Notes to Consolidated Financial Statements Notes

Note 7: Pension Plans

In 1997, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which amends a number of previous statements and establishes guidance for disclosure in annual financial statements. As required, the company adopted the disclosures prescribed by this statement below.

The company has noncontributory pension plans that provide defined benefits to domestic and non-U.S. employees meeting age and length of service requirements. The following disclosures include amounts for both the U.S. and significant foreign pension plans.

Pension income primarily reflects recognition of favorable investment experience as stipulated by SFAS No. 87. The pension benefit payments in all three years included payments related to voluntary early retirement incentives and a severance benefit program.

The early retirement and severance benefit programs resulted in a pre-tax gain of $3 million, $4 million and $2 million in 1998, 1997 and 1996, respectively, as settlement gains from retirees electing lump-sum distributions exceeded the cost of the special termination benefits.

Plan activity and status as of and for the years ended December 31 were as follows:

Net assets of the pension trusts, which primarily consist of common stocks and debt securities, were measured at market value. Assumptions used are as follows:

The company transferred excess pension plan assets of $14 million in 1998 and $13 million in 1997 to fund retiree medical expenses as allowed by U.S. tax regulations.

The company has a noncontributory, unfunded pension plan that provides supplemental defined benefits to U.S. employees whose benefits under the qualified pension plan are limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code. These employees must meet age and length of service requirements. Pension cost determined in accordance with plan provisions was $11 million in 1998, $6 million in 1997 and $7 million in 1996. Pension benefit payments for this plan were $4 million in 1998 and 1997 and $5 million in 1996.

The company has a nonqualified trