ø Fair Value Measurements of Financial Instruments
In the first quarter of 2008, we adopted SFAS No. 157 for financial assets and liabilities. SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level    1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level    2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level    3: Unobservable inputs that reflect our own assumptions.

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Reportable Segments at December 31, 2008
We operate seven reportable segments, as presented below. Additional information regarding the markets these segments serve can be found in Item 1. Business. Our sales and earnings by reportable operating segment and region are presented below.
                                                 
Net Sales
    North                           Segment    
(in millions)   America   Europe   Asia-Pacific   Latin America   Eliminations   Total
 
Electronic Technologies
                                               
2008
  $ 390     $ 210     $ 1,053     $ 1     $     $ 1,654  
2007
    407       230       1,029                   1,666  
2006
    436       226       889                   1,551  
 
Display Technologies
                                               
2008
  $ 3     $ 17     $ 264     $     $     $ 284  
2007
    1             44                   45  
2006
    1             12                   13  
 
Electronic Materials Group
                                               
2008
  $ 393     $ 227     $ 1,317     $ 1     $     $ 1,938  
2007
    408       230       1,073                   1,711  
2006
    437       226       901                   1,564  
 
Paint and Coatings Materials
                                               
2008
  $ 1,238     $ 457     $ 371     $ 151     $     $ 2,217  
2007
    1,258       396       326       140             2,120  
2006
    1,324       355       252       119             2,050  
 
Packaging and Building Materials
                                               
2008
  $ 654     $ 681     $ 337     $ 135     $     $ 1,807  
2007
    701       681       320       124             1,826  
2006
    733       649       282       112             1,776  
 
Primary Materials
                                               
2008
  $ 501     $ 496     $ 56     $ 92     $ 1,222     $ 2,367  
2007
    460       407       45       63       1,103       2,078  
2006
    456       327       40       54       1,102       1,979  
 
Segment Eliminations
                                               
2008
  $     $     $     $     $ (1,222 )   $ (1,222 )
2007
                            (1,103 )     (1,103 )
2006
                            (1,102 )     (1,102 )
 
Specialty Materials Group
                                               
2008
  $ 2,393     $ 1,634     $ 764     $ 378     $     $ 5,169  
2007
    2,419       1,484       691       327             4,921  
2006
    2,513       1,331       574       285             4,703  
 
Performance Materials Group
                                               
2008
  $ 396     $ 547     $ 232     $ 73     $     $ 1,248  
2007
    410       527       209       59             1,205  
2006
    420       473       184       57             1,134  
 
Salt
                                               
2008
  $ 1,220     $     $     $     $     $ 1,220  
2007
    1,060                               1,060  
2006
    829                               829  
 
Total
                                               
2008
  $ 4,402     $ 2,408     $ 2,313     $ 452     $     $ 9,575  
2007
    4,297       2,241       1,973       386             8,897  
2006
    4,199       2,030       1,659       342             8,230  
 

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(in millions)   2008     2007     2006  
 
Pretax Earnings from Continuing Operations
                       
Electronic Technologies
  $ 390     $ 410     $ 345  
Display Technologies
    (40 )     (23 )     1  
     
Electronic Materials Group
  $ 350     $  387     $ 346  
Paint and Coatings Materials
    169        323       353  
Packaging and Building Materials
    55        161       186  
Primary Materials
    82       108       215  
     
Specialty Materials Group
  $ 306     $  592     $  754  
Performance Materials Group
    117       132        103  
Salt
    177       115       54  
Corporate
    (389 )     (346 )     (215 )
     
Total
  $ 561     $  880     $ 1,042  
     
Consolidated Results of Operations for the Years Ended December 31, 2006 through December 31, 2008
Net Sales and Gross Profits
In 2008, our consolidated net sales were $9,575 million, an increase of 8% or $678 million over 2007 net sales of $8,897 million. This increase was primarily driven by increases in selling price, favorable currencies and acquisitions, tempered by weakened demand. The weakened demand resulted from deteriorating market conditions, across all regions, which were pronounced in the fourth quarter of 2008 and are expected to continue in 2009. The Electronic Materials Group showed growth within the Display Technologies segment, due mainly to acquisitions. The Salt business showed strong performance, benefiting from favorable weather conditions throughout 2008, as well as improved product line management. The Specialty Materials Group showed strong growth in all regions outside of North America and Europe, including Rapidly Developing Economies, during most of 2008. However, that growth was tempered by the global market decline late in the year. The Performance Materials Group continued to benefit from stronger demand in the Asia Pacific and Latin America Regions, coupled with the impact of increased pricing and favorable currencies in Europe, which more than offset weakness in North America.
In 2007, our consolidated net sales were $8,897 million, an increase of 8% or $667 million over 2006 net sales of $8,230 million. This increase was primarily driven by higher demand and favorable currencies. The Electronic Materials Group showed strong performance, with accelerating growth, particularly in the second half of the year. The Salt business showed strong performance, benefiting from favorable weather conditions in the fourth quarter, as well as improved productline management. The Specialty Materials Group showed strong growth in all regions outside of North America, including Rapidly Developing Economies. The Performance Materials Group continued to benefit from stronger demand, particularly in the Asia Pacific and Latin America Regions, coupled with the impact of increased pricing and favorable currencies in Europe, which more than offset weakness in North America.
                 
    2008 from 2007   2007 from 2006
Sales Change   %   %
 
Demand/Volume
    (3 )     4  
Currency
    3       3  
Selling price
    5       1  
Other*
    3        
 
               
Total Change
    8 %     8 %
 
               
 
*   Other includes items such as the acquisitions, divestitures and rounding.

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(in millions)   2008   2007   2006
 
Gross profit
  $ 2,410     $ 2,467     $ 2,483  
As a percentage of sales
    25.2 %     27.7 %     30.2 %
Gross profit for 2008 was $2,410 million, a decrease of 2% from $2,467 million in 2007, on higher sales. The 250 basis point decrease in 2008 versus 2007 gross profit margin reflects the impact of lower overall demand, and higher operating costs, partially offset by pricing actions, favorable currencies and proactive cost control.
Gross profit for 2007 was $2,467 million, a decrease of 1% from $2,483 million in 2006, on higher sales. The 250 basis point decrease in 2007 versus 2006 gross profit margin reflects the impact of higher raw material, energy and freight costs and the poor operating performance of our Houston monomer plant which more than offset increases in demand, currency and selling prices.
In 2009, we continue to anticipate volatile raw material and natural gas prices. To mitigate the impact of volatile raw material and energy costs, we will adjust selling prices as necessary, and we are exercising control over discretionary spending, and utilizing commodity swap, option and collar contracts. For further information regarding the impact of raw materials on our businesses, please see “Raw Materials” on page 14.
Selling and Administrative Expense
                         
(in millions)   2008   2007   2006
 
Selling and administrative expense
  $ 1,138     $ 1,091     $ 1,041  
As a percentage of sales
    11.9 %     12.3 %     12.7 %
In 2008, selling and administrative expense decreased as a percentage of sales due to positive sales growth and strict cost control efforts, in addition to reduced employee bonuses in line with company performance. These decreases were tempered by the unfavorable impact of currencies.
In 2007, selling and administrative expense decreased as a percentage of sales as positive sales growth more than offset the $50 million increase in costs in comparison to 2006. The increase in costs is primarily due to normal salary increases, the negative impact of currencies, costs related to the establishment of a European Headquarters in Switzerland, as well as additional costs resulting from acquisitions.
We believe that our cost savings initiatives, including a 2009 salary freeze, where applicable, will continue to reduce certain administrative costs as we improve efficiencies. However, we anticipate overall higher employee-related costs in 2009 as a result of increasing healthcare costs and higher pension costs.
Research and Development Expense
                         
(in millions)   2008   2007   2006
 
Research and development expense
  $ 327     $ 296     $ 286  
As a percentage of sales
    3.4 %     3.3 %     3.5 %
We spent $327 million on research and development in 2008, representing a 10% increase from $296 million in 2007. In 2007, we spent $296 million on research and development, a 3% increase from $286 million in 2006. The increase in 2008 resulted from an increase in projects related to the SKC Haas joint venture acquired in December 2007 and the acquisition of Gracel Display in April 2008. In 2008 and 2007 growth initiatives in the Electronic Technologies segment also contributed to the increase in research and development.
In 2009, we expect to spend approximately $330 million on research and development.

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Interest Expense
Interest expense for 2008 increased $44 million from $120 million during 2007 to $164 million during 2008. The increase is primarily attributable to the issuance of new debt in September 2007 to fund a $1 billion accelerated share repurchase and the impacts of foreign currency.
Interest expense for 2007 increased $26 million from $94 million during 2006 to $120 million during 2007. The increase is primarily attributable to the issuance of new debt in September 2007 to fund a $1 billion accelerated share repurchase coupled with an increase in effective interest rates.
Amortization of Finite-lived Intangible Assets
Amortization of intangible assets for 2008, 2007 and 2006 was $63 million, $57 million, and $56 million respectively. The $6 million and $1 million increase in 2008 and 2007, respectively, is mainly due to additional amortization of intangible assets primarily resulting from the acquisitions of Gracel Display in April 2008, Eastman Kodak Company’s light management film technology assets on June 15, 2007 and the formation of the SKC Haas Display Film joint venture on December 1, 2007.
Amortization of intangible assets is estimated to be approximately $63 million in 2009.
Restructuring and Asset Impairments
                         
(in millions)   2008   2007   2006
 
Severance and employee benefits (net)
  $ 157     $ 10     $ 23  
Asset impairments, net of gains on sales
    42       18       2  
Other, including contract lease termination penalties
                2  
     
Amount charged to earnings
  $ 199     $ 28     $ 27  
     
Restructuring and Asset Impairments by Business Segment
                         
(in millions)                  
Business Segment   2008     2007     2006  
 
Electronic Technologies
  $ 27     $ (2 )   $ (1 )
Display Technologies
    8       4        
     
Electronic Materials Group
  $ 35     $ 2     $ (1 )
Paint and Coatings Materials
    67       1       4  
Packaging and Building Materials
    39       2       5  
Primary Materials
    1             2  
     
Specialty Materials Group
  $ 107     $ 3     $ 11  
Performance Materials Group
    29       9       8  
Salt
    3             5  
Corporate
    25       14       4  
     
Total
  $ 199     $ 28     $ 27  
     
Severance and Employee Benefits
2008 Actions
For the year ended December 31, 2008, we recorded approximately $153 million of expense for severance and associated employee benefits, primarily associated with the elimination of 1,910 positions resulting from:
    An adjustment of production schedules in some manufacturing facilities to reflect current market softness;
 
    A realignment of our manufacturing footprint to better utilize assets, including idling or closing underutilized plants;
 
    Reducing commercial-related positions that have been directly impacted by lower market demand;
 
    A 30 percent reduction of installed capacity in our emulsions network in North America, reflecting the cumulative impact of productivity improvement efforts and reduced market demand;
 
    Significant reductions included selling and administrative costs for the Specialty Materials Group in mature markets;

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    An adjustment of our infrastructure for the Electronic Materials Group, reflecting the continued shift of the business to Asia;
 
    Cost reductions related to productivity improvements for various other businesses and regions; and
 
    The termination of toll manufacturing support arrangements at two facilities related to a prior divestiture.
During 2008, we recorded additional severance and employee benefit charges related to changes in estimates of $2 million for 2008 initiatives and $2 million for 2006 initiatives. The 2008 cost savings initiatives are expected to yield pre-tax savings of approximately $200 million annually beginning in 2010. As of December 31, 2008, we have realized savings of $11 million in our Consolidated Statement of Operations from 2008 initiatives, which was offset by $32 million of accelerated depreciation. Of the initial 1,910 positions identified under the total 2008 restructuring initiatives, we increased the total number of positions to be affected by these initiatives by 3 to 1,913 positions in total. As of December 31, 2008, 344 positions have been eliminated.
2007 Actions
For the year ended December 31, 2007, we recorded approximately $15 million of expense for severance and associated employee benefits, primarily associated with the elimination of 201 positions as part of our on-going efforts to reposition our business portfolio for accelerated growth by exiting non-strategic business lines, as well as to improve operating excellence through productivity initiatives in manufacturing, research and development, and business services. Reducing the effect of the 2007 charge were favorable adjustments of $5 million for severance and employee benefits due to fewer employee separations than originally anticipated related to 2005 and 2006 actions. The 2007 cost savings initiatives are expected to yield pre-tax savings of approximately $21 million annually. Of the initial 201 positions identified, we reduced the total number of positions to be affected by these initiatives by 18 to 183 positions in total. As of December 31, 2008, 133 positions have been eliminated.
2006 Actions
For the year ended December 31, 2006, we recorded approximately $26 million of expense for severance and associated employee benefits associated with the elimination of 329 positions. These charges related to the restructuring within our North American support services and Coating and Salt segments, concentrated in North America. Our management approved these restructuring actions to implement organizational alignments to support our Vision 2010 strategic plan and to further improve the efficiency of our manufacturing network. The organizational alignments included a more streamlined business structure, and deployment of resources to higher growth markets. Staffing reductions related to several of our manufacturing operations and were a direct result of changes in the execution of existing processes and productivity improvements, while support services staffing reductions were made possible as we continue to capitalize on the enhancements achieved through the implementation of our Enterprise Resource Planning System. This charge was partially offset by $1 million of favorable adjustments to adequately reflect changes in estimates of remaining obligations related to severance payments within our global Graphic Arts business within our Packaging and Building Materials segment, actions announced in the first quarter of 2006. Additionally, there were favorable adjustments of $2 million related to severance and employee benefits due to fewer employee separations than originally anticipated offset by $2 million for lease contract obligations related to our 2005 and prior initiatives. The 2006 restructuring actions are expected to yield pre-tax savings of $33 million annually. Of the initial 329 positions identified, we reduced the total number of positions by 64 to 265 positions in total. As of December 31, 2008, all positions have been eliminated.
Asset Impairments
2008 Impairments
For the year ended December 31, 2008, we recognized $42 million of fixed asset impairment charges. These charges include $3 million of impairments due to damage at our Salt operation in the Bahamas related to Hurricane Ike. In an effort to better utilize our assets we recorded $2 million of asset impairment charges relating to the closure of two plants within the Performance Materials Group, which support the Powder Coatings and Advanced Materials businesses. Reduced market demand and productivity improvements in North America resulted in the impairment of fixed assets totaling $5 million, $3 million of which impacted the Paint and Coatings Materials business

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and $2 million related to the Packaging and Building Materials business. In addition, the Paint and Coatings Materials business also recorded an $8 million charge relating to the closure of a plant due to continued reductions in market demand. The Packaging and Building Materials business recorded fixed asset impairment charges of $7 million due to the transfer of select business lines and $2 million relating to the exiting of a business line. An adjustment of our infrastructure for the Electronic Materials Group, reflecting the continued shift of the business to Asia resulted in asset impairment charges of $9 million; $8 million resulted from exiting select business lines within Packaging and Finishing Technologies and $1 million from the closing of a research and development site supporting Semiconductor Technologies. Further, we recorded a $1 million write-off of in process research and development relating to the Gracel acquisition within Display Technologies. Lastly, we recorded $5 million of asset impairment charges in the first quarter of 2008 associated with fixed asset write downs related to the restructuring of two manufacturing facilities due to the termination of toll manufacturing support arrangements related to a prior divestiture.
2007 Impairments
For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges. These charges were offset by $6 million in gains related to sales of previously impaired assets. These impairments included the $13 million write-off within our Corporate segment of our investment in Elemica, an online chemicals e-marketplace, $5 million related to our digital imaging business line within our Performance Materials Group, a $4 million impairment of in-process research and development cost within our Display Technologies segment, comprised of $3 million and $1 million relating to the Eastman Kodak Company light management films asset acquisition and SKC Haas joint venture, respectively, and a $2 million write-down of an investment in our Electronic Technologies segment to fair market value.
2006 Impairments
For the year ended December 31, 2006, we recognized approximately $3 million of fixed asset impairment charges associated with the restructuring of our global Graphic Arts business within our Packaging and Building Materials segment. This charge was offset by $1 million for sales of previously impaired assets.
In 2006, we recorded a $7 million asset impairment related to our discontinued operation. See Note 2 to the Consolidated Financial Statements for more information.
Pension Judgment
As discussed further in Note 26, we have recorded a non-cash charge in the third quarter of 2007 for $65 million ($42 million after-tax) to recognize the estimated potential impact of a court decision related to cost of living adjustments on our long-term pension plan obligations.
Share of Affiliate Earnings, net
In 2008, we recorded affiliate net earnings of $97 million, an increase of $75 million in comparison to $22 million in 2007. The increase is primarily due to the sale of our 40% interest in UP Chemical Company on April 4, 2008, resulting in a pre-tax gain of approximately $85 million. Absent the impact of earnings and the divesture gain related to UP Chemical Company, affiliate earnings decreased reflecting weaker demand in the second half of 2008.
In 2007, we recorded affiliate net earnings of $22 million, an increase of $12 million in comparison to $10 million in 2006. The increase is primarily due to Viance, the new wood joint venture in our Performance Materials Group and increased earnings from an equity affiliate in our Electronic Materials Group. The Viance joint venture is 50% owned by Rohm and Haas and 50% owned by Chemical Specialties, Inc., a wholly owned subsidiary of Rockwood Holdings, Inc.

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Other Expense (Income), net
Other expense for 2008 was $55 million compared to other income of $48 million in 2007. The increase in other expense was primarily due to expenses related to the planned merger with Dow, lower interest and investment income and currency losses.
In 2007, net other income decreased to $48 million from $53 million in 2006. The decrease is primarily attributable to a reduction in currency losses of $21 million offset by a decrease in interest and investment income of $13 million and a reduction in gains on fixed asset disposals of $4 million.
Minority Interest
Minority interest for 2008 decreased $10 million from $14 million in 2007 to $4 million in 2008. The decrease in minority interest for the twelve months ended December 31, 2008, was due to decreased earnings from an equity affiliate in our Electronic Technologies segment and increased losses of the SKC Haas joint venture in our Display Technologies segment, both brought about by the weakening global economic conditions. The decrease in earnings in the Electronic Technology affiliate is due to a sharp second half of the year demand-related decline as well as price erosion to maintain volumes. The increased loss related to the SKC Haas joint venture was due to the impact of significantly softening demand in the second half of 2008.
Income Taxes
Full-year income tax expense was $77 million, reflecting an effective tax rate of 13.7 percent, as compared to $206 million, or an effective tax rate of 23.4 percent for the prior-year period. The reduction to the effective rate was primarily due to a reduction of earnings in jurisdictions with a higher statutory tax rate. The tax benefit of the one-time pension charge as well as favorable tax valuation adjustments and other credits reduced 2007 compared to 2006 tax expense by $33 million.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have been applied to all income tax positions commencing from that date. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. The cumulative effect of applying the provisions of FIN 48, $9 million, has been reported as an adjustment to the opening balance of retained earnings as of January 1, 2007.
Results of Operations for the Years Ended December 31, 2006 through December 31, 2008
– By Business Segment
ELECTRONIC MATERIALS GROUP
The Electronic Materials Group comprises two reportable segments which provide materials for use in applications such as telecommunications, consumer electronics and household appliances. Overall sales for this Group were up 13% in 2008 over the prior year. Sales growth was strong in the first half of the year, driven by robust consumer demand, but then weakened precipitously in the second half as demand fell, first in the U.S. and Europe and then later in Asia. Pre-tax earnings for 2008 were down 10% compared to the prior year for this Group due primarily to lower demand and higher raw materials costs, partially offset by favorable currencies.
Overall sales for this Group were up 9% in 2007 over the prior year. Sales growth was weak in the first half due to an industry-wide slowdown in semiconductor production, but rebounded strongly beginning in the second half of the year. Pre-tax earnings for 2007 were up 12% over the prior year for this Group.

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The results for the Electronic Materials Group are reported under the two separate reportable segments as follows:
ELECTRONIC TECHNOLOGIES
Net sales in 2008 for Electronic Technologies were $1,654 million, down 1%, or $12 million, versus prior year sales. All businesses reported strong first half growth in Asia, then weakening demand later in the year as it began to decline during the third quarter. In North America and Europe, sales for most businesses were flat or declined in the first half and then also reported sharp declines in the second half of the year. Sales in advanced technology product lines were flat versus the prior year. Sales from Semiconductor Technologies contracted slightly versus last year as the strong first half growth in Asia was not enough to compensate for the sharp second half demand-related declines, as well as price erosion to maintain volumes. Circuit Board Technologies sales grew 4% as first half growth in Asia, as well as single-digit sales dollar gains in Europe, more than offset the business contraction in North America. Sales in 2008 of new Photovoltaic technologies helped sales advance. Packaging and Finishing Technologies sales were down 3% versus last year on lower precious metals and Process sales.
Full year pre-tax earnings of $390 million were down from the $410 million earned in the prior year. This year’s results include an $85 million gain related to the sale our 40% interest in UP Chemical Company during the second quarter, as well as restructuring charges, for the full year, of $27 million. Prior year results included a $2 million benefit due to a change in estimate related to restructuring costs. Excluding the effect of the UP Chemical Company sale and restructuring in both periods, pre-tax earnings declined $76 million reflecting the impact of weaker demand in the second half of the year and higher raw material prices and freight costs, only partially offset by favorable currencies and continued discipline in cost management.
Net sales in 2007 for the Electronic Technologies business reached $1,666 million, up 7%, or $115 million, versus net sales of $1,551 million in 2006. Demand was strong across all businesses, especially in Asia-Pacific. Sales in advanced technology product lines were up 13% versus the prior year. Sales from Semiconductor Technologies grew 10% over the prior year period, reflecting continued strength in sales of Chemical Mechanical Planarization (CMP) pads and slurries as well as advanced photoresists and related products. Circuit Board Technologies sales grew 6% as solid growth in Asia more than offset weaker demand in North America and Europe. Sales of photovoltaic products, primarily in Europe, began to gain traction this year. Packaging and Finishing Technologies sales were up only slightly versus 2006 as lower volumes of precious metal sales in North America offset 5% higher Process sales.
Full year 2007 pre-tax earnings of $410 million were up significantly from the $345 million earned in 2006, reflecting increased sales of advanced technology products, mostly in Asia, and continued discipline in cost management.
DISPLAY TECHNOLOGIES
In June 2007, we acquired the net assets of Eastman Kodak Company’s light management films technology business, which produces advanced films that improve the brightness and efficiency of liquid crystal displays (LCD). In late November 2007, we completed the formation of SKC Haas Display Films, a joint venture with SKC Incorporated of South Korea for the development, manufacture and marketing of advanced optical and functional films used in the flat panel display industry. In April 2008, we acquired Gracel Display, Inc., a leading developer and manufacturer of Organic Light Emitting Diode materials. These new businesses, along with process-related materials also used in the flat panel display industry and previously included as part of our Semiconductor Technologies unit, form the reportable segment now referred to as Display Technologies.
Net sales in 2008 for Display Technologies of $284 million were driven by the partial-year results of Gracel Display, Inc. and full-year results of the SKC Haas joint venture referred to above. Net sales in 2007, which include only sales of process related materials previously included as part of Semiconductor Technologies and

44


 

one month of results related to SKC Haas, were $45 million. The business enjoyed strong industry demand-driven volume growth throughout most of the first half of 2008, though experienced significant softening of demand throughout the second half, in response to weakening global economic conditions.
The segment reported a pre-tax loss of $40 million for 2008, versus the $23 million loss recorded during the prior year period, reflecting the development stage nature of the newly acquired light management films technologies, as well as acquisition and purchase-accounting related charges. The current year includes a restructuring related charge of $8 million.
Net sales in 2007 for Display Technologies were $45 million, primarily reflecting the partial-year results of the newly acquired assets and joint venture referred to above. Net sales in 2006, which include only sales of process related materials previously included as part of Semiconductor Technologies, were $13 million.
The segment reported a pre-tax loss of $23 million for 2007, reflecting the development stage nature of the newly acquired light management films technologies, as well as acquisition and purchase-accounting related charges, including the write-off of $4 million, related to in-process research and development costs.
SPECIALTY MATERIALS GROUP
The Specialty Materials Group comprises three reportable segments that represent the majority of the company’s chemicals business, serving a broad range of end-use markets.
Overall sales for this Group (after intersegment elimination) were up 5% in 2008 over the prior year, due to higher selling prices and favorable currencies partially offset by lower demand. Higher demand in Rapidly Developing Economies was more than offset by soft demand in the U.S. and Western Europe.
Pre-tax earnings for the twelve months ended December 31, 2008 were $306 million, down 48% from prior year earnings of $592 million for the Group. Earnings include charges of $107 million and $3 million for restructuring and asset impairment charges in 2008 and 2007, respectively. In addition, we incurred $18 million in charges during the third quarter from the impact of Hurricane Ike on our Deer Park, Texas operations. Excluding these charges, current year earnings of $431 million were down $164 million, or 28%, versus the prior year period. Increased selling prices and favorable currencies were more than offset by higher raw material, energy and freight costs, softer demand in the Western markets, higher plant operating costs due to volume shortfalls, and losses on hedging activities.
Sales in 2007 for this Group (after intersegment elimination) were up 5% over the prior year, due to favorable currencies and increased demand. Pre-tax earnings for 2007 of $592 million were down 21% from prior year earnings of $754 million for this Group. Increased sales in Rapidly Developing Economies and favorable currencies were more than offset by higher raw material and energy costs, unexpected operating difficulties at our Houston manufacturing facility and slowed demand in the U.S.
The results for Specialty Materials Group are reported under the three separate reportable segments as follows:
PAINT AND COATINGS MATERIALS
In 2008, net sales from our Paint and Coatings Materials segment were $2,217 million, an increase of 5%, or $97 million, from net sales of $2,120 million in 2007. This increase is the result of higher selling prices instituted to recover the higher raw material costs, as well as favorable currencies and the benefit of the Finndisp acquisition. These increases were substantially offset by lower volumes, primarily in the U.S. and mature economies. The reduced demand in the U.S. was due to weakness in the architectural paint market reflecting the pronounced slowdown in home improvements as well as lower existing and new home sales. In the fourth quarter, demand comparisons were lower across all regions reflecting the global economic slow down brought on by the global credit crisis.

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Pre-tax earnings of $169 million in 2008 were down $154 million, or 48% versus prior year earnings of $323 million. Included in earnings were $67 million and $1 million in restructuring and asset impairment charges in 2008 and 2007, respectively. Excluding these charges, pre-tax earnings decreased by $88 million driven by lower volumes in the U.S. and other mature economies, higher raw material, energy and freight costs partially offset by higher selling prices, favorable currencies, and higher demand growth in Rapidly Developing Economies for most of 2008.
In 2007, net sales from our Paint and Coatings Materials segment were $2,120 million, an increase of 3%, or $70 million, from net sales of $2,050 million in 2006. Favorable currencies as well as strong demand, sustained across all regions other than the U.S., and slightly higher pricing more than offset the slowed demand in the U.S. The slowed demand in the U.S. was due to weakness in the architectural paint market reflecting the pronounced slowdown in home improvements as well as lower existing and new home sales. In the fourth quarter, demand in Europe also moderated while Rapidly Developing Economies showed strong growth.
Pre-tax earnings were $323 million in 2007 versus prior year earnings of $353 million. This decrease in earnings was driven by the unfavorable impact of lower demand in the U.S. combined with higher raw material and operating costs, partially offset by favorable currencies, higher selling prices and demand growth in other regions.
PACKAGING AND BUILDING MATERIALS
In 2008, net sales from our Packaging and Building Materials segment were $1,807 million, a decrease of 1%, or $19 million, from net sales of $1,826 million in 2007. The decrease reflects lower demand, partially offset by strong European currencies and higher pricing. The lower demand was due to the impacts of a strong demand drop starting in North America in the beginning of the year and then spreading to all regions by the fourth quarter. While Rapidly Developing Economies started the year with strong growth year over year, even these markets struggled in the second half of 2008. Global economic softness in the second half of 2008 combined with persistent economic softness in the U.S. and Western Europe building and construction markets more than offset earlier demand growth in Rapidly Developing Economies.
Pre-tax earnings for 2008 of $55 million were down versus pre-tax earnings of $161 million for 2007, a decrease of $106 million, or 66%. Excluding the restructuring and asset impairment charges of $39 million in 2008, the pre-tax earnings decline reflects increased raw material, energy and freight costs and lower demand, which more than offset favorable currencies and increased selling prices.
In 2007, net sales from our Packaging and Building Materials segment were $1,826 million, an increase of 3%, or $50 million, from net sales of $1,776 million in 2006. The increase reflects the impacts of strong European currencies and higher pricing partially offset by lower demand. While Rapidly Developing Economies showed strong growth year over year, economic softness in the U.S. building and construction markets and some soft spots in Western Europe more than offset the demand growth. The overall lower demand is mainly the result of softness in the vinyl siding and windows profile markets in North America that use our plastics additives products and paper products in Western Europe.
Pre-tax earnings of $161 million were down versus pre-tax earnings of $186 million for 2006, a decrease of $25 million, or 13%. 2006 results included a $5 million, pre-tax, charge primarily for restructuring and other one-time costs related to our Graphic Arts business. Excluding the restructuring charge, the pre-tax earnings decline reflects increased raw material costs and lower demand, which more than offset favorable currencies and increased selling prices.

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PRIMARY MATERIALS
                         
    Year Ended December 31,
(in millions)   2008   2007   2006
 
Total Sales
  $ 2,367     $ 2,078     $ 1,979  
Elimination of Inter-segment Sales
    (1,222 )     (1,103 )     (1,102 )
     
Third Party Sales
  $ 1,145     $ 975     $ 877  
     
In 2008, net sales for Primary Materials were $2,367 million, an increase of $289 million, or 14%, from prior year net sales of $2,078 million. Net sales for Primary Materials include sales to our internal downstream monomer-consuming businesses, primarily Paint and Coatings Materials and Packaging and Building Materials, along with sales to third party customers. Sales to external customers increased 17% to $1,145 million in 2008 from $975 million in the prior period, primarily due to a combination of higher volumes, higher selling prices and favorable currencies. Sales to our downstream business increased 11% to $1,222 million in 2008 from $1,103 million in the prior period, primarily due to a combination of higher selling prices and favorable currencies, partially offset by lower volume.
Pre-tax earnings of $82 million in 2008 decreased 24% from $108 million in 2007. The reduction in earnings reflects lower downstream demand, costs associated with Hurricane Ike, higher raw material and energy costs and higher selling, administrative and research spending, partially offset by favorable currencies, higher selling prices and the absence of significant unexpected operation outages in Houston manufacturing facility experienced in 2007. In 2008, the business was able to pass through most raw material cost increases by raising prices.
In 2007, net sales for Primary Materials were $2,078 million, an increase of $99 million, or 5%, from prior year net sales of $1,979 million. Net sales for Primary Materials include sales to our internal downstream monomer-consuming businesses, primarily Paint and Coatings Materials and Packaging and Building Materials, along with sales to third party customers. Sales to external customers increased 11% to $975 million in 2007 from $877 million in the prior period, primarily due to a combination of higher volumes and favorable currencies, partially offset by lower selling prices. Sales to our downstream businesses were flat.
Pre-tax earnings of $108 million in 2007 decreased 50% from $215 million in 2006. The reduction in earnings can be attributed to higher raw material costs, lower selling prices and a series of unplanned operating issues earlier this year. The negative impact in 2007 of unexpected operating difficulties at our Houston manufacturing facility is approximately $51 million pre-tax.
We anticipate that global monomer manufacturing capacity will increase again during 2009 in spite of anticipated lower demand.
PERFORMANCE MATERIALS GROUP
Net sales for the Performance Materials Group reached $1,248 million for the period ended December 31, 2008, an increase of 4%, or $43 million, versus sales of $1,205 million in 2007. The impact of favorable currencies along with stronger demand in the Asia Pacific and Latin American regions and increased pricing, more than offset overall economic weakness in Europe and North America.
Net sales for Process Chemicals and Biocides were $799 million, an increase of 6%, or $44 million over sales in 2007. The increase is mainly attributable to favorable currencies, increased overall demand within Rapidly Developing Economies and higher selling prices, partially offset by the demand weakness experienced in North America and Europe within the building and construction markets and the paper market. Within the Rapidly Developing Economies, particularly South East Asia and China, the ion exchange product line saw increased demand in the industrial water treatment and power markets. This product line also realized solid growth in new markets, such as catalysis and potable water. Net sales for Powder Coatings were $334 million, essentially flat

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versus sales of $335 million in 2007. The impact of favorable currencies and higher pricing was offset by weaker core demand in Europe and North America (Automotive and Consumer markets). Net sales for the other businesses, including AgroFresh and Advanced Materials were essentially flat with 2007 at $115 million. Continued growth of our patented 1-methylcyclopropene (1-MCP) technology in AgroFresh was offset by our 2008 exit from our digital imaging business line.
Pre-tax earnings for 2008 of $117 million include $29 million pre-tax impact of restructuring and asset impairment charges, mainly associated with exiting the Digital Imaging business. Excluding restructuring and asset impairment charges for both periods, earnings increased $5 million, or 4% compared to 2007. Earnings improvement was due to increased demand, notably in the Rapidly Developing Economies, favorable currencies, and higher selling prices, partially offset by higher raw material, energy and freight costs as well as weak demand in the North America region.
Net sales for the Performance Materials Group reached $1,205 million for the year ended December 31, 2007, an increase of 6%, or $71 million, versus sales of $1,134 million in 2006. Stronger demand in the Asia Pacific and Latin American regions, coupled with the impact of increased demand and favorable currencies in Europe, more than offset overall economic weakness in North America.
Net sales for Process Chemicals and Biocides were $755 million in 2007, an increase of 8%, or $52 million versus sales in 2006. Demand was strong across all regions except North America due to weakness in building and construction markets. In the Rapidly Developing Economies, particularly China and Central and Eastern Europe and Turkey, the ion exchange business saw increased demand in the industrial water treatment and mining markets. The business also realized solid growth in new markets, such as biodiesel and potable water. Net sales for Powder Coatings were $335 million, an increase of 1%, or $3 million over sales of $332 million in 2006. The sales increase was driven by the impact of favorable currencies and higher pricing, partially offset by weaker demand. Net sales for the other businesses, including AgroFresh, Advanced Materials and Digital Imaging, increased 15% or $15 million from $100 million in 2006 to $115 million in 2007. This increase was mainly driven by continued growth of our patented 1-methylcyclopropene (1-MCP) technology in AgroFresh and increased demand in Advanced Materials.
Pre-tax earnings for 2007 of $132 million include $9 million pre-tax impact of restructuring and asset impairment charges, mainly associated with exiting the Digital Imaging business. Excluding restructuring and asset impairment charges for both periods, earnings increased $30 million, or 27% compared to 2006. The pre-tax earnings increase is due to increased demand, higher selling prices, the impact of favorable currencies, and improvement year-over-year in the Powder Coatings business. The 2007 results include additional investment in more advanced applications in ion exchange and biocides such as bio-processing, advanced water treatment and microbial protection, and the expansion of the 1-MCP technology from our AgroFresh business for additional high-value applications in both horticultural and agronomic markets.
SALT
For the year 2008, net sales from Salt were $1,220 million, an increase of 15% versus prior period net sales of $1,060 million. Highway de-icing sales were favorably impacted by both demand and effective product line management. Favorable weather conditions throughout 2008 raised demand for highway de-icing salt by 11%. Sales of consumer and industrial salt products increased by 10% compared with last year as a result of sales growth within consumer ice control products, product line management, and mix in the consumer and industrial markets. Favorable currencies also contributed to the improvement in sales, in 2008 compared with 2007.
Pre-tax earnings for 2008 of $177 million increased by $62 million, or 54%, compared to pre-tax earnings of $115 million in 2007. Pre-tax earnings were largely impacted by improved demand for ice control related products. Product line management and favorable mix across all markets, as well as company-wide cost improvement initiatives, also contributed to the earnings improvement compared with the prior year.

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For the year 2007, net sales from Salt were $1,060 million, an increase of 28% versus prior period net sales of $829 million. The increase reflects a significant improvement in ice control volumes as a result of favorable weather conditions, which raised demand for highway de-icing salt by 72%, compared with mild winter conditions present in 2006. Sales of consumer and industrial salt products increased by 9% compared with last year as a result of improved demand, product line management, and mix in the consumer and industrial markets. Favorable currencies also contributed to the improvement in sales, in 2007 compared with 2006.
Pre-tax earnings for 2007 of $115 million increased by $61 million, or 113%, compared to pre-tax earnings of $54 million in 2006. Pre-tax earnings were largely impacted by improved demand for ice control related products. Improved demand and favorable mix in the industrial and consumer markets, as well as company-wide cost improvement initiatives, also contributed to the earnings improvement compared with the prior year. Pre-tax earnings in 2006 included $5 million, pre-tax, in restructuring and asset impairment charges.
CORPORATE
Corporate pre-tax expense of $389 million for the year ended December 31, 2008, increased from $346 million in the prior year period primarily due to higher interest expense, costs associated with our pending transaction with The Dow Chemical Company and unfavorable currencies which were partially offset by the absence of the 2007 pension judgment.
Corporate pre-tax expense of $346 million for the year ended December 31, 2007, increased from $215 million in the prior year period primarily due to the recognition of the estimated one-time non-cash pre-tax pension charge of $65 million. Other factors contributing to the increase were higher non-recurring costs associated with establishing the European Headquarters in Switzerland, as well as higher interest expense due to higher effective interest rates and the issuance of $1.1 billion in new debt in September of 2007 to fund an accelerated share repurchase.

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LIQUIDITY AND CAPITAL RESOURCES
Overview
As of December 31, 2008, our company’s debt ratio (total debt in proportion to total debt plus minority interest and stockholders’ equity) was 52%, up from 50% as of December 31, 2007. Cash provided by operating activities was approximately 31% of our year-end debt (cash from operating activities in proportion to total debt) in 2008, versus 29% in 2007. During 2008, the book value of existing debt increased, not borrowings, which caused the changes noted above. Specifically, the dollar value of debt denominated in Japanese Yen increased due to this currency’s appreciation against the dollar in 2008. Further, the book value of our long term debt increased due to deferred gains related to our termination of interest rate swap contracts in the U.S. during November 2008. We expect to maintain our debt ratio at approximately 50%, while growing cash from operating activities.
Maintenance of a strong balance sheet well-covered by our cash flows remains a key financial policy. We have been in a cash conservation mode pending our merger with The Dow Chemical Company and have not issued commercial paper since October, 2008. While the merger is pending, we intend to continue to seek to conserve cash while supporting essential business investments through our capital expenditure program and through very selective, small acquisitions.
In the year ended December 31, 2008, our primary source of cash was from operating activities, employee stock option exercises, and the sale of an affiliate, UP Chemical, during the second quarter. Our principal uses of cash were capital expenditures, dividends, and acquisitions. We also invested $200 million in short-term marketable securities to fund non-qualified pension and savings plan liabilities in the U.S. as required by the terms of our Rabbi Trust prior to a change in control. See Note 9 to the financial statements for further information. Our cash flow statement summarizes these sources and uses of cash from our combined continued and discontinued operations for all periods presented. These are summarized in the table below:
                 
    Year Ended
    December 31,
(in millions)   2008   2007
 
Cash provided by operating activities
  $ 1,040     $ 963  
Issuance of long-term debt
    2       1,394  
Stock repurchases
    (15 )     (1,462 )
Stock option exercise proceeds
    104       46  
Repayments of long-term debt
    (8 )     (441 )
Capital expenditures
    (520 )     (417 )
Acquisitions
    (164 )     (117 )
Dividends
    (314 )     (303 )
Our cash flow statement includes the combined results of our continued and discontinued operation for all periods presented.
Cash Provided by Operating Activities
For the year ended December 31, 2008, cash provided by operating activities of $1,040 million set a company record exceeding the $963 million provided for the year ended December 31, 2007 by $77 million or 8%. Lower cash from lower net earnings was compensated by cash from working capital reductions and $69 million in proceeds from the termination of interest rate swap contracts during the fourth quarter. Customer accounts receivable were reduced as collections exceeded sales by $397 million during 2008. Tempering the cash inflow from collections were higher inventories which grew during the fourth quarter due to slowing sales and payments to suppliers. We continue to focus on working capital management and are taking action to bring inventories down to levels commensurate with an anticipated lower level of business during 2009 resulting from weakening market conditions.

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Approximately 60% of 2008 cash provided by operating activities was generated during the second half of the year. This is typical of our seasonality with cash from operating activities concentrated in the third and fourth quarters due to working capital patterns in some of our core businesses, such as Paint and Coatings Materials and Salt, as well as the timing of certain annual payments such as employee bonuses, interest on debt and property taxes, which have been concentrated in the first half of the year. During 2009 we intend to manage working capital to compensate for anticipated earnings declines so that cash from operating activities is maintained at 2008 levels excluding the one-time 2008 benefit from terminating interest rate swaps.
Pension Plan and Postretirement Benefit Plan Funding and Liability
As of December 31, 2008, our U.S. ERISA qualified pension plans together with the qualified plans in the UK and Canada represented approximately 84% of our global qualified and non-qualified pension plan liabilities and approximately 90% of plan assets. The majority of the balance of plan assets and liabilities relate to pension plans offered in our Western Europe and Asia locations.
In 2008, we contributed approximately $81 million to our global qualified and non-qualified pension plans as well as our postretirement healthcare plans, compared to the $84 million in the prior year period. We did not make a contribution to our U.S. qualified retirement plan in 2007 or 2008.
We are not required, nor do we expect to make contributions to our U.S. pension trust during 2009. We do expect to contribute approximately $81 million to fund both non-U.S. qualified pension, non-qualified pension and other postretirement plans. Funding requirements for subsequent years are uncertain and will depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plans, and any legislative or regulatory changes affecting plan funding requirements. See Contractual Obligations table for our forecasted qualified pension plan contributions, and non-qualified pension and postretirement benefit plan contributions, which reflect expected benefit payments. The company may increase, accelerate, decrease or delay contributions to the plans to the extent permitted by law.
The U.S. qualified pension plans have an unfunded deficit of $388 million as of December 31, 2008, compared to a surplus of $163 million as of December 31, 2007. This decrease in funded status is primarily due to losses in the fair market value of plan assets driven by investment losses, partially offset by actuarial gains, which are primarily due to an increase in the discount rate.
The unfunded status of the non-U.S. plans increased from $98 million to $125 million during 2008 due to lower returns on plan assets. This deficit in the funded status of our non-U.S. plans was tempered by higher discount rates which decreased the plans’ projected benefit obligation.
Global qualified and non-qualified pension expense decreased from $129 million in 2007 to $40 million in 2008 largely due to the absence of the $65 million charge related to the court ruling covering cost of living adjustments (“COLA”) on our long term pension plan obligations that was recorded in our U.S. plan in 2007. This decrease in expense is also attributable to lower amortization of U.S. qualified plan losses in 2008 due to gains achieved from 2007 plan provision changes.
Global qualified and non-qualified pension expense in 2009 is expected to increase approximately $22 million to $62 million with final expense dependent on results of the 2009 actuarial valuations of the plans. The expected growth in expense is largely due to higher amortization of 2008 plan asset value losses for our U.S. plan, offset in part by lower expense for certain foreign plans attributable to a higher discount rate.

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Capital Expenditures
We manage our capital expenditures to take advantage of growth and productivity improvement opportunities as well as to fund ongoing environmental protection and plant infrastructure requirements. We have a well defined review procedure for the authorization of capital projects. Capital expenditures in 2008 were higher than prior year expenditures due to several large projects, including projects in Rapidly Developing Economies. Significant capital additions include:
Ø 2008
(1) An Immersion Scanner to support research and development in our Semiconductor Technologies;
(2) Expenditures to establish our Display Technologies business;
(3) Various Primary Materials investments to reduce weather-related risks and improve operations at Deer Park, Texas; and
(4) Various Packaging and Building Materials plant and plant enhancement projects.
Ø 2007
(1) Construction of new Paint and Coatings plants in Mexico, India, and China;
(2) Environmental regulation compliance projects at Manistee and Silver Springs;
(3) Technology infrastructure enhancements; and
(4) Construction of new Packaging and Building Materials plant in Turkey.
Ø 2006
(1) Completion of the new research and development center in Shanghai, China;
(2) Opening of the new CMP Research and Manufacturing Center in Taiwan;
(3) A project in our Louisville, Kentucky Plant to meet new environmental requirements;
(4) Expansions in our Qingpu, China and Weeks Island, Louisiana Plants to increase capacity; and
(5) Construction of new manufacturing facilities in Queretaro, Mexico and Chennai, India.
Expenditures for the past three years, categorized by primary purpose of project, are presented below:
                         
(in millions)   2008     2007     2006  
 
Cost savings and infrastructure
  $ 287     $ 276     $ 263  
Capacity additions and new products
    193       102       65  
Research facilities and equipment
    25       27       65  
Capitalized interest cost
    15       12       11  
 
                 
Total
  $ 520     $ 417     $ 404  
 
                 
Spending for environmental protection equipment included in several of the categories in the table shown above, was $41 million in 2008, $59 million in 2007 and $63 million in 2006. Projected capital expenditures in 2009 of approximately $400 million are expected to be below depreciation expense as we conserve cash in the face of difficult economic conditions.

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Dividends
Common stock dividends have been paid each year since 1927. The payout has increased at an average of 10.6% compound annual growth rate since 1978.
                 
    Dividend Paid   Amount
Year   (Per common share)   (In millions)
2006
  $ 1.28     $ 283  
2007
  $ 1.44     $ 303  
2008
  $ 1.60     $ 314  
(GARAPH LOGO)
Share Repurchase Program
On July 16, 2007, our Board of Directors authorized the repurchase of up to $2 billion of our common stock, the first $1 billion of which was financed with debt. For the debt financed portion of this authorization, we entered into an accelerated share repurchase agreement (ASR) with Goldman, Sachs & Co. (Goldman Sachs) on September 10, 2007. Under the ASR, we paid $1 billion to Goldman Sachs and initially received approximately 16.2 million of shares of our common stock on September 11, 2007. In June 2008, upon closing of the ASR, we received an additional 3.1 million shares. The average share price for the 19.3 million total shares repurchased was $51.56, approximately 3% below the average market price of our stock during the repurchase period. We have discontinued repurchasing our shares.

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Liquidity and Debt
As of December 31, 2008, we had $335 million in total cash and $3,387 million in debt compared with $268 million and $3,297 million, respectively, as of December 31, 2007. A summary of our cash and debt balances is provided below:
                 
    December 31,   December 31,
(in millions)   2008   2007
 
Short-term obligations
  $ 177     $ 158  
Long-term debt
    3,210       3,139  
       
Total debt
  $ 3,387     $ 3,297  
       
 
               
Cash and cash equivalents
  $ 335     $ 265  
Restricted cash
          3  
       
Total cash
  $ 335     $ 268  
       
We expect interest expense to run at a quarterly rate of approximately $40 million during 2009.
Credit Ratings
In July 2007, we decided to support our Vision 2010 strategic plan by increasing the debt component of our capital structure. Accordingly, in September 2007, we borrowed to repurchase $1 billion of our capital stock in a transaction which is described more fully above. As a result of this change in financial policy, Standard and Poor’s and Moody’s changed our senior unsecured debt ratings from A minus and A3 to BBB and Baa1, respectively, both with stable outlooks. Our short-term commercial paper ratings were unchanged at A2 and P2 by Standard and Poor’s and Moody’s, respectively. Since that time we have funded our businesses and paid dividends primarily from cash from operating activities and have not increased borrowings. We believe solid investment grade ratings are consistent with the objectives of our long-term financial policies. Although we managed our debt levels consistent with these objectives throughout 2008, during the second half of 2008, our credit ratings were impacted negatively by the pending merger with The Dow Chemical Company. On July 10, 2008, after the announcement of our pending merger with The Dow Chemical Company, Moody’s placed all of our credit ratings “under review for possible downgrade,” then reiterated this status on December 31, 2008. Standard & Poor’s has responded to the merger announcement by placing us on “Credit Watch.” On December 29, 2008, Standard & Poor’s revised the implications of their “Credit Watch” on our long-term debt from “developing” to “negative” and reiterated their view that developments with The Dow Chemical Company had negative implications for our short-term credit rating including commercial paper.
Short-term Debt
In September 2007, we expanded our syndicated revolving credit facility from $500 million to $750 million, and in December 2007, we extended this facility through December 2012. At December 31, 2008, our short-term debt was composed of local bank borrowings and the portion of our long-term debt which is due within one year. During 2008, our primary source of short-term liquidity was cash from operating activities and commercial paper borrowings. We had access to the commercial paper market, as needed, in September and mid-October of 2008 when we last issued commercial paper. We expect to be able to access this market for overnight liquidity, if needed, during 2009. In addition, our $750 million revolving credit facility with a syndication of 14 financially-solvent banks remains in full force and effect while the merger with The Dow Chemical Company is pending and is available for use at our discretion. This credit facility will be terminated concurrent with the closing of the merger. Meanwhile, we have no plans to draw on this facility, but, if we do need it, we believe the banks will provide funding under the terms of this agreement. This facility contains a financial covenant which requires us to generate trailing four-quarter earnings before interest, taxes, depreciation, amortization, other postretirement benefits expense, excluding extraordinary items of at least 3.5 times interest on debt (both expensed and capitalized). By comparison, our 2008 coverage was just above 7 times, substantially above the covenant requirement and we forecast being able to maintain performance well above the covenant threshold for the foreseeable future.

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Long-term Debt
Our most recent long-term debt issuance was $1.1 billion issued at an effective interest rate of 6.2% in September, 2007. These debt proceeds were used to finance the $1 billion accelerated share repurchase and to reduce commercial paper outstanding. The indentures for this debt allow bondholders to put the debt back to us at 101% of par in the event of a change in control which results in the debt being downgraded by both Standard & Poor’s and Moody’s to below investment grade (below “BBB minus” and “Baa3,” respectively). The merger with The Dow Chemical Company would constitute a “change in control” for this purpose and the bondholder rights to put the debt back to us would be triggered if the transaction caused the above-mentioned downgrades within a 60-day period as defined. Our $77 million of 9.80% debentures due in 2020 have similar change in control provisions that allow the bondholders to put the debt back to us at 100% of par value.
In March 2007, we issued €175 million of 4.50% Private Placement Senior Notes due March 9, 2014. This Private Placement indenture contains a financial covenant which requires us to generate trailing four-quarter earnings before interest, taxes, depreciation, amortization, restructuring and asset impairment charges, and excluding extraordinary items of at least 3.0 times interest on debt (both expensed and capitalized). By comparison, our 2008 coverage was just above 8 times, substantially above the covenant requirement and we forecast being able to maintain performance well above the covenant threshold for the foreseeable future.
During 2007, we retired our 6.0% notes for €160 million upon maturity and early retired at par $19 million of our 8.74% notes.
Use of Derivative Instruments to Manage Market Risk
We use derivative instruments to reduce volatility arising from conducting our business in a variety of currencies, financing at long- and short-term interest rates and pricing our raw materials at market prices.
We sell products, purchase materials, and finance our operations internationally. These activities result in assets and liabilities the values of which are exposed to exchange rate fluctuation. During the year ended December 31, 2008, exchange rate movements decreased the carrying value of these net balance sheet asset positions by $26 million after tax. During the same period the derivative instruments we entered to counter-balance these exposures generated gains which offset all but $4 million of the after-tax losses on underlying positions (see Note 6, Financial Instruments). All other derivative instruments generated $54 million in cash and $8 million in after-tax gains during the year ended December 31, 2008. As of December 31, 2008, all derivative contracts represented a $19 million after-tax asset compared with a $20 million liability at December 31, 2007.

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Contractual Obligations
The following table provides contractual obligations and commitments for future payments:
                                         
(in millions)   Payments due by period
Contractual obligations   Total(4)   Within 1 year   2-3 years   4-5 years   Over 5 years
 
Operating Activities:
                                       
Operating leases
  $ 235     $ 67     $ 104     $ 64     $  
Interest on long-term debt
    2,398       181       362       334       1,521  
Raw material purchase obligations(1,2)
    1,799       607       475       320       397  
Purchase obligations, other (1,2)
    251       124       121       5       1  
Pension and other employee benefit funding (3)
    623       81       157       156       229  
FIN 48 liabilities(4)
    109                                  
Environmental liabilities(5)
    160       50       60       22       28  
Deferred revenue
    33       7       13       11       2  
Financing Activities:
                                       
Long-term debt, including current portion
    3,210       38             681       2,491  
Investing Activities:
                                       
Construction commitments
    50       47       3              
Other Activities:
                                       
ESOP loan guarantees
    134       7       16       19       92  
Interest on ESOP loan guarantees
    90       13       24       21       32  
           
Total contractual cash obligations(4)
  $ 9,090     $ 1,222     $ 1,335     $ 1,633     $ 4,793  
Notes:
 
(1)   For our requirements contracts, we have assumed that our existing business segments will require materials and services generally consistent with prior years. The amount of the obligation is based upon either projected requirements or historical spend. Our purchase obligations include raw materials, indirect materials, traffic and logistics, utilities and energy, information technology and communications contracts.
 
(2)   These obligations include evergreen contracts that renew automatically until specifically cancelled by either party. We have assumed that our evergreen contracts will continue through 2009.
 
(3)   Qualified pension plan contributions depend upon changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in employee groups covered by the plans, and any legislative or regulatory changes affecting plan funding requirements; therefore we have only forecasted funding requirements for 5 years due to the fact that significant assumptions are required. As such, the funding requirements disclosed are subject to change. The non-qualified plan and other employee benefits reflect expected future benefit payments, which are forecasted out through 2018. See Note 9 to our Consolidated Financial Statements.
 
(4)   On January 1, 2007, we adopted the provisions of FIN 48. See Note 7 Income Taxes. As of December 31, 2008, we had approximately $109 million of tax liabilities, including interest and penalties, related to uncertain tax positions. Because of the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities, we are unable to estimate the years in which settlement will occur with the respective taxing authorities.
 
(5)   These obligations include liabilities expected to be paid out within 10 years. See Note 26 to our Consolidated Financial Statements for additional information.
Trading Activities
We do not have any trading activity that involves non-exchange traded contracts accounted for at fair value.
Unconsolidated Entities
All significant entities are consolidated. Any unconsolidated entities are de minimis in nature and there are no significant contractual requirements to fund losses of unconsolidated entities. See Note 1 to the Consolidated Financial Statements for our treatment of Variable Interest Entities.

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Litigation Against The Dow Chemical Company
We entered into an Agreement and Plan of Merger with The Dow Chemical Company and its subsidiary Ramses Acquisition Corp. (Dow) on July 10, 2008. On January 26, 2009, we filed suit in the Delaware Court of Chancery against Dow alleging that, even though all conditions to Dow’s obligation to close the merger have been satisfied, Dow, in breach of its obligations under the Merger Agreement has refused to consummate the transaction. The suit seeks an order of specific performance requiring Dow to close the merger immediately. A trial date has been set for March 9, 2009.
Environmental Matters and Litigation
Our chemical operations, as those of other chemical manufacturers, involve the use and disposal of substances regulated under environmental protection laws. Our environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the risk of harm to the environment.
We have participated in the remediation of waste disposal and manufacturing sites as required under the Superfund and related laws. Remediation is well underway or has been completed at many sites. Nevertheless, we continue to face government enforcement actions, as well as private actions, related to past manufacturing and disposal and continue to focus on achieving cost-effective remediation where required.
Accruals
We have provided for costs to remediate former manufacturing and waste disposal sites, including Superfund sites, as well as our company facilities. We consider a broad range of information when we determine the amount necessary for remediation accruals, including available facts about the waste site, existing and proposed remediation technology and the range of costs of applying those technologies, prior experience, government proposals for these or similar sites, the liability of other parties, the ability of other Potentially Responsible Parties (“PRPs”) to pay costs apportioned to them and current laws and regulations. Reserves for environmental remediation that we believe to be probable and estimable are recorded appropriately as current and long-term liabilities in the Consolidated Balance Sheets. These reserves include liabilities expected to be paid out within the next 10 years. Accruals for estimated losses from environmental remediation obligations generally are recognized at the point during the remedial feasibility study when costs become probable and estimable. We do not accrue for legal costs expected to be incurred with a loss contingency. We assess the accruals quarterly and update them as additional technical and legal information becomes available. However, at certain sites, we are unable, due to a variety of factors, to assess and quantify the ultimate extent of our responsibility for study and remediation costs. If we believe that no best estimate exists, we accrue the minimum in a range of possible losses, and disclose any material, reasonably possible, additional losses. If we determine a liability to be only reasonably possible, we consider the same information to estimate the possible exposure and disclose any material potential liability. In addition, estimates for liabilities to be incurred between 11 to 30 years in the future are also considered only reasonably possible because the chance of a future event occurring is more than remote but less probable. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment. We have identified reasonably possible loss contingencies related to environmental matters of approximately $138 million and $124 million at December 31, 2008 and December 31, 2007, respectively. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of goods sold and are presented below:
         
(in millions)   Balance  
 
December 31, 2006
  $ 141  
Amounts charged to earnings
    37  
Amounts spent
    (28 )
 
     
December 31, 2007
  $ 150  
Amounts charged to earnings
    45  
Amounts spent
    (35 )
 
     
December 31, 2008
  $ 160  
 
     

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Wood-Ridge/Berry’s Creek
The Wood-Ridge, New Jersey site (“Site”), and Berry’s Creek, which runs past this Site, are areas of environmental significance to the Company. The Site is the location of a former mercury processing plant acquired many years ago by a company later acquired by Morton International, Inc. (“Morton”). Morton and Velsicol Chemical Corporation (“Velsicol”) have been held jointly and severally liable for the cost of remediation of the Site. The New Jersey Department of Environmental Protection (“NJDEP”) issued the Record of Decision documenting the clean-up requirements for the manufacturing site in October 2006. The Company entered into an agreement to perform the work in October 2008. The trust created by Velsicol will bear a portion of the cost of remediation, consistent with the bankruptcy trust agreement that established the trust. In addition, an unsuccessful two day mediation session was conducted in July 2008 with approximately one dozen non-settling parties, including companies whose materials were processed at the manufacturing site, to resolve their share of the liability for a portion of the remediation costs. We are in continued discussions with these parties under an agreement tolling the deadlines for filing cost-recovery litigation. Our ultimate exposure at the Site will depend on clean-up costs and on the level of contribution from other parties.
In May 2008, Morton and nearly 100 other potentially responsible parties (“PRPs”) entered into an agreement to perform a Remedial Investigation and Feasibility Study (RI/FS) for the Berry’s Creek Study Area; this study will examine risks posed by contamination in Berry’s Creek and the surrounding wetlands. Through its technical consultants, the group submitted a work plan for the study in September 2008, and is in the process of addressing agency comments. The schedule calls for field sampling beginning in the spring of 2009. The proposed schedule provides that the RI/FS will take at least four years to complete. In addition, subsequent sampling events, studies, testing, or other actions typically add several years before a final remedy is selected. Today, there is much uncertainty as to what will be required to address Berry’s Creek, but investigation and clean-up costs, as well as potential resource damage assessments, could be substantial and our share of these costs could possibly be material to the results of our operations, cash flows and consolidated financial position.
Other Environmental Expenditures
The laws and regulations under which we operate require significant expenditures for capital improvements, operation of environmental protection equipment, environmental compliance and remediation. Our major competitors are confronted by substantially similar environmental risks and regulations. Future developments and even more stringent environmental regulations may require us to make unforeseen additional environmental expenditures.
Capital spending for new environmental protection equipment was $41 million, $59 million and $63 million in 2008, 2007 and 2006, respectively. Spending for 2009 and 2010 is expected to approximate $59 million and $55 million, respectively. Capital expenditures in this category include projects whose primary purposes are pollution control and safety, as well as environmental projects intended primarily to improve operations or increase plant efficiency. Capital spending does not include the cost of environmental remediation of waste disposal sites.
The cost of managing, operating and maintaining current pollution abatement facilities was $184 million, $159 million and $151 million in 2008, 2007 and 2006, respectively, and was charged against each year’s earnings.
Climate Change
The Company sees both commercial opportunities and risks associated with the global interest in climate change. The Kyoto Protocol to the United Nations Framework Convention on Climate Change was adopted in 2005 in many countries. For instance, the European Union (EU) has a mandatory Emissions Trading Scheme to implement its objectives under the Kyoto Protocol. Four of our European locations currently exceed the threshold for participation in the EU Emissions Trading Scheme pursuant to the Kyoto Protocol and are implementing the requirements established by their respective countries. Global attention is now focused on the development of a global policy framework to address climate change when the Kyoto Protocol expires in 2012. Climate change legislation, and legislative initiatives are already well along in Europe, Canada and other countries, and related legislation has passed or is being introduced in some U.S. states. In addition, the 2007 Supreme Court decision in Massachusetts v. EPA, holding that greenhouse gases, including carbon dioxide (CO2) are “air pollutants” subject to regulation by EPA has resulted in the anticipation of additional regulatory, legislative and judicial actions in

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the US. The EPA has recently announced its intention to review its position on CO2 emissions. In the United States, we are advocating the development of energy supplies and energy efficiency, as well as the need for a comprehensive federal energy policy.
Due to the nature of our business, we have emissions of CO2 primarily from combustion sources; we also have some minor process by-product CO2 emissions. Our emissions of other greenhouse gases are infrequent and minimal as compared to CO2 emissions. We have therefore focused on ways to increase energy efficiency and curb increases in greenhouse gas emissions resulting from growth in production in addition to lowering the energy usage of existing operations. The absence of comprehensive climate change legislation prevents any accurate estimates of the long-term impact on us. However, any legislation that limits CO2 emissions may create a potential restriction to business growth by capping consumption of traditional energy sources available to all consumers of energy, including Rohm and Haas and our customers. Capping consumption could result in: increased energy costs, additional capital investment to lower energy intensity and rationed usage with the need to purchase greenhouse gas emission credits. Our Manufacturing Council, comprised of facility plant managers, has a global effort underway to improve our energy efficiency at all of our locations through energy audits, sharing best practices and in some cases installation of more efficient equipment. In 2008, our Corporate Energy Team focused attention on reducing energy consumption at those locations which incurred 90% of energy costs and realized a reduction in energy consumption. We will continue to follow these climate change issues, work to improve the energy efficiencies of our operations, work to minimize any negative impacts on our operations and seek technological breakthroughs in energy supply and efficiency in both our operations and product development. Additionally, we have recognized that climate change presents commercial opportunities and we continue to develop environmentally friendly products, especially in the areas of coatings, advanced water treatment and food preservation. In early 2008, we announced a partnership with The Natural Step International, through which we are learning to incorporate sustainability objectives in all of our business, research and development and operating practices which will benefit us in recognizing ways to both manage and benefit from climate change issues.
Chemical Company Regulations
European Union (“EU”) chemicals regulation for Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”), went into effect on June 1, 2007. The overarching goals of REACH are to better protect human health and the environment, while further driving the competitiveness of the EU chemical industry. We have a pro-active cross-functional team in place to manage our compliance and exposure to REACH. While REACH will require significant effort on our part, its impacts on our European business are somewhat muted by two key factors: i) polymers made from registered monomers do not have to be separately registered and ii) formulators such as our Adhesives and Electronic Materials businesses do not bear the burden of registering their raw materials for use — their suppliers do.
Our key chemicals subject to registration are monomers, sodium borohydride and substances we directly import into Europe that are utilized in our products. The majority of registrations will be near 2018, with a projected cost of 20 to 40 million euros over the course of the 11-year phase-in period to close our data gaps. Rohm and Haas currently uses roughly 50 substances classified CMR (cat. 1 and 2). Over the past three years, Rohm and Haas has significantly decreased its use of these chemicals, supporting our objective to proactively remove Concern Substances from our formulations prior to the implementation of REACH. We successfully completed the first REACH milestone, when we preregistered 500 substances which we manufacture or import into the EU prior to December 1, 2008. While REACH will result in some additional costs for our businesses, we do not anticipate either any significant competitive advantage or disadvantage to result from its implementation.
It is anticipated that U.S. EPA and Congress may review the Toxic Substances Control Act of 1976 for updating and possible harmonizing with REACH.
Litigation
We are involved in various kinds of litigation, principally in the United States. We strive to resolve litigation where we can through negotiation and other alternative dispute resolution methods such as mediation. Otherwise, we vigorously prosecute or defend lawsuits in the courts. Significant litigation is described in Note 26 to the Consolidated Financial Statements.

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Acquisitions and Divestitures
Significant acquisitions and divestitures are discussed in Note 2 to the Consolidated Financial Statements.
Working Capital
For 2008, working capital increased by 10 days as compared to 2007 due to the combination of a decrease in cost of goods sold in the fourth quarter of 2008 and an increase in inventory. The decrease in cost of goods sold is due to a significant rapid decline in demand in the second half of 2008.
Details about two major components of working capital at the end of 2008 and 2007 are summarized below:
                 
(millions)   2008   2007
 
Inventories
               
Year-end balance
  $ 1,099     $ 1,024  
Annual turnover
    6.75       6.40  
 
               
Days cost of sales in ending inventory
    66       54  
     
Customer receivables, net
               
Year-end balance
  $ 1,360     $ 1,610  
Annual turnover
    6.45       6.00  
 
               
Days sales outstanding
    59       60  
     
Notes:
    Days sales outstanding were calculated by dividing ending net customer receivables by daily sales for the fourth quarter.
 
    Days cost of sales in ending inventory was calculated by dividing ending inventory by daily cost of sales for the fourth quarter.
 
    For customer receivables, annual turnover figures are calculated by dividing annual sales by the average customer receivables balance.
 
    For inventories, annual turnover figures are calculated by dividing cost of goods sold by the average inventory balance.
Asset Turnover equals sales divided by average year-end assets. Asset turnover was 1.0x in 2008 and 0.9x in 2007 and 2006.

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ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED
Employers’ Disclosures about Postretirement Benefit Plan Assets
In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”, which requires additional disclosures such as significant risks within plan assets, investment allocation decisions, fair values by major category of plan assets and valuation techniques. This statement is effective for fiscal years ending after December 15, 2009. We believe the impact to our Consolidated Financial Statements will be limited to additional disclosure.
Determining Whether Share Based Payment Transactions are Participating Securities
In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings Per Share.” Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. FSP EITF 03-6-1 is effective for fiscal periods beginning after December 15, 2008. All prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. We are currently assessing the impact of the adoption of this FSP to our Consolidated Financial Statements.
Accounting for Collaborative Arrangements
In December 2007, the EITF met and ratified EITF No. 07-01, “Accounting for Collaborative Arrangements,” in order to define collaborative arrangements and to establish reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. This EITF is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. This EITF is to be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We do not believe this EITF will have a material effect on our Consolidated Financial Statements.
Non-controlling Interests
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements,” which amends ARB No. 51. SFAS No. 160 establishes accounting and reporting standards that require that 1) non-controlling interests held by non-parent parties be clearly identified and presented in the consolidated statement of financial position within equity, separate from the parent’s equity and 2) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly presented on the face of the consolidated statement of income. SFAS No. 160 also requires consistent reporting of any changes to the parent’s ownership while retaining a controlling financial interest, as well as specific guidelines over how to treat the deconsolidation of controlling interests and any applicable gains or losses. This statement will be effective for financial statements issued in 2009. We are currently assessing the impact to our Consolidated Financial Statements.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices since we denominate our business transactions in a variety of foreign currencies, finance our operations through long- and short-term borrowings, and purchase raw materials at market prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. Our operating and financing plans include actions to reduce this uncertainty including, but not limited to, the use of derivative instruments.

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We have established policies governing our use of derivative instruments. We do not use derivative instruments for trading or speculative purposes, nor are we a party to any leveraged derivative instruments or any instruments for which the fair market values are not available from independent third parties. We manage counter-party risk by entering into derivative contracts only with major financial institutions of investment grade credit rating and by limiting the amount of exposure to each financial institution. The terms of certain derivative instruments contain a credit clause where each party has a right to settle at market if the other party is downgraded below investment grade. As of December 31, 2008, the fair market value of all derivative contracts in our Consolidated Balance Sheet was a net asset of $22 million pre-tax. All of these contracts were with investment grade financial institutions.
We enter into derivative contracts based on economic analysis of underlying exposures, anticipating that adverse impacts on future earnings, cash flows and fair values due to fluctuations in foreign currency exchange rates, interest rates and commodity prices will be offset by the proceeds from and changes in the fair value of the derivative instruments. Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings, cash flows and fair values, as this would not be cost effective.
Sensitivity analysis is used as a primary tool in evaluating the effects of changes in foreign currency exchange rates, interest rates and commodity prices on our business operations. The analyses quantify the impact of potential changes in these rates and prices on our earnings, cash flows and fair values of assets and liabilities during the forecast period, most commonly within a one-year period. The ranges of changes used for the purpose of this analysis reflect our view of changes that are reasonably possible over the forecast period. Fair values are the present value of projected future cash flows based on market rates and chosen prices.
Foreign Exchange Rate Risk
Our products are manufactured and sold in a number of locations around the world. We generate revenues and incur costs in a variety of European, Asian and Latin American currencies. Additionally, we finance operations outside of the United States in local currencies. Our diverse base of local currency costs, financings, and foreign exchange option, forward and swap contracts will partially counterbalance the impact of changing foreign currency exchange rates on revenues, earnings, cash flows and fair values of assets and liabilities. Nevertheless, when those anticipated transactions are realized, actual effects of changing foreign currency exchange rates could have a material impact on earnings and cash flows in future periods.
Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Germany, France, Italy, the Netherlands, Switzerland, the United Kingdom, Sweden, South Africa, Canada, Japan, Australia, Korea, Taiwan, Singapore, China, the Philippines, Thailand and Brazil. Known and anticipated exposures are covered by using foreign exchange option, forward and swap contracts. We estimate that an instantaneous 10% depreciation in all the currencies of these countries from their levels against the dollar as of December 31, 2008, with all other variables held constant, would increase the fair value of foreign currency hedging contracts held at December 31, 2008 by $25 million; a 10% appreciation of these currencies would decrease the fair market value by $25 million. This estimate is based on market conditions as of December 31, 2008, without reflecting the effects of underlying anticipated transactions.
Interest Rate Risk
We are exposed to changes in interest rates primarily due to our financing, investing and cash management activities, which include long- and short-term debt to maintain liquidity and fund business operations. A 50 basis point increase in interest rates would reduce the fair value of short- and long-term debt by $99 million. A 50 basis point decrease in interest rates will increase the fair value by $119 million. However, such changes in fair values would not have a material impact on our earnings per share or cash flows as the majority of our debt

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obligations at December 31, 2008 consisted of fixed rate instruments. A 50 basis point movement is equivalent to approximately 8% of the weighted average rate on our worldwide debt.
Commodity Price Risk
We purchase certain raw materials and energy sources such as natural gas, propylene, acetone, butanol and styrene under short- and long-term supply contracts. The purchase prices are generally determined based on prevailing market conditions. Changing raw material and energy prices have had material impacts on our earnings and cash flows in the past, and will likely continue to have significant impacts on earnings and cash flows in future periods. Commodity derivative instruments are used to reduce portions of commodity price risks. A 25% increase in the underlying commodity price would increase the fair value of commodity derivative instruments by $2 million. A 25% decrease in the underlying commodity price would decrease the fair value of commodity derivative instruments by $2 million.

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Item 8: Financial Statements and Supplementary Data
         
    Page  
 
    65  
    66  
Consolidated Financial Statements:
       
    67  
    68  
    69  
    70  
    71  

64


 

Management’s Report on Internal Control Over Financial Reporting
Rohm and Haas Company’s (the “Company’s”) management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Rohm and Haas Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (COSO). Based on our assessment, management has concluded that, as of December 31, 2008, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an attestation report on the Company’s internal controls over financial reporting, which is included in this Annual Report on Form 10-K.
         
/s/ Raj L. Gupta
 
  /s/ Jacques M. Croisetiere
 
       
Raj L. Gupta
  Jacques M. Croisetiere    
Chairman and Chief Executive Officer
  Executive Vice President, Chief Financial Officer    
 
  and Chief Strategy Officer    
February 27, 2009

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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Rohm and Haas Company:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Rohm and Haas Company and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Notes 7 and 9 to the consolidated financial statements, the Company adopted a new financial accounting standard for uncertain tax positions during 2007 and a new financial accounting standard for defined benefit pension and other postretirement plans during 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 27, 2009

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Rohm and Haas Company and Subsidiaries
Consolidated Statements of Operations
                         
For the years ended December 31,   2008     2007     2006  
 
(in millions, except per share amounts)
                       
Net sales
  $ 9,575     $ 8,897     $ 8,230  
Cost of goods sold
    7,165       6,430       5,747  
 
                 
 
                       
Gross profit
    2,410       2,467       2,483  
Selling and administrative expense
    1,138       1,091       1,041  
Research and development expense
    327       296       286  
Interest expense
    164       120       94  
Amortization of intangibles
    63       57       56  
Restructuring and asset impairments
    199       28       27  
Pension judgment
          65        
Share of affiliate earnings, net
    97       22       10  
Other expense (income), net
    55       (48 )     (53 )
 
                 
Earnings from continuing operations before income taxes, and minority interest
    561       880       1,042  
Income tax expense
    77       206       274  
Minority interest
    4       14       13  
 
                 
Earnings from continuing operations
    480       660       755  
 
                 
 
                       
Discontinued operations:
                       
Net earnings (loss) of discontinued lines of business, net of income tax (benefit) expense of $(1), $(2), and $14 in 2008, 2007 and 2006, respectively
    2       1       (20 )
 
                 
Net earnings
  $ 482     $ 661     $ 735  
 
                 
 
                       
Basic earnings per share (in dollars):
                       
From continuing operations
  $ 2.48     $ 3.17     $ 3.45  
Income (loss) from discontinued operation
    0.01       0.01       (0.09 )
 
                 
Net earnings per share
  $ 2.49     $ 3.18     $ 3.36  
 
                 
 
                       
Diluted earnings per share (in dollars):
                       
From continuing operations
  $ 2.44     $ 3.12     $ 3.41  
Income (loss) from discontinued operation
    0.01       0.01       (0.09 )
 
                 
Net earnings per share
  $ 2.45     $ 3.13     $ 3.32  
 
                 
 
                       
Weighted average common shares outstanding — basic
    193.6       207.8       218.9  
Weighted average common shares outstanding — diluted
    196.5       211.0       221.2  
See Notes to Consolidated Financial Statements

67


 

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Cash Flows
                         
For the years ended December 31,   2008     2007     2006  
 
(in millions)
                       
Cash Flows from Operating Activities
                       
Net earnings
  $ 482     $ 661     $ 735  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
(Gain) loss on disposal of business and equity affilitates
    (86 )     (1 )     16  
Income taxes related to disposal of business and equity affiliates
    39              
(Gain) loss on sale of assets
    (4 )     3       7  
Provision for allowance for doubtful accounts
    16       5       6  
Provision for LIFO reserve
    (23 )     43       7  
Benefit from deferred taxes
    (152 )     (75 )     (37 )
Asset impairments
    42       18       2  
Depreciation
    467       412       407  
Amortization of finite-lived intangibles
    63       57       58  
Pension judgment
          65        
Share-based compensation
    49       49       48  
Premium paid on debt retirement
                (6 )
Changes in assets and liabilities
                       
Accounts receivable
    397       (266 )     (30 )
Inventories
    (79 )     18       (161 )
Prepaid expenses and other current assets
    (49 )     (36 )     3  
Accounts payable and accrued liabilities
    (129 )     22       (12 )
Federal, foreign and other income taxes payable
    (98 )     23       (96 )
Payments to fund US pension plans
                (137 )
Swap termination proceeds
    69              
Other, net
    36       (35 )     30  
 
                 
Net cash provided by operating activities
    1,040       963       840  
 
                 
 
                       
Cash Flows from Investing Activities
                       
Acquisitions of businesses affiliates and intangibles, net of cash received
    (164 )     (117 )     (46 )
Proceeds from disposal of businesses and equity affiliates, net
    119       15       256  
Decrease in restricted cash
    3             1  
Investments in Rabbi Trust
    (200 )            
Proceeds from the sale of land, buildings and equipment
    15       17       12  
Capital expenditures for land, buildings and equipment
    (520 )     (417 )     (404 )
Payments to settle derivative contracts
    (25 )     (67 )     (22 )
 
                 
Net cash used in investing activities
    (772 )     (569 )     (203 )
 
                 
 
                       
Cash Flows from Financing Activities
                       
Proceeds from issuance of long-term debt
    2       1,394       23  
Repayments of long-term debt
    (8 )     (441 )     (182 )
Contribution from minority shareholder in consolidated joint venture
    22              
Purchase of common stock
    (15 )     (1,462 )     (264 )
Tax benefit on stock options
    32       8       8  
Proceeds from exercise of stock options
    104       46       74  
Net change in short-term borrowings
    12       11       (8 )
Payment of dividends
    (314 )     (303 )     (283 )
 
                 
Net cash used in financing activities
    (165 )     (747 )     (632 )
 
                 
Net increase (decrease) in cash and cash equivalents
    103       (353 )     5  
Effect of exchange rate changes on cash and cash equivalents
    (33 )     25       22  
Cash and cash equivalents at the beginning of the year
    265       593       566  
 
                 
Cash and cash equivalents at the end of the year
  $ 335     $ 265     $ 593  
 
                 
 
                       
Supplemental Cash Flow Information
                       
 
                       
Cash paid during the year for:
                       
Interest, net of amounts capitalized
  $ 165     $ 117     $ 109  
Income taxes, net of refunds received
    206       230       381  
See Notes to Consolidated Financial Statements

68


 

Rohm and Haas Company and Subsidiaries
Consolidated Balance Sheets
                 
December 31,   2008     2007  
 
(in millions, except share data)
               
Assets
               
Cash and cash equivalents
  $ 335     $ 265  
Restricted cash
          3  
Receivables, net
    1,538       1,876  
Inventories
    1,099       1,024  
Prepaid expenses and other current assets
    386       258  
 
           
 
               
Total current assets
    3,358       3,426  
 
           
 
               
Land, buildings and equipment, net of accumulated depreciation
    2,853       2,871  
Investments in and advances to affiliates
    176       195  
Goodwill, net of accumulated amortization
    1,666       1,668  
Other intangible assets, net of accumulated amortization
    1,418       1,492  
Other assets
    438       455  
 
               
 
           
Total Assets
  $ 9,909     $ 10,107  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Short-term obligations
  $ 177     $ 158  
Trade and other payables
    633       806  
Accrued liabilities
    859       788  
Income taxes payable
          17  
 
           
 
               
Total current liabilities
    1,669       1,769  
 
           
 
               
Long-term debt
    3,210       3,139  
Employee benefits
    1,138       760  
Deferred income taxes
    413       766  
Other liabilities
    290       312  
 
           
 
               
Total Liabilities
    6,720       6,746  
 
           
 
               
Minority Interest
    213       215  
 
               
Commitments and contingencies
               
 
               
Stockholders’ Equity:
               
Preferred stock; par value - $1.00; authorized - 25,000,000 shares; issued - no shares
           
Common stock; par value - $2.50; authorized - 400,000,000 shares; issued - 242,078,349 shares
    605       605  
Additional paid-in capital
    2,307       2,147  
Retained earnings
    2,742       2,569  
 
           
 
               
 
    5,654       5,321  
Treasury stock at cost (2008 - 46,844,623, shares; 2007 - 46,227,211 shares)
    (1,921 )     (1,918 )
ESOP shares (2008 - 7,311,125 shares; 2007 - 7,995,877 shares)
    (70 )     (75 )
Accumulated other comprehensive loss
    (687 )     (182 )
 
           
 
               
Total Stockholders’ Equity
    2,976       3,146  
 
           
 
               
Total Liabilities and Stockholders’ Equity
  $ 9,909     $ 10,107  
 
           
See Notes to Consolidated Financial Statements

69


 

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the years ended December 31, 2008, 2007, and 2006
                                                                                   
    Number of                             Number of                                      
    Shares of                             Shares of                     Accumulated                
    Common             Additional             Treasury                     Other     Total       Total  
    Stock     Common     Paid-in     Retained     Stock     Treasury             Comprehensive     Stockholders’       Comprehensive  
(in millions, except share amounts in thousands)   Outstanding     Stock     Capital     Earnings     Outstanding     Stock     ESOP     Income (Loss)     Equity       Income  
       
2006
                                                                                 
Net earnings
                            735                                       735       $ 735  
Reclassification of derivatives to earnings, net of taxes of $(6)
                                                            (11 )     (11 )       (11 )
Changes in fair value of derivatives, net of taxes of $5
                                                            10       10         10  
Cumulative translation adjustment, net of taxes of $(8)
                                                            (2 )     (2 )       (2 )
Change in minimum pension liability, net of taxes of $11
                                                            35       35         35  
 
                                                                               
Total comprehensive income
                                                                            $ 767  
 
                                                                               
Adjustment to initially apply FASB Statement No. 158, net of tax of $(127)
                                                            (243 )     (243 )          
Repurchase of common stock
    (5,697 )                             5,697       (264 )                     (264 )          
Common stock issued:
                                                                                 
Stock-based compensation
    2,573               62               (2,573 )     65                       127            
ESOP
                                                    6               6            
Tax benefit on ESOP
                            4                                       4            
Common dividends ($1.28 per share)
                            (283 )                                     (283 )          
 
                                                                                 
               
Balance December 31, 2006
    218,839     $ 605     $ 2,214     $ 2,218       23,240     $ (608 )   $ (82 )   $ (316 )   $ 4,031            
               
 
                                                                                 
2007
                                                                                 
Cumulative Transition Adjustment for FIN 48
                            (9 )                                     (9 )          
Net earnings
                            661                                       661       $ 661  
Cumulative translation adjustment, net of taxes of $(21)
                                                            17       17         17  
Reclassification of derivatives to earnings, net of taxes of $(3)
                                                        (5 )     (5 )          
Changes in fair value of derivatives, net of taxes of $1
                                                            1       1         1  
Prior service credit, net, from pension plan amendments arising during period, net of taxes of $18
                                                            41       41         41  
Amortization of net actuarial loss for pension and postretirement plans, net of taxes of $8
                                                            18       18         18  
Net actuarial gain on pension and postretirement plans arising during period, net of taxes of $28
                                                            62       62         62  
 
                                                                               
Total comprehensive income
                                                                            $ 795  
 
                                                                               
Repurchase of common stock
    (24,747 )             (99 )             24,747       (1,363 )                     (1,462 )          
Common stock issued:
                                                                                 
Stock-based compensation
    1,760               32               (1,760 )     53                       85            
ESOP
                                                    7               7            
Tax benefit on ESOP
                            2                                       2            
Common dividends ($1.44 per share)
                            (303 )                                     (303 )          
 
                                                                                 
               
Balance December 31, 2007
    195,852     $ 605     $ 2,147     $ 2,569       46,227     $ (1,918 )   $ (75 )   $ (182 )   $ 3,146            
               
 
                                                                                 
2008
                                                                                 
Net earnings
                            482                                       482       $ 482  
Cumulative translation adjustment, net of taxes of $(38)
                                                            (104 )     (104 )       (104 )
Reclassification of derivatives to earnings, net of taxes of $2
                                                            3       3         3  
Changes in fair value of derivatives, net of taxes of $1
                                                            1       1         1  
Net gain (loss) on marketable securities, net of taxes of $0
                                                            (1 )     (1 )       (1 )
Prior service cost, net, from pension plan amendments arising during period, net of taxes of $(1)
                                                            (1 )     (1 )       (1 )
Amortization of prior service credit, net of taxes of $(2)
                                                            (3 )     (3 )       (3 )
Net actuarial loss on pension and postretirement plans arising during period, net of taxes of $(200)
                                                            (408 )     (408 )       (408 )
Amortization of net actuarial loss for pension and postretirement plans, net of taxes of $5
                                                            8       8         8  
 
                                                                               
Total comprehensive income
                                                                            $ (23 )
 
                                                                               
Repurchase of common stock
    (3,296 )             99               3,296       (114 )                     (15 )          
Common stock issued:
                                                                                 
Stock-based compensation
    2,678               61               (2,678 )     111                       172            
ESOP
                                                    5               5            
Tax benefit on ESOP
                            5                                       5            
Common dividends ($1.60 per share)
                            (314 )                                     (314 )          
 
                                                                                 
               
Balance December 31, 2008
    195,234     $ 605     $ 2,307     $ 2,742       46,845     $ (1,921 )   $ (70 )   $ (687 )   $ 2,976            
               
See Notes to Consolidated Financial Statements

70


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Summary of Significant Accounting Policies
Nature of Business
Rohm and Haas Company was incorporated in 1917 under the laws of the State of Delaware. Our shares are traded on the New York Stock Exchange under the symbol “ROH.” We are a leading specialty materials company that leverages science and technology in many different forms to design materials and processes that enable the products of our customers to work. We serve many different market places, the largest of which include: building and construction, electronics, packaging and paper, industrial and other, transportation, household and personal care, water and food. To serve these markets, we have significant operations in approximately 98 manufacturing and 34 research facilities in 30 countries. We have approximately 15,490 employees working for us worldwide.
Use of Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In accordance with GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Principles of Consolidation
Our Consolidated Financial Statements include the accounts of our company and subsidiaries. We consolidate all entities in which we have a controlling ownership interest. All of our significant entities are consolidated. We have no significant contractual requirements to fund losses of unconsolidated entities. Also in accordance with Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities,” we consolidate variable interest entities in which we bear a majority of the risk to the potential losses or gains from a majority of the expected returns.
We are the primary beneficiary of a joint venture deemed to be a variable interest entity. Each joint venture partner holds several equivalent variable interests, with the exception of a royalty agreement held exclusively between the joint venture and us. In addition, the entire output of the joint venture is sold to us for resale to third party customers. As the primary beneficiary, we consolidated the joint venture’s assets, liabilities, and results of operations in our Consolidated Financial Statements.

71


 

As of December 31, 2008 and 2007, the carrying amount of the joint venture’s assets and liabilities before intercompany eliminations, were as follows:
                 
(in millions)   2008   2007
 
Cash and cash equivalents
  $ 27     $ 31  
Receivables, net
    56       62  
Inventory
    13       11  
Land, buildings and equipment, net of accumulated depreciation
    86       66  
Investments in and advances to affiliates
    23       1  
Other
    7       6  
     
Total assets
  $ 212     $ 177  
     
 
               
Short-term obligations
  $ 10     $ 9  
Trade and other payables
    19       23  
Accrued liabilities
    9       11  
Income taxes payable
    9       10  
Other
    8       4  
     
Total liabilities
  $ 55     $ 57  
     
We hold a variable interest in another joint venture, which we account for under the equity method of accounting. The variable interest relates to a cost-plus arrangement between the joint venture and each joint venture partner. The entity provides manufacturing services to us and the other joint venture partner, and has been in existence since 1999. We have determined that Rohm and Haas is not the primary beneficiary as a majority of the joint venture’s output is sold to our joint venture partner. Therefore we have not consolidated the entity’s assets, liabilities, and results of operations in our Consolidated Financial Statements. As of December 31, 2008, our investment in the joint venture was approximately $56 million, representing our maximum exposure to loss. This amount is recorded in Investments and advances to affiliates in the Consolidated Balance Sheet.
We use the equity method to account for our investments in companies in which we have the ability to exercise significant influence over operating and financial policies, generally 20-50% owned. Accordingly, our consolidated net earnings or loss include our share of the net earnings or loss of these companies.
We account for our investments in other companies that we do not control and for which we do not have the ability to exercise significant influence, which are generally less than 20%, under the cost method. In accordance with the cost method, the assets are recorded at cost or fair value, as appropriate.
All significant intercompany accounts, transactions and unrealized profits and losses are eliminated appropriately in consolidation from our financial results.
Foreign Currency Translation
We translate foreign currency amounts into U.S. dollars in accordance with GAAP. The majority of our operating subsidiaries in regions other than Latin America use the local currency as their functional currency. We translate the assets and liabilities of those entities into U.S. dollars using the appropriate exchange rates. We translate revenues and expenses using the average exchange rates for the reporting period. Translation gains and losses are recorded in accumulated other comprehensive income (loss), net of taxes, except for foreign subsidiaries where earnings are permanently reinvested outside the U.S.
For entities that continue to use the U.S. dollar as their functional currency, we remeasure land, buildings and equipment, accumulated depreciation, inventories, goodwill and intangibles and accumulated amortization at their respective historical rates of exchange. We remeasure all other assets and liabilities using the appropriate exchange rates at the end of the period. Revenue, cost of goods sold and operating expenses other than depreciation and amortization are translated using the average rates of exchange for the reporting period.

72


 

Foreign exchange gains and losses, including recognition of open foreign exchange derivative contracts, are credited or charged to income.
Cost of Goods Sold
Cost of goods sold as reported in the Consolidated Statements of Operations includes inbound freight charges, purchasing and receiving costs, inspection costs, internal transfer costs, and other distribution network charges.
Revenue Recognition
We recognize revenue when the earnings process is complete. This occurs when products are shipped to or received by the customer in accordance with the terms of the agreement, title and risk of loss have been transferred, collectibility is probable and pricing is fixed or determinable. The exception to this practice is for sales made under supplier-owned and managed inventory (“SOMI”) arrangements. We recognize revenue for inventory sold under SOMI arrangements when usage of inventory is reported by the customer, generally on a weekly or monthly basis. Revenues from product sales are recorded net of applicable allowances.
Customer payments received in advance are recorded as deferred revenue and recognized into income upon completion of the earnings process. We account for cash sales incentives as a reduction to revenue. Certain of our customers earn cash incentive rebates when their cumulative annual purchases meet specified measurement targets per the terms of their individual agreement. We record these rebate incentives as a reduction to revenue based on the customers’ progress against the specified measurement target. Non-cash sales incentives, such as product samples, are recorded as a charge to selling and administrative expense at the time of shipment.
Amounts billed to customers for shipping and handling fees are included in net sales, and costs we have incurred for the delivery of goods are classified as cost of goods sold in the Consolidated Statements of Operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable result from the sale of goods or services with terms that provide for future payment. They are created when an invoice is generated and are reduced by payments. We record an allowance for doubtful accounts as a best estimate of the amount of probable credit losses in our existing accounts receivable. We consider factors such as customer credit, past transaction history with the customer, and changes in customer payment terms when determining whether the collection of an invoice is reasonably assured. We review our allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Receivables are charged off against the allowance for doubtful accounts when we feel it is probable the receivable will not be recovered.
Earnings Per Share
We use the weighted-average number of shares outstanding to calculate basic earnings per share. Diluted earnings per share include the dilutive effect of share-based compensation, such as stock options and restricted stock.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and readily marketable securities with original maturities of three months or less.
Inventories
Our inventories are stated at the lower of cost or market. Approximately 35% of our inventory is determined by the last-in, first-out (LIFO) method. The remainder is determined by the first-in, first-out (FIFO) method. We allocate fixed production overhead and record inventory costs in accordance with Financial Accounting Standard No. 151: “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” whereby abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) are recognized in the Consolidated Statement of Operations in the period in which they are incurred.
Land, Buildings and Equipment, and Accumulated Depreciation
The value of our land, buildings and equipment is carried at cost less accumulated depreciation. The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvements (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7); capitalized interest (11). The principle life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is

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shorter. These assets are depreciated over their estimated useful lives using straight-line methods. Construction costs, labor and applicable overhead related to construction and installation of these assets are capitalized. Expenditures for additions and improvements that extend the lives or increase the capacity of plant assets are capitalized. Maintenance and repair costs for these assets are expensed as incurred. Repair and maintenance costs associated with planned major maintenance activities are expensed as incurred and are included in cost of goods sold. Replacements and betterment costs are capitalized. The cost and related accumulated depreciation of our assets are removed from the accounting records when they are retired or disposed.
Capitalized Software
We capitalize certain costs, such as software coding, installation and testing, that are incurred to purchase or create and implement internal use computer software in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The majority of our capitalized software relates to the implementation of our enterprise resource planning system, which was completed in 2004.
Goodwill and Indefinite-Lived Intangible Assets
We consider this to be one of the critical accounting estimates used in the preparation of our Consolidated Financial Statements. We believe the current assumptions and other considerations used to value goodwill and indefinite-lived intangible assets to be appropriate. However, if actual experience differs from the assumptions and considerations used in our analysis, the resulting change could have a material adverse impact on the consolidated results of operations and statement of position. We will continue to monitor cash flows and other factors that may trigger a future impairment in the light of the current global recession.
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is assigned to reporting units, which may be one level below our operating segments. Goodwill is assigned to the reporting unit that benefits from the synergies arising from each particular business combination. Goodwill and indefinite-lived intangible assets are reviewed annually, or more frequently, if changes in circumstances indicate the carrying value may not be recoverable. To test for recoverability, we typically utilize discounted estimated future cash flows to measure fair value for each reporting unit. This calculation is highly sensitive to both the estimated future cash flows of each reporting unit and the discount rate assumed in these calculations. Our annual impairment review is as of May 31.
During 2008, 2007 and 2006, the annual impairment review was completed without the identification of any impairment.
Impairment of Long-Lived Assets
We consider this to be one of the critical accounting estimates used in the preparation of our Consolidated Financial Statements. We believe the current assumptions and other considerations used to evaluate the carrying value of long-lived assets to be appropriate. However, if actual experience differs from the assumptions and considerations used in our estimates, the resulting change could have a material adverse impact on the Consolidated Statement of Operations and Consolidated Balance Sheet.
Our long-lived assets, other than goodwill and indefinite-lived intangible assets, which are discussed above, include land, buildings, equipment, long-term investments, and other intangible assets. Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include events such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used, is planned to be used or in its physical condition, or a history of operating or cash flow losses associated with the use of the asset. In addition, changes in the expected useful life of these long-lived assets may also be an impairment indicator. When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future undiscounted cash flows associated with the asset’s planned future use and eventual disposition of the asset, if applicable. If the carrying value of the asset is not determined to be recoverable, we estimate the fair value of the asset primarily from discounted future cash flows expected to result from the use of the asset and compare that to the carrying value of the asset. Long-lived assets are grouped at the lowest level for which identifiable cash flows are largely independent, generally the plant level. We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset’s fair value. If the carrying value is greater than the fair value, an impairment loss is recorded. In some circumstances the carrying value

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may be appropriate; however, the event that triggered the review of the asset may indicate a revision to the useful life of the asset. In such cases, we will accelerate depreciation to match the revised useful life of the asset.
The key variables that we must estimate include assumptions regarding sales volume, selling prices, raw material prices, labor and other benefit costs, capital additions, assumed discount rates and other economic factors. These variables require significant management judgment and include inherent uncertainties since they are forecasting future events. If such assets are considered impaired, an impairment loss is recognized equal to the amount by which the asset’s carrying value exceeds its fair value.
The fair values of our long-term investments are dependent on the financial performance and solvency of the entities in which we invest, as well as volatility inherent in their external markets. In assessing potential impairment for these investments, we consider these factors as well as the forecasted financial performance of the investment entities. If these forecasts are not met, we may have to record impairment charges.
Research and Development
Research and development costs include costs in connection with new product development, fundamental and exploratory research, process improvement, product applications research and product registration and technical support of current technology. We expense all research and development costs as incurred.
Litigation and Environmental Contingencies and Reserves
We consider this to be one of the critical accounting estimates used in the preparation of our Consolidated Financial Statements. We are involved in litigation in the ordinary course of business involving employee, personal injury, property damage and environmental matters. Additionally, we are involved in environmental remediation and spend significant amounts for both company-owned and third party locations. In accordance with GAAP, we are required to assess these matters to: 1) determine if a liability is probable; and 2) record such a liability when the financial exposure can be reasonably estimated. The determination and estimation of these liabilities are critical to the preparation of our financial statements. We have provided for future costs, on an undiscounted basis, at certain of these sites. Accruals for estimated losses from environmental remediation obligations generally are recognized at the point during the remedial feasibility study when costs become probable and estimable. We do not accrue for legal costs expected to be incurred with a loss contingency.
In reviewing such matters, we consider a broad range of information, including the claims, demands, settlement offers received from governmental authorities or private parties, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute as well as our prior experience, to determine if a liability is probable and if the value is reasonably estimable. If both of these conditions are met, we record a reserve. These reserves include liabilities expected to be paid out within the next 10 years. If we believe that no best estimate exists, we accrue the minimum in a range of possible losses, and disclose any material, reasonably possible, additional losses. If we determine a liability to be only reasonably possible, we consider the same information to estimate the possible exposure and disclose any material potential liability. In addition, estimates for liabilities to be incurred between 11 to 30 years in the future are also considered only reasonably possible because the chance of a future event occurring is more than remote but less than probable. These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment.
Our most significant reserves have been established for remediation and restoration costs associated with environmental issues. We conduct studies and site surveys to determine the extent of environmental contamination and necessary remediation. With the expertise of our environmental engineers and legal counsel we determine our best estimates for remediation and restoration costs. These estimates are based on forecasts of future costs for remediation and change periodically as additional and better information becomes available. Changes to assumptions and considerations used to calculate remediation reserves could materially affect our results of operations. If we determine that the scope of remediation is broader than originally planned, discover new contamination, discover previously unknown sites or become subject to related personal injury or property damage claims, our estimates and assumptions could materially change.
We believe the current assumptions and other considerations used to estimate reserves for both our environmental and other legal liabilities are appropriate. These estimates are based in large part on information currently available and the current laws and regulations governing these matters. If additional information becomes available, there are changes to

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the laws or regulations or actual experience differs from the assumptions and considerations used in estimating our reserves, the resulting change could have a material impact on the consolidated statement of operations and consolidated balance sheet.
Income Taxes
We consider this to be one of the critical accounting estimates used in the preparation of our Consolidated Financial Statements. We believe the current assumptions and other considerations used to determine our current year and deferred income tax provisions to be appropriate. However, if actual experience differs from the assumptions and considerations used, the resulting change could have a material impact on the consolidated financial position, results of operations or cash flows.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future consequences of temporary differences between the financial statement carrying value of assets and liabilities and their values as measured by tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Retirement Benefits
We consider this to be one of the critical accounting estimates used in preparation of our Consolidated Financial Statements. We believe the assumptions and other considerations used to determine our pension and postretirement benefit obligations to be appropriate. However, if actual experience differs from the assumptions and considerations used, the resulting change could have a material impact on the consolidated financial position, results of operations or cash flows.
We adopted the recognition provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” (“SFAS No. 158”) for the fiscal year ended December 31, 2006. SFAS No. 158 requires employers to recognize the overfunded or underfunded projected benefit obligation of a defined benefit plan as an asset or liability in the statement of financial position. SFAS No. 158 also requires employers to recognize annual changes in gains or losses, prior service costs, or other credits that have not been recognized as a component of net periodic pension cost, net of tax, through accumulated other comprehensive loss.
Treasury Stock
Treasury stock consists of shares of Rohm and Haas stock that have been issued but subsequently reacquired. We account for treasury stock purchases under the cost method. In accordance with the cost method, we account for the entire cost of acquiring shares of our stock as treasury stock, which is a contra equity account. When these shares are reissued, we use an average cost method for determining cost. Proceeds in excess of cost are credited to additional paid-in capital.
Share-Based Compensation
We consider this to be one of the critical accounting estimates used in the preparation of our Consolidated Financial Statements. We have various share-based compensation plans for directors, executives and employees, which are comprised primarily of restricted stock, restricted stock units and stock option grants. Prior to 2003, we accounted for these plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense was recognized prior to 2003 for stock options.
Effective January 1, 2003, we adopted the fair value method of recording share-based compensation as defined in SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). As a result, we began to expense the fair value of stock options awarded to employees after January 1, 2003. The fair value is calculated using the Black-Scholes pricing model as of the grant date and is recorded as compensation expense over the appropriate vesting period, which is typically three years. We also calculate and record the fair value of our restricted stock awards in accordance with SFAS No. 123. Compensation expense is recognized over the vesting period, which is typically five years. Our policy is to issue treasury stock, not cash, to settle equity instruments granted under share-based payment agreements.
In December 2004, the Financial Accounting Standards Board (FASB) amended SFAS No. 123. This Statement supersedes APB No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. This Statement eliminates the prospective option we have applied under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and requires all share-based payments to employees, including grants of

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employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Due to the fact that the majority of our options issued prior to January 1, 2003, the date we adopted SFAS No. 123, vested as of June 15, 2005, the revised computations did not have a material impact on our financial statements.
Fair Value Measurements of Financial Instruments
In the first quarter of 2008, we adopted SFAS No. 157 for financial assets and liabilities. The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect our own assumptions.
Accounting for Derivative Instruments and Hedging Activities
We use derivative and non-derivative instruments to manage market risk arising out of changes in interest rates, foreign exchange rates, commodity prices and the U.S. dollar value of our net investments outside the U.S. These instruments are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133”) as amended.
We have established policies governing our use of derivative instruments. We do not use derivative instruments for trading or speculative purposes, nor are we a party to any leveraged derivative instruments or any instruments for which the fair market values are not available from independent third parties. We manage counter-party default risk by entering into derivative contracts with only major financial institutions of investment grade credit rating and by limiting the amount of exposure to each financial institution. Certain of our derivative instruments contain credit clauses giving each party the right to settle at market if the other party is downgraded below investment grade.
The accounting standards require that all derivative instruments be reported on the balance sheet at their fair values. For derivative instruments designated as fair value hedges, changes in the fair value of the derivative instruments generally offset the changes in fair value of the hedged items in the Consolidated Statements of Operations. For derivative instruments designated as cash flow hedges to reduce the variability of future cash flows related to forecasted transactions, the effective portions of hedges are recorded in accumulated other comprehensive income (loss) until the hedged items are realized and recorded in earnings. When cash flow hedges are terminated early but the underlying hedged forecast transactions are likely to occur, related gains or losses are deferred in accumulated other comprehensive income (loss) until the hedged items occur. Any ineffective portions of the hedges are recognized in current period earnings.
Changes in the value of derivative or non-derivative instruments, which are designated as, and meet all of the criteria for, hedges of net investments are recorded in accumulated other comprehensive income (loss) based on changes measured on a spot-to-spot basis of exchange rates. Ineffective portions of net investment hedges are charged to earnings.
Changes in the fair values are immediately recorded in current period earnings if derivative instruments were not designated as hedges or fail to meet the criteria as effective hedges.
Cash flows resulting from our hedging activities are reported under operating activities in our Consolidated Statements of Cash Flows, except for cash flows from derivatives hedges of net investments in foreign subsidiaries and derivatives not accounted for as hedges under SFAS No. 133, which are reported separately under investing activities.

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Note 2: Acquisitions and Dispositions of Assets
Acquisitions
2008
In July 2008, we acquired the operations of SKC Euro Display for approximately $28 million, which included fixed assets of approximately $22 million, accounts receivable of approximately $5 million and inventory of approximately $1 million. We expect to have the purchase price allocation complete by the middle of 2009 as we are finalizing the final value of the closing balance sheet.
On July 31, 2008, our Salt segment acquired the Season-All® brand seasoned salt product line from McCormick & Company for $15 million in cash, primarily comprised of $14 million of intangible assets, including $12 million of trade name, $2 million of customer lists and $1 million of inventory. This purchase supports the Salt segment’s strategy of expanding its specialty salt portfolio.
On April 1, 2008, we acquired the FINNDISP division of OY Forcit AB, a Finnish paint emulsions operation, for approximately 52 million Euros (approximately $79 million). Based in Hanko, Finland, this former division of Forcit makes water-based emulsions used in the manufacture of paints and coatings, lacquers and adhesives in Northern Europe and the Commonwealth of Independent States (former Soviet Union). As part of the initial purchase price allocation, $14 million was allocated to definite-lived intangible assets primarily consisting of customer relationships.
The following table presents the initial purchase price allocation of our acquisition of FINNDISP:
         
(in millions)   April 1, 2008  
 
Current assets, including cash acquired of $1 million
       
 
       
Accounts receivable
  $ 14  
 
       
Inventories
    8  
 
       
Land, buildings and equipment
    42  
 
       
Goodwill
    23  
Intangible assets
    14  
Other, including cash acquired of $1 million
    1  
 
     
Total assets acquired
  $ 102  
 
       
Current liabilities
       
Accounts payable
  $ 6  
Accrued expenses
    1  
Notes payable
    16  
 
     
Total liabilities assumed
  $ 23  
 
       
 
     
Net assets
  $ 79  
 
     
On April 4, 2008, we acquired Gracel Display, Inc., a leading developer and manufacturer of Organic Light Emitting Diode materials based in South Korea for approximately $41 million. As part of the initial purchase price allocation, $5 million was allocated to definite-lived intangible assets primarily consisting of customer relationships with useful lives of five to seven years. We also recorded a charge of $1 million for acquired in-process research and development, for which technological feasibility had not yet been established. This charge is included in restructuring and asset impairments in the Consolidated Statement of Operations.

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The following table presents the purchase price allocation of our acquisition of Gracel Display, Inc.:
         
(in millions)   April 4, 2008  
 
Current assets, including cash acquired of $6 million
       
 
       
Goodwill
    28  
Intangible assets
    5  
In-process research and development
    1  
Other, including cash acquired of $6 million
    10  
 
     
Total assets acquired
  $ 44  
 
       
Total liabilities assumed
  $ 3  
 
       
 
     
Net assets
  $ 41  
 
     
The following table represents the unaudited pro forma results had the acquisitions of FINNDISP and Gracel Display, Inc. occurred on January 1, 2007 and 2008:
                 
    Twelve months ended
    December 31,
(in millions, except per share amounts)   2008   2007
 
Pro forma net sales
  $ 9,589     $ 8,940  
Pro forma net earnings
    483       664  
Pro forma earnings per share -
               
Basic
  $ 2.49     $ 3.20  
Diluted
    2.46       3.15  
The unaudited pro forma data may not be indicative of the results that would have been obtained had the acquisitions actually been formed at the beginning of each of the periods presented, nor are they intended to be indicative of future consolidated results.
On April 16, 2008, we announced our intention to participate with a 25% interest in a joint venture with Tasnee Sahara Olefins Company of Saudi Arabia which will produce acrylic acid and related esters in Jubail, Saudi Arabia, beginning in 2011. We will invest approximately $50 million for our equity stake in the venture and its technology for making acrylic acid.
2007
On November 30, 2007, we acquired a 51% ownership interest in a joint venture formed with SKC, Co. Ltd. (“SKC”) that will develop, manufacture and market advanced optical and functional films used in the flat panel display industry. The purchase price for our controlling interest in the joint venture was approximately $196 million. As part of the purchase price allocation, $22 million was allocated to definite-lived intangible assets, consisting of licensed technology of $6 million, with a useful life of 3 to 4 years, and customer relationships of $16 million, with a useful life of 7 years, and , in addition, we recorded a charge of $1 million for acquired in-process research and development, for which technological feasibility had not yet been established, which is included in restructuring and asset impairments in the Consolidated Statement of Operations. The results of operations of the new joint venture are included in the Display Technologies segment of our Electronic Materials Group as of the fourth quarter of 2007.

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The following table presents the purchase price allocation of our SKC joint venture:
         
    November 30,  
(in millions)   2007  
 
Current assets, including cash acquired of $2 million
  $ 289  
 
       
Land, buildings and equipment, net
    72  
 
       
Goodwill
    95  
Intangible assets
    22  
In-process research and development
    1  
Deferred tax benefits
    11  
Other
    2  
 
     
Total assets acquired
  $ 492  
 
     
Current liabilities
  $ 194  
 
     
Deferred tax liabilities
    10  
Other long-term liabilities
    11  
 
     
Other liabilities
    21  
 
     
Total liabilities acquired
  $ 215  
 
     
 
       
Minority interest acquired
  $ 81  
 
     
Included in current liabilities above are Notes Payable totaling $145 million which matured and were paid off by the joint venture on December 4, 2007.
The following table represents the unaudited pro forma results as if the formation of the SKC Haas joint venture had occurred on January 1, 2006:
                 
(in millions, except per share amounts)   2007   2006
 
Net sales
  $ 9,112     $ 8,437  
Net (loss) earnings
    655       738  
Earnings per share -
               
Basic
    3.15       3.37  
Diluted
  $ 3.10     $ 3.34  
The unaudited pro forma data may not be indicative of the results that would have been obtained had the joint venture actually been formed at the beginning of each of the periods presented, nor are they intended to be indicative of future consolidated results.
On June 15, 2007, we acquired the net assets of Eastman Kodak Company’s light management films technology business, which produces advanced films that improve the brightness and efficiency of liquid crystal displays (LCD). Of the $40 million purchase price, $9 million was allocated to intangible assets, primarily consisting of developed technology, and we recorded a charge of $3 million for acquired in-process research and development, for which technological feasibility had not yet been established, which is included in restructuring and asset impairments in the Consolidated Statement of Operations. The remainder of the purchase price was allocated to the tangible net assets acquired. The proforma results for the years ended December 31, 2007 and 2006, respectively, would not be material to the Rohm and Haas Consolidated Statements of Operations for those respective periods. The results of operations of the light management films business are included in the Display Technologies segment of our Electronic Materials Group as of the second quarter of 2007.
On January 4, 2007, we completed the formation of Viance, LLC, a joint venture owned 50% by Rohm and Haas and 50% by Chemical Specialties, Inc. (CSI), a wholly owned subsidiary of Rockwood Holdings, Inc. Rohm and Haas paid CSI $73 million to create the new company, which combines the wood biocides business of Rohm and Haas and the wood protection chemicals business of CSI. The results of this joint venture are included in our Performance Materials Group segment as an equity method investment.

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2006
In the second quarter of 2006, we acquired the net assets of Floralife®, Inc. (“Floralife”), a top global provider of post-harvest care products for the floral industry based in South Carolina, for approximately $22 million. As part of the purchase price allocation, $14 million was allocated to intangible assets, primarily consisting of licensed technology and customer relationships, $3 million to net working capital, $3 million to fixed assets, $6 million to goodwill and $4 million to deferred tax liabilities. The intangible assets primarily consist of definite-lived intangible assets with useful lives ranging from 5 to 9 years. Prior to this acquisition, we had a royalty agreement with Floralife under which we paid Floralife for the use of certain technologies. The acquisition by Rohm and Haas is intended to expand the portfolio of our AgroFresh™ business to include post-harvest flowers on a global basis. The proforma results of operations for Floralife for the years ended December 31, 2007 and 2006, respectively, are not material to the Rohm and Haas Consolidated Statements of Operations for those respective periods. The results of operations for Floralife are included in our Performance Materials Group business segment as of the second quarter of 2006. In January of 2007, we sold Floralife with the exception of certain technologies we will maintain to support the Performance Materials Group. This sale resulted in an immaterial after-tax gain in January 2007.
Dispositions
2008

On April 4, 2008, we divested our 40 percent equity interest in UP Chemical Company, a South Korean firm that specializes in advanced technology used in the production of leading edge semiconductor chips. As part of the transaction, we received approximately $114 million for our equity interest, reflecting a pre-tax gain of approximately $85 million. This gain is included in Share of affiliate earnings, net in the Consolidated Statements of Operations.
2007
None.
2006
In the second quarter of 2006, we determined that the global Automotive Coatings business became an Asset Held for Sale and qualified for treatment as a discontinued operation. We have reflected this business as such in our financial statements for all periods presented. On October 1, 2006, we completed the sale of our global Automotive Coatings business, excluding that business’ European operations, which was previously a business within our former Coatings reporting segment. Proceeds included $230 million, in cash, plus working capital adjustments as defined in the sale agreement. In January of 2007, we paid $9 million in closing working capital adjustments. In the fourth quarter of 2006, we recorded a pre-tax gain of $1 million in the sale. The European Automotive Coatings business’ operations were sold on June 30, 2007 for proceeds of $3 million. The sale resulted in a pre-tax loss of approximately $3 million.
In accordance with EITF No. 93-17, “Recognition of Deferred Tax Assets for a Parent Company’s Excess Tax Basis in the Stock of a Subsidiary That is Accounted for as a Discontinued Operation,” we recorded certain tax/book basis differences resulting in the recognition of income taxes of $24 million, which is included in the net loss from discontinued operation for 2006.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we compared the fair value of our expected disposal asset groupings and determined that the net carrying value of one asset group was impaired by approximately $7 million pre-tax during the second quarter of 2006, which is included in the loss from the discontinued operation.
The following table presents the results of operations of our Automotive Coatings discontinued operation:
                         
(in millions)   2007   2006        
         
Net sales from discontinued operation
  $ 14     $ 78          
 
                       
(Loss) earnings from discontinued line of business
    (1 )     (6 )        
Income tax benefit (provision)
    2       (20 )        
     
Net earnings (loss) from discontinued operation
  $ 1     $ (26 )        
     

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During the fourth quarter of 2006, we also reversed $6 million in tax reserves related to a previously disposed business resulting from the favorable resolution of prior year tax contingencies.
Note 3: Provision for Restructuring and Asset Impairments
Severance and employee benefit costs associated with restructuring initiatives are primarily accounted for in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” Asset impairment charges are accounted for in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” The following net restructuring charges were recorded for the three years ended December 31, 2008, 2007 and 2006, respectively, as detailed below:
Restructuring and Asset Impairments
                         
(in millions)   2008   2007   2006
 
Severance and employee benefits (net)
  $ 157     $ 10     $ 23  
Asset impairments, net of gains on sales
    42       18       2  
Other, including contract lease termination penalties
                2  
     
Amount charged to earnings
  $ 199     $ 28     $ 27  
     
Restructuring by Initiative
                                                 
    Severance Employee Benefits   Headcount
(in millions, except headcount)   2008   2007   2006   2008   2007   2006
         
Initial Charge
                                               
 
                                               
Electronic Technologies
  $ 20     $ 3     $ 1       430       51       9  
Display Technologies
    6                   95              
         
Electronic Materials Group
  $ 26     $ 3     $ 1       525       51       9  
 
                                               
Paint and Coatings Materials
    53       2       6       575       15       75  
Packaging and Building Materials
    28       1       1       298       14       18  
Primary Materials
    2             2       9             17  
         
Specialty Materials Group
  $ 83     $ 3     $ 9       882       29       110  
Performance Materials Group
    29       7       6       338       82       37  
Salt
                5             9       114  
Corporate
    15       2       5       165       30       59  
         
Total
  $ 153     $ 15     $ 26       1,910       201       329  
         
 
                                               
Activity during 2006
                  $ (3 )                     (68 )
Changes in estimate
                    (1 )                      
         
 
                                               
December 31, 2006 ending balance
                    22                       261  
Activity during 2007
          $ (4 )     (17 )             (72 )     (182 )
Changes in estimate
                  (3 )             (9 )     (47 )
         
 
                                               
December 31, 2007 ending balance
            11       2               120       32  
Activity during 2008
  $ (14 )     (7 )     (1 )     (344 )     (61 )     (15 )
Changes in estimate
    2             2       3       (9 )     (17 )
Currency effects
    2       (1 )     (3 )                        
         
 
                                               
Balance at December 31, 2008
  $ 143     $ 3     $       1,569       50        
         
Restructuring reserves as of December 31, 2008 total $146 million and are included in accrued liabilities in the Consolidated Balance Sheet. The restructuring reserve balance presented is considered adequate to cover committed restructuring actions. Cash payments related to severance and employee benefits are expected to be paid over the next 18 months.

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2008 Actions
For the year ended December 31, 2008, we recorded approximately $153 million of expense for severance and associated employee benefits, primarily associated with the elimination of 1,910 positions resulting from:
    An adjustment of production schedules in some manufacturing facilities to reflect current market softness;
 
    A realignment of our manufacturing footprint to better utilize assets, including idling or closing underutilized plants;
 
    Reducing commercial-related positions that have been directly impacted by lower market demand;
 
    A 30 percent reduction of installed capacity in our emulsions network in North America, reflecting the cumulative impact of productivity improvement efforts and reduced market demand;
 
    Significant reductions in selling and administrative costs for the Specialty Materials Group in mature markets;
 
    An adjustment of our infrastructure for the Electronic Materials Group, reflecting the continued shift of the business to Asia;
 
    Cost reductions related to productivity improvements for various other businesses and regions; and
 
    The termination of toll manufacturing support arrangements at two facilities related to a prior divestiture.
During 2008, we recorded additional severance and employee benefit charges related to changes in estimate of $2 million and $2 million for 2008 and 2006 actions, respectively.
The 2008 cost savings actions are expected to yield pre-tax savings of approximately $200 million annually beginning in 2010.
Of the initial 1,910 positions identified under the total 2008 restructuring initiatives, we increased the total number of positions to be affected by these initiatives by 3 to 1,913 positions in total. As of December 31, 2008, 344 positions have been eliminated.
2007 Actions
For the year ended December 31, 2007, we recorded approximately $15 million of expense for severance and associated employee benefits, primarily associated with the elimination of 201 positions as part of our on-going efforts to reposition our business portfolio for accelerated growth by exiting non-strategic business lines, as well as to improve operating excellence through productivity initiatives in manufacturing, research and development, and business services.
Reducing the effect of the 2007 charge were favorable adjustments of $5 million for severance and employee benefits due to fewer employee separations than originally anticipated related to 2005 and 2006 actions.
The 2007 cost savings actions are expected to yield pre-tax savings of approximately $21 million annually.
Of the initial 201 positions identified, we reduced the total number of positions to be affected by these initiatives by 18 to 183 positions in total. As of December 31, 2008, 133 positions have been eliminated.
2006 Actions
For the year ended December 31, 2006, we recorded approximately $26 million of expense for severance and associated employee benefits associated with the elimination of 329 positions. These charges related to the restructuring within our North American support services and Coating and Salt segments, concentrated in North America. Our management approved these restructuring actions to implement organizational alignments to support our Vision 2010 strategic plan and to further improve the efficiency of our manufacturing network. The organizational alignments included a more streamlined business structure, and deployment of resources to higher growth markets. Staffing reductions related to several of our manufacturing operations and were a direct result of changes in the execution of existing processes and productivity improvements, while support services staffing reductions were made possible as we continue to capitalize on the enhancements achieved through the implementation of our Enterprise Resource Planning System.
This charge was partially offset by $1 million of favorable adjustments to adequately reflect changes in estimates of remaining obligations related to severance payments within our global Graphic Arts business within our Packaging and Building Materials segment, actions announced in the first quarter of 2006. Additionally, there were favorable adjustments of $2 million related to severance and employee benefits due to fewer employee separations than originally anticipated offset by $2 million for lease contract obligations related to our 2005 and prior initiatives.

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The 2006 restructuring actions are expected to yield pre-tax savings of $33 million annually.
Of the initial 329 positions identified, we reduced the total number of positions by 64 to 265 positions in total. As of December 31, 2008, all positions have been eliminated.
Asset Impairments
2008 Impairments
For the year ended December 31, 2008, we recognized $42 million of fixed asset impairment charges. These charges include $3 million of impairments due to damage at our Salt operation related to hurricane Ike. In an effort to better utilize our assets we recorded $2 million of asset impairment charges relating to the closure of two plants within the Performance Materials Group, which support the Powder Coatings and Advanced Materials businesses. Reduced market demand and productivity improvements in North America resulted in the impairment of fixed assets totaling $5 million, $3 million of which impacted the Paint and Coatings Materials business and $2 million related to the Packaging and Building Materials business. In addition, the Paint and Coatings Materials business also recorded an $8 million charge relating to the closure of a plant due to continued reductions in market demand. The Packaging and Building Materials business recorded fixed asset impairment charges of $7 million due to the transfer of select business lines and $2 million relating to the exiting of a business line. An adjustment of our infrastructure for the Electronic Materials Group, reflecting the continued shift of the business to Asia resulted in asset impairment charges of $9 million; $8 million of which resulted from exiting select business lines within Packaging and Finishing Technologies, and $1 million for the closing of a research and development site relating to Semiconductor Technologies. Further, we recorded a $1 million write-off of in process research and development relating to the Gracel acquisition within Display Technologies. Lastly, we recorded $5 million of asset impairment charges in the first quarter of 2008 associated with fixed asset write downs related to the restructuring of two manufacturing facilities due to the termination of toll manufacturing support arrangements related to a prior divestiture.
2007 Impairments
For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges. These charges were offset by $6 million in gains related to sales of previously impaired assets. These impairments included the $13 million write-off within our Corporate segment of our investment in Elemica, an online chemicals e-marketplace, $5 million related to our digital imaging business line within our Performance Materials Group, a $4 million impairment of in-process research and development cost within our Display Technologies segment, comprised of $3 million and $1 million relating to the Eastman Kodak Company light management films asset acquisition and SKC Haas joint venture, respectively, and a $2 million write-down of an investment in our Electronic Technologies segment to fair market value.
2006 Impairments
For the year ended December 31, 2006, we recognized approximately $3 million of fixed asset impairment charges associated with the restructuring of our global Graphic Arts business within our Packaging and Building Materials segment. This charge was offset by $1 million for sales of previously impaired assets.
In 2006, we recorded a $7 million asset impairment related to our discontinued operation. See Note 2 to the Consolidated Financial Statements for more information.

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Note 4: Other Expense (Income), net
We recorded other expense, net of $55 million in 2008. For 2007 and 2006 we recorded other income, net of $48 million and $53 million, respectively. The major categories of our other income, net are summarized in the following table:
                         
(in millions)   2008     2007     2006  
 
Royalty income
  $ (3 )   $ (4 )   $ (4 )
Foreign exchange losses (gains) and related hedging
    19       (5 )     16  
Interest and investment (income) loss
    2       (18 )     (27 )
Sales of real estate
    (7 )     ( 3 )     (3 )
Tolling
    (6 )     (6 )     (4 )
Investment gains
                (4 )
Dow acquisition related expenses
    40              
Non-designated commodity hedges
    18              
Other, net
    (8 )     (12 )     (27 )
     
Total
  $ 55     $ (48 )   $ (53 )
     
Note 5: Fair Value Measurements
In the first quarter of 2008, we adopted SFAS No. 157, “Fair Value Measurements,” for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
             
 
    Level 1:   Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
           
 
    Level 2:   Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
           
 
    Level 3:   Unobservable inputs that reflect our own assumptions.
 
           
The following describes the valuation methodologies used to measure fair value and key inputs:
 
           
      Cash equivalents: We classify highly liquid investments with a maturity date of 90 days or less at the date of purchase including U.S. Treasury bills, federal agency securities and commercial paper as cash equivalents. We use quoted prices where available to determine fair value for U.S. Treasury notes, and industry standard valuation models using market based inputs when quoted prices are unavailable such as for corporate obligations.
 
           
      Receivables, net, short term borrowings and trade and other payables: Given the short-term nature of these items the estimated fair value approximates its carrying value.
 
           
      Long-term investments: These investments are quoted at market prices from various stock and bond exchanges.
 
           
      Derivative instruments and long-term debt: As part of our risk management strategy, we enter into derivative transactions to mitigate exposures. Our derivative instruments include interest rate swaps on long-term debt, currency swaps and currency forwards and options. Commodity derivative instruments are used to reduce portions of our commodity price risks, especially energy. The fair values for our derivatives and related long-term debt are based on quoted market prices from various banking institutions or an independent third party provider for similar instruments.

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Our population of financial assets and liabilities subject to fair value disclosures are as follows:
                                 
    Fair Value As    
    of   Fair Value Measurements at December 31,
    December 31,   2008 using Fair Value Hierarchy
(in millions)   2008   Level 1   Level 2   Level 3
 
Assets
                               
Cash and cash equivalents
  $ 335     $ 335     $     $  
Receivables, net
    1,538       1,538              
Foreign exchange derivatives
    47             47        
Long-term investments
    258       258              
     
Total assets at fair value
  $ 2,178     $ 2,131     $ 47     $  
     
 
                               
Liabilities
                               
Short term borrowings
  $ 139     $ 139     $     $  
Trade and other payables
    633       633              
Long-term debt
    3,005             3,005        
Foreign exchange derivatives
    14             14        
Commodity derivatives
    11             11        
     
Total liabilities at fair value
  $ 3,802     $ 772     $ 3,030     $  
     
Counter-party Risk
We manage counter-party risk by entering into derivative contracts only with major financial institutions of investment grade credit rating and by limiting the amount of exposure to each financial institution. On a selective basis we structure our derivative contracts to allow settlement at market if the counter-party is downgraded below investment grade. As of December 31, 2008, our largest exposure on derivative contracts with any one financial institution was $14 million, and our total exposure was $36 million. Based on our credit evaluation of each institution comprising these exposures, we have determined the carrying values as of December 31, 2008 to be fully realizable upon settlement.
Note 6: Financial Instruments
We denominate our business transactions in a variety of foreign currencies, finance our operations through long- and short-term borrowings, and purchase raw materials at market prices. Accordingly, changing market prices for foreign currencies and commodities and changing interest rates materially impact our earnings, cash flows and the fair values of our assets and liabilities. Our operating and financing plans include actions to reduce, but not eliminate, the uncertainty associated with these changes including the use of derivative instruments. See Note 1 to our Consolidated Financial Statements.
Currency Hedges
We enter into foreign exchange option and forward contracts in order to reduce the risk associated with variability in our operating results from foreign-currency-denominated earnings, cash flows, assets and liabilities. We direct these hedging efforts toward three distinct currency hedging objectives:
  (1)   To preserve the U.S. dollar values of anticipated non-U.S. dollar cash flows and earnings, primarily with respect to transactions forecast to occur within a one-year period;
 
  (2)   To prevent changes in the values of assets and liabilities denominated in currencies other than the legal entity’s functional currency which may create undue earnings volatility (we refer to this hedging activity as “asset and liability hedging”); and
 
  (3)   To hedge the dollar values of our net investments in operations outside the U.S.
During 2008, non-dollar currencies in which we transacted business were weaker by year-end, on average, compared with the prior-year period. These currencies had a $25 million favorable after-tax impact on our 2008 earnings compared with 2007, net of all currency hedging. Through the first half of 2008, the dollar continued to weaken against most currencies, reaching its weakest point by mid-year. The second half of 2008 saw the resurgence of the dollar, until at December 31, 2008, the basket of currencies in which our operations are invested was weaker against the dollar than at

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December 31, 2007. This was recorded as a $104 million cumulative translation adjustment loss during 2008, net of gains from net investment hedges.
Hedges entered to preserve the U.S. dollar values of anticipated non-U.S. dollar cash flows and earnings
We generally purchase options which give us the right, but not the obligation, to sell the underlying currencies when the cash flows denominated in those currencies are forecast to occur. In this way, the premiums paid for the options represent the maximum cost of the hedge. If, when the forecasted transactions occur, the underlying currencies have strengthened, the options become worthless and are expensed. In this case, the dollar values of the underlying forecast non-dollar cash flows and earnings are higher than anticipated. If the underlying currencies have weakened, the options are exercised and the underlying currencies are sold at the stronger historical rate, thus preserving the dollar values of the forecast non-dollar cash flows.
These contracts are designated as foreign currency cash flow hedges covering portions of our twelve month forecasted non-dollar cash flows and mature when the underlying cash flows being hedged are forecast to occur. Because the options are considered highly effective hedges, the cash value less cost will be reflected in earnings when the contracts mature. These contracts are marked-to-market at each balance sheet date with changes in fair value prior to maturity recorded in accumulated other comprehensive income (loss). For each of the years ended December 31, 2008 and 2007, a $4 million after-tax gain and a $2 million after-tax loss, respectively, was recorded in accumulated other comprehensive income (loss). For the years ended December 31, 2008, 2007 and 2006, an after-tax gain of $3 million, and after-tax losses of $3 million and $2 million, respectively, were recorded in earnings related to foreign currency cash flow hedges that matured during the respective periods. Changing market conditions will impact the actual amounts recorded to earnings during the following twelve-month periods. Both the effective and ineffective portions of foreign currency cash flow hedges recorded in the Consolidated Statements of Operations are classified in other income, net.
Asset and liability hedging
We contract with counter-parties to buy and sell foreign currencies to offset the impact of exchange rate changes on recognized assets and liabilities denominated in non-functional currencies, including inter-company loans. These contracts generally require exchange of one foreign currency for another at a fixed rate at a future date. These contracts have maturities generally less than twelve months. All contracts are marked-to-market at each balance sheet date with changes in fair value recorded in other income, net. For the years ended December 31, 2008, 2007 and 2006, after-tax gains of $23 million, and after-tax losses of $30 million and $7 million, respectively, were recorded in earnings for these contracts. The impacts of these contracts were largely offset by gains and losses, respectively, resulting from the impact of changes in exchange rates on recognized assets and liabilities denominated in non-functional currencies.
Net investment hedging
We utilize foreign exchange forward and currency collar contracts together with non-dollar borrowings to hedge the dollar values of our net investments in foreign operating units in Europe, Japan and Canada. These derivative instruments and non-dollar borrowings are designated as hedges of net investments. Accordingly, the effective portions of foreign exchange gains or losses on these hedges are recorded as part of the cumulative translation adjustment, which is part of accumulated other comprehensive income (loss). As of December 31, 2008, $223 million in after-tax losses were recorded in cumulative translation adjustment, representing the effective portions of foreign exchange losses on these hedges and non-dollar borrowings. Of this amount, $93 million in after-tax losses at December 31, 2008 was related to long-term Euro and Japanese Yen borrowings and the remainder was related to exchange forward and currency collar contracts. As of December 31, 2007, $228 million in after-tax losses were recorded in cumulative translation adjustment, representing the effective portions of foreign exchange losses on these hedges. Of this amount, $98 million in after-tax losses at December 31, 2007 was related to long-term Euro and Japanese Yen borrowings and the remainder was related to exchange forward and currency collar contracts.
The total notional value of derivatives and outstanding balance of non-dollar borrowings designated as hedges of net investments outstanding at December 31, 2008 and 2007 was $681 million, respectively.
Included in other comprehensive income (loss) as cumulative translation adjustment were a loss of $77 million and a gain of $27 million for the years ended December 31, 2008 and 2007, respectively, all net of related hedge gains and losses.

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    Cumulative   Foreign    
    Change of   Currency    
    Value of Hedges   Translation   Cumulative
(in millions)   of Net   Impact on Net   Translation
Gains/(Losses)   Investment   Investment   Adjustment
 
Balance as of December 31, 2006
  $ (134 )   $ 144     $ 10  
Changes in fair value
    (94 )     111       17  
     
Balance as of December 31, 2007
  $ (228 )   $ 255     $ 27  
Changes in fair value
    5       (109 )     (104 )
     
Balance as of December 31, 2008
  $ (223 )     146       (77 )
     
The amounts that were considered ineffective on these net investment hedges were recorded in interest expense. Interest expense was decreased by an immaterial amount, $9 million and $19 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Commodity Hedges
We use commodity swap, option and collar contracts to reduce the effects of changing raw material prices. Some of these contracts were designated and accounted for as cash flow hedges. The notional value of these commodity derivatives outstanding at December 31, 2008 and 2007 was $14 million and $8 million, respectively. The remaining outstanding contracts at December 31, 2008, with a notional value of $66 million were not designated to receive hedge accounting treatment.
Included in accumulated other comprehensive income (loss) at December 31, 2008 and 2007 are a $1 million after-tax loss and an immaterial amount, respectively, which represents the accumulated market value changes in those outstanding commodity swap, option and collar contracts designated as hedges. To the extent these contracts are considered effective as hedges, changes in market value will be recorded in accumulated other comprehensive income (loss) and upon maturity will be recorded in earnings consistent with our purchases of the underlying commodities during the following period up to twenty-four months. For the years ended December 31, 2008, 2007 and 2006, an immaterial amount, $3 million and $14 million in losses, respectively, were recorded as components of costs of goods sold with the related tax effect recorded in tax expense with respect to those commodity swap, option and collar contracts maturing during the same periods. The ineffective portions of these contracts were immaterial to earnings in 2008, 2007 and 2006, respectively, and were recorded in other income, net.
Included in other income (expense) at December 31, 2008 is an $18 million loss which represents the accumulated market value changes in commodity swap, option and collar contracts not designated as hedges.
Interest Rate Hedges
To reach a desired level of floating rate debt, we utilize interest rate swap agreements to convert specific fixed rate debt issuances into variable rate debt. These interest rate swaps are designated as fair value hedges. The changes in fair value of interest rate swap agreements are marked-to-market through income together with the offsetting changes in fair value of the underlying notes using the short cut method of measuring effectiveness. At December 31, 2008, we had no interest rate swaps outstanding.
In September 2005, we entered into a LIBOR rate lock agreement with a bank to hedge against changes in long-term interest rates in anticipation of a long-term debt issuance, a cash flow hedge. As of December 31, 2006, $7 million of after-tax deferred net gains on the interest rate lock are in accumulated other comprehensive income (loss). In conjunction with the issuance of the debt in March of 2007, the interest rate lock agreement was settled resulting in the receipt by us of approximately $11 million from the counterparty. Since the hedge was deemed effective, the $7 million after-tax gain was recorded in accumulated other comprehensive income (loss) and will be amortized to interest expense over the life of the Euro 175 million notes due in March 2014. As of December 31, 2008, the unamortized balance included in accumulated other comprehensive income (loss) is a $5 million gain.
In September 2007, we issued $250 million of notes due in March 2013 and $850 million of notes due in September 2017. In August 2007, in anticipation of the debt issuance we entered into a $350 million interest rate lock agreement designated as a cash flow hedge to mitigate exposure to interest rate fluctuations which would impact semi-annual interest payments. In conjunction with the issuance of the debt, the interest rate lock agreement was settled

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resulting in a payment from us to the counterparty of approximately $10 million. Less than half a million after-tax of this value was deemed ineffective and immediately recognized in earnings during 2007. The remaining $6 million after-tax loss was recorded in accumulated other comprehensive income (loss) and will be amortized to interest expense over the life of the $850 million notes due in September 2017. As of December 31, 2008, the unamortized balance included in accumulated other comprehensive income (loss) is a $5 million loss.
In September 2007, we entered into interest rate swap agreements totaling $250 million to swap the fixed rate components of the $250 million notes due in March 2013 to a floating rate based on six-month LIBOR. In the second quarter of 2008, we entered into interest rate swap agreements totaling $850 million to swap the fixed rate component of the $850 million 10-year fixed rate notes due in June 2017, to a floating rate based on three and six month LIBOR. In November 2008, we terminated the total $1.1 billion of these interest rate swap contracts. The $69 million gain received from the termination of the interest rate swap contracts is being amortized as a reduction to interest expense over the remaining 5-year and 9-year respective lives of the notes. As of December 31, 2008, the unamortized balance included in long-term debt is a $68 million gain.
The following tables set forth the fair value of derivative instruments outstanding on the consolidated balance sheets as of December 31, 2008 and 2007.
(in millions)
                         
Derivatives-designated as   December 31, 2008     December 31, 2007  
hedging instruments under   Balance Sheet   Fair     Balance Sheet   Fair  
Statement 133   Location   Value     Location   Value  
Interest Rate Contracts
  Other assets   $     Other assets   $ 7  
Foreign Exchange Contracts
  Prepaid expenses and other current assets     16     Prepaid expenses and other current assets     13  
Commodity Contracts
  Prepaid expenses and other current assets         Prepaid expenses and other current assets     1  
 
                   
Total derivative assets
      $ 16         $ 21  
 
                       
Foreign Exchange Contracts
  Accrued liabilities   $     Accrued liabilities   $ 34  
Commodity Contracts
  Accrued liabilities     2     Accrued liabilities      
 
                   
Total derivative liabilities
      $ 2         $ 34  
 
                       
 
                   
Net derivative assets/(liabilities)
      $ 14         $ (13 )
 
                   
(in millions)
                         
Derivatives-not designated as   December 31, 2008     December 31, 2007  
hedging instruments under   Balance Sheet   Fair     Balance Sheet   Fair  
Statement 133   Location   Value     Location   Value  
Foreign Exchange Contracts
  Prepaid expenses and other current assets   $ 31     Prepaid expenses and other current assets   $ 12  
Commodity Contracts
  Prepaid expenses and other current assets         Prepaid expenses and other current assets      
 
                   
Total derivative assets
      $ 31         $ 12  
 
                       
Foreign Exchange Contracts
  Accrued liabilities   $ 14     Accrued liabilities   $ 33  
Commodity Contracts
  Accrued liabilities     9     Accrued liabilities      
 
                   
Total derivative liabilities
      $ 23         $ 33  
 
                       
 
                   
Net derivative assets/(liabilities)
      $ 8         $ (21 )
 
                   

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The following tables set forth the impact of derivative instruments and related hedged items on the consolidated income statements for the years ended December 31, 2008, 2007 and 2006.
(in millions)
                             
Derivatives-in Statement 133   Location of Gain (Loss)   Amount of Gain (Loss) Recognized in Income on
Fair Value   Recognized in Income   Derivative
Hedging Relationships   on Derivative   2008   2007   2006
Interest Rate Contracts
  Interest expense   $ 12     $ 1     $  
(in millions)
                             
Hedged Items in Statement   Location of Gain (Loss)   Amount of Gain (Loss) Recognized in Income on
133 Fair Value Hedge   Recognized in Income   Derivative
Relationships   on Derivative   2008   2007   2006
Long-term debt
  Interest expense   $ (12 )   $ (1 )   $  
(in millions)
                             
Derivatives-in Statement 133       Amount of Gain (Loss) Recognized in OCI on  
Cash Flow       Derivative (Effective Portion)  
Hedging Relationships       2008     2007     2006  
Interest Rate Contracts
      $     $     $ 7  
Foreign Exchange Contracts
        6             (2 )
Commodity Contracts
        (2 )           (1 )
 
                     
   
Total
  $ 4     $     $ 4  
 
                     
(in millions)
                             
    Location of Gain (Loss)      
Derivatives-in Statement 133   Reclassified from   Amount of Gain (Loss) Reclassified from  
Cash Flow   Accumulated OCI into   Accumulated OCI into Income (Effective Portion)  
Hedging Relationships   Income (Effective Portion)   2008     2007     2006  
Interest Rate Contracts  
Interest expense
  $     $ 1     $  
Foreign Exchange Contracts  
Other income, net
    (5 )     4       3  
Commodity Contracts  
Cost of goods sold
          3       14  
   
 
                 
   
Total
  $ (5 )   $ 8     $ 17  
   
 
                 
(in millions)
                             
    Location of Gain (Loss)      
    Recognized in Income on      
    Derivative (Ineffective   Amount of Gain (Loss) Recognized in Income on  
Derivatives-in Statement 133   Portion and Amount   Derivative (Ineffective Portion and Amount  
Cash Flow   Excluded from   Excluded from Effectiveness Testing)  
Hedging Relationships   Effectiveness Testing)   2008     2007     2006  
Interest Rate Contracts  
Interest expense
  $     $ (1 )   $  
Foreign Exchange Contracts  
Other income, net
                 
Commodity Contracts  
Other income, net
    (1 )     1        
   
 
                 
   
Total
  $ (1 )   $     $  
   
 
                 

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(in millions)
                             
        Amount of Gain (Loss) Recognized in OCI on
Derivatives-in Statement 133       Derivative (Effective Portion)
Net Hedging Relationships       2008   2007   2006
Foreign Exchange Contracts
      $ (130 )   $ (130 )   $ (82 )
(in millions)
                             
    Location of Gain (Loss)    
    Reclassified from   Amount of Gain (Loss) Reclassified from
Derivatives-in Statement 133   Accumulated OCI into   Accumulated OCI into Income (Effective Portion)
Net Hedging Relationships   Income (Effective Portion)   2008   2007   2006
Foreign Exchange Contracts
  (None)   $     $     $  
(in millions)
                             
    Location of Gain (Loss)    
    Recognized in Income on    
    Derivative (Ineffective   Amount of Gain (Loss) Recognized in Income on
    Portion and Amount   Derivative (Ineffective Portion and Amount
Derivatives-in Statement 133   Excluded from   Excluded from Effectiveness Testing)
Net Hedging Relationships   Effectiveness Testing)   2008   2007   2006
Foreign Exchange Contracts
  Interest expense   $     $ 9     $ 19  
(in millions)
                             
Derivatives Not Designated as   Location of Gain (Loss)   Amount of Gain (Loss) Recognized in Income on  
Hedging Instruments under   Recognized in Income on   Derivative  
Statement 133   Derivative   2008     2007     2006  
Foreign Exchange Contracts  
Other income, net
  $ 14     $ (9 )   $ (5 )
Commodity Contracts  
Other income, net
    (18 )            
   
 
                 
   
Total
  $ (4 )   $ (9 )   $ 5  
   
 
                 

91


 

Note 7: Income Taxes
Earnings from continuing operations before income taxes, and minority interest earned within or outside the United States are shown below:
                         
(in millions)   2008     2007     2006  
 
United States
                       
Parent and Subsidiaries
  $ 78     $ 486     $ 688  
Affiliates
    95       11        
Foreign
                       
Subsidiaries
    387       372       344  
Affiliates
    1       11       10  
     
Earnings from continuing operations before income taxes and minority interest
  $ 561     $ 880     $ 1,042  
     
The provision for income taxes from continuing operations is composed of:
                         
(in millions)   2008     2007     2006  
 
Income taxes on U.S. earnings
                       
Federal
                       
Current
  $ 99     $ 137     $ 208  
Deferred
    (80 )     3       (18 )
 
                       
State and other
    2       8       8  
     
Total taxes on U.S. earnings
    21       148       198  
     
 
                       
Taxes on foreign earnings
                       
Current
    127       134       99  
Deferred
    (71 )     (76 )     (23 )
     
Total taxes on foreign earnings
    56       58       76  
     
Total Income Taxes
  $ 77     $ 206     $ 274  
     
The provision for income tax expense (benefit) attributable to items other than continuing operations is shown below:
                         
(in millions)   2008     2007     2006  
 
Discontinued lines of business
  $ (1 )   $ (2 )   $ 14  
Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting. Details at December 31, 2008 and 2007 were:
                 
(in millions)   2008     2007  
 
Deferred tax assets related to:
               
Compensation and benefit programs
  $ 271     $ 262  
Pension programs
    224       30  
Asset impairments and restructuring reserves
    45       7  
Accruals for waste disposal site remediation
    44       37  
Foreign Earnings
    67        
All other
    117       89  
     
Total deferred tax assets
    768       425  
 
               
Deferred tax liabilities related to:
               
Intangible assets
    491       525  
Depreciation and amortization
    372       363  
Foreign Earnings
          53  
All other
    33       34  
     
Total deferred tax liabilities
    896       975  
     
Net deferred tax liability
  $ 128     $ 550  
     

92


 

At December 31, 2008, we had foreign net operating losses of $221 million and state net operating losses of $2,131 million, all of which substantially carry a full valuation allowance. Of these, $169 million have no expiration and the remaining will expire in future years as follows: $34 million in 2009, $18 million in 2010, $27 million in 2011, $30 million in 2012, $29 million in 2013 and the remaining balance in other years.
Deferred taxes, which are classified into a net current and non-current balance by tax jurisdiction, are presented in the balance sheet as follows:
                 
(in millions)   2008     2007  
 
Prepaid expenses and other current assets
  $ 217     $ 136  
Other assets
    71       83  
Accrued liabilities
    3       3  
Deferred income taxes
    413       766  
     
Net deferred tax liability
  $ 128     $ 550  
     
The effective tax rate on pre-tax income differs from the U.S. statutory tax rate due to the following:
                         
             
             
           
    2008   2007   2006
    %   %   %
 
Statutory tax rate
    35.0       35.0       35.0  
U.S. business credits
    (4.4 )     (2.5 )     (2.7 )
Foreign, including credits
    (20.1 )     (9.5 )     (5.4 )
Restructuring
    2.6       0.2       (0.2 )
UP Chemical Sale
    1.6              
Other, net
    (1.0 )     0.2       (0.4 )
     
Effective tax rate
    13.7       23.4       26.3  
     
During 2008, we have recognized $2 million of foreign investment credits as a reduction of income tax expense. Deferred income taxes have been provided for the unremitted earnings of foreign subsidiaries and affiliates which have not been reinvested abroad indefinitely. Approximately $754 million, $392 million and $216 million at December 31, 2008, 2007 and 2006, respectively, of net foreign subsidiary and affiliate foreign earnings have been deemed permanently reinvested abroad. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts. No accrual of United States income tax has been made for years ended 2008, 2007 and 2006 related to these permanently reinvested earnings as there was no plan in place to repatriate any of these foreign earnings to the United States as of the end of the year.

93


 

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, we recorded a non-cash cumulative transition charge of approximately $9 million, recorded as a reduction to beginning retained earnings (see Consolidated Statement of Shareholders’ Equity). A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
         
(in millions)   2007  
 
Balance at January 1, 2007
  $ 75  
Additions based on tax positions related to the current year
    17  
Additions for positions of prior years
    18  
Reductions for tax positions of prior years
    (11 )
Settlements
    (5 )
Translation impacts
    3  
 
     
Balance at December 31, 2007
  $ 97  
 
     
         
(in millions)   2008  
 
Balance at December 31, 2007
  $ 97  
Additions based on tax positions related to the current year
    13  
Additions for positions of prior years
    7  
Reductions for tax positions of prior years
    (6 )
Settlements
    (16 )
Translation impacts
    (2 )
 
     
Balance at December 31, 2008
  $ 93  
 
     
In addition, we have interest and penalties provisions associated with the above tax positions which are classified as liabilities in the consolidated balance sheet. There was approximately $20 million of accrued interest and penalties as of December 31, 2007 and there is $16 million of interest and penalties as of December 31, 2008. Changes in these balances are recorded in income tax expense.
As of December 31, 2008, we have unrecognized income tax benefits totaling $93 million and related accrued interest and penalties of $16 million that, if recognized, $109 million would be recorded as a benefit to income taxes on the statement of operations and, therefore, would impact the reported effective tax rate. During 2007, we concluded the IRS audit related to our 2002, 2003 and 2004 tax years and a tax audit in Germany related to our 1999 through 2003 tax years. We are currently under audit by the IRS for years 2005, 2006 and 2007. We are also in appeal proceedings with the applicable fiscal authority in the United States and Canada. Although it is not possible to predict the timing or the conclusion of these pending audits and appeal proceedings with accuracy, we do not anticipate that the current IRS audit will be complete by the end of 2009. Given the various stages of completion of audits, we can not currently anticipate significant changes in the amount of unrecognized income tax benefits over the next year.
As of December 31, 2008, the following tax years remained subject to examination by the major tax jurisdiction indicated:
     
Major    
Jurisdictions   Open Years
Canada
  1999 through 2001, 2003 through 2008
China
  2001 through 2008
France
  2004 through 2008
Germany
  2004 through 2008
Italy
  2003 through 2008
Japan
  2001 through 2008
Korea
  2002 through 2008
Switzerland
  2005 through 2008
Taiwan
  2002 through 2008
United Kingdom
  2003 through 2008
United States
  2005 through 2008

94


 

We are also subject to income taxes in many hundreds of state and local taxing jurisdictions in the U.S. and around the world, many of which are still open to tax examinations. Management does not believe these represent a significant financial exposure for the Company.
Note 8: Segment Information
We operate seven reportable segments: Electronic Technologies, Display Technologies, Paint and Coatings Materials, Packaging and Building Materials, Primary Materials, Performance Materials Group, and Salt. Electronic Technologies and Display Technologies are managed under one executive as the Electronic Materials Group. Similarly, Paint and Coatings Materials, Packaging and Building Materials and Primary Materials are managed under one executive as the Specialty Materials Group. The reportable operating segments and the types of products from which their revenues are derived are discussed below.
Ø   Electronic Technologies
 
    This group of businesses provides cutting-edge technology for use in telecommunications, consumer electronics and household appliances. It is comprised of three aggregated businesses: Semiconductor Technologies, Circuit Board Technologies, and Packaging and Finishing Technologies. The Semiconductor Technologies business develops and supplies integrated products and technologies on a global basis enabling our customers to drive leading-edge semiconductor design to boost performance of semiconductor devices powered by smaller and faster chips. This business also develops and delivers materials used for chemical mechanical planarization, the process used to create the flawless surfaces required to allow manufacturers to make faster and more powerful integrated circuits and electronic substrates. The Circuit Board Technologies business develops and delivers the technology, materials and fabrication services for increasingly powerful, high-density circuit boards in computers, cell phones, automobiles and many other electronic devices. The Packaging and Finishing Technologies business develops and delivers innovative materials and processes that boost the performance of a diverse range of electronic, optoelectronic and industrial packaging and finishing applications.
 
Ø   Display Technologies
 
    This business develops, manufactures and markets materials used in the production of electronic displays. This business includes our joint venture with SKC Co. Ltd. of South Korea, SKC Haas Display Films (“SKC Haas”), which develops, manufactures, and markets advanced specialty films and materials used in LCD and plasma displays. These include light diffuser films, micro lens films, optical protection films, release protection films, reflectors, technology for touch panels, Plasma Display Panel filters, and process chemicals used to manufacture LCD color filters. This business also includes the leading-edge light management film technology acquired from Eastman Kodak in 2007, as well as process chemicals used in LCD production originally developed by Rohm and Haas. On April 4, 2008, we acquired Gracel Display, Inc., a leading developer and manufacturer of Organic Light Emitting Diode materials for approximately $41 million. In July 2008, we acquired the operations of SKC Euro Display for approximately $28 million. See Note 2 for further discussion on this acquisition. The results of these acquisitions have been included in Display Technologies since their respective acquisition dates.
 
Ø   Paint and Coatings Materials
 
    This business produces acrylic emulsions and additives that are used primarily to make decorative and industrial coatings. Its products are critical components used in the manufacture of architectural paints used by do-it-yourself consumers and professional contractors. Paint and Coatings Materials products are also used in the production of industrial coatings (for use on wood and metal, and in traffic paint); in construction applications (for use in roofing materials, insulation, and cement modification); and floor care products. On April 1, 2008, we acquired the FINNDISP former division of OY Forcit AB, a Finnish paint emulsions operation for approximately 52 million Euros or approximately U.S. $79 million. Beginning on April 1, 2008, the results of this operation are included in Paint and Coatings Materials. See Note 2 for further discussion on this acquisition.
 
Ø   Packaging and Building Materials
 
    This business offers a broad range of polymers, additives, and formulated value-added products (which utilize a broad range of chemistries and technologies, including our world-class acrylic technology). Its products are used in a wide range of markets, including: packaging and paper, building and construction, durables and transportation, and other industrial markets. Product lines include: additives for the manufacture of plastic and vinyl products,

95


 

    packaging, pressure sensitive, construction, and transportation adhesives, as well as polymers and additives used in textile, graphic arts, nonwoven, paper and leather applications.
 
Ø   Primary Materials
 
    This business produces methyl methacrylate, acrylic acid and associated esters as well as specialty monomer products which are building blocks used in our downstream polymer businesses and which are also sold externally. Internal consumption of Primary Materials products is principally in the Paint and Coatings Materials and Packaging and Building Materials businesses. Primary Materials also provides polyacrylic acid dispersants, opacifiers and rheology modifiers/thickeners to the global household and industrial markets.
 
Ø   Performance Materials Group
 
    This business group includes our other businesses that facilitate the use of technologies to meet growing societal needs in the areas of water, food, personal care and energy. It is comprised of the operating results of Process Chemicals and Biocides and Powder Coatings. Also included in the results of our Performance Materials Group are several small businesses, including AgroFresh and Advanced Materials, that are building positions based on technology areas outside of the core of the company’s operations. Its products include: ion exchange resins, sodium borohydride, biocides, polymers and additives used in personal care applications and other niche technologies.
 
Ø   Salt
 
    The Salt business houses the Morton Salt name, including the well-known image of the Morton Salt Umbrella Girl and the familiar slogan, “when it rains it pours.” This business also encompasses the leading table salt brand in Canada, Windsor Salt. Salt’s product offerings extend well beyond the consumer market to include salts used for food processing, agriculture, water conditioning, highway ice-control and industrial processing applications. On July 31, 2008, we acquired the Season-All® brand from McCormick & Company for approximately $15 million. Beginning on July 31, 2008, the results of this business were included in the Salt segment. See Note 2 for further discussion on this acquisition.

96


 

The table below presents net sales by business segment. Segment eliminations are presented for intercompany sales between the reportable segments within the Specialty Materials Group.
                         
(in millions)   2008     2007     2006  
 
Electronic Technologies
  $ 1,654     $ 1,666     $ 1,551  
Display Technologies
    284       45       13  
     
Electronic Materials Group
  $ 1,938     $ 1,711     $ 1,564  
Paint and Coatings Materials
    2,217       2,120       2,050  
Packaging and Building Materials
    1,807       1,826       1,776  
Primary Materials
    2,367       2,078       1,979  
Elimination of Inter-segment Sales
    (1,222 )     (1,103 )     (1,102 )
     
Specialty Materials Group
  $ 5,169     $ 4,921     $ 4,703  
Performance Materials Group
    1,248       1,205       1,134  
Salt
    1,220       1,060       829  
     
Total
  $ 9,575     $ 8,897     $ 8,230  
     
The tables below present summarized financial information about our reportable segments:
                                                 
    Pre-tax                            
    Earnings                            
    (loss)from   Share of                        
2008   continuing   affiliate                   Segment   Capital
(in millions)   operations   earnings, net   Depreciation   Amortization   assets   additions
 
Electronic Technologies
  $ 390     $ 87     $ 70     $ 17     $ 1,635     $ 111  
Display Technologies
    (40 )           12       5       376       49  
     
Electronic Materials Group
  $ 350     $ 87     $ 82     $ 22     $ 2,011     $ 160  
Paint and Coatings Materials
    169             81       2       885       82  
Packaging and Building Materials
    55       1       66       10       1,602       40  
Primary Materials
    82             76             1,039       83  
     
Specialty Materials Group
  $ 306     $ 1     $ 223     $ 12     $ 3,526     $ 205  
Performance Materials Group
    117       9       50       20       1,420       26  
Salt
    177             82       8       1,618       54  
Corporate(1)
    (389 )           30       1       1,334       75  
     
Total
  $ 561     $ 97     $ 467     $ 63     $ 9,909     $ 520  
     
                                                 
    Pre-tax                            
    Earnings (loss)                            
    from   Share of                        
2007   continuing   affiliate                   Segment   Capital
(in millions)   operations   earnings, net   Depreciation   Amortization   assets   additions
 
Electronic Technologies
  $ 410     $ 10     $ 59     $ 17     $ 1,688     $ 82  
Display Technologies
    (23 )           2       1       376       18  
     
Electronic Materials Group
  $ 387     $ 10     $ 61     $ 18     $ 2,064     $ 100  
Paint and Coatings Materials
    323             58       1       930       95  
Packaging and Building Materials
    161       1       59       10       1,667       34  
Primary Materials
    108             82             1,030       74  
     
Specialty Materials Group
  $ 592     $ 1     $ 199     $ 11     $ 3,627     $ 203  
Performance Materials Group
    132       11       50       19       1,463       34  
Salt
    115             81       8       1,691       58  
Corporate(1)
    (346 )           21       1       1,262       59  
     
Total
  $ 880     $ 22     $ 412     $ 57     $ 10,107     $ 454  
     

97


 

                                                 
    Pre-tax                            
    Earnings (loss)                            
    from   Share of                        
2006   continuing   affiliate                   Segment   Capital
(in millions)   operations   earnings, net   Depreciation   Amortization   assets   additions
Electronic Technologies
  $ 345     $ 9     $ 56     $ 17     $ 1,616     $ 82  
Display Technologies
    1                         11        
     
Electronic Materials Group
  $ 346     $ 9     $ 56     $ 17     $ 1,627     $ 82  
Paint and Coatings Materials
    353             55       1       848       70  
Packaging and Building Materials
    186       1       57       9       1,667       28  
Primary Materials
    215             87       1       976       69  
     
Specialty Materials Group
  $ 754     $ 1     $ 199     $ 11     $ 3,491     $ 167  
Performance Materials Group
    103             50       20       1,395       41  
Salt
    54             77       7       1,607       48  
Corporate(1)
    (215 )           21       1       1,417       66  
     
Total
  $ 1,042     $ 10     $ 403     $ 56     $ 9,537     $ 404  
     
 
Notes:
 
(1)   Corporate includes items such as corporate governance costs, interest income and expense, environmental remediation expense, Dow acquisition costs, insurance recoveries, exploratory research and development expense, balance sheet currency translation gains and losses, any unallocated portion of shared services and certain discrete period tax items.
The table below presents sales by geographic area. Sales are attributed to the geographic location based on customer location and not on the geographic location from which goods were shipped. Long-lived assets are attributed to geographic areas based on asset location. We define long-lived assets as Land, Buildings and Equipment.
                                         
                    Asia-        
            European   Pacific        
(in millions)   U.S.   Region   Region   Other   Total
 
2008
                                       
Net sales
  $ 3,928     $ 2,408     $ 2,313     $ 926     $ 9,575  
Long-lived assets
    1,614       437       597       205       2,853  
2007
                                       
Net sales
  $ 3,893     $ 2,241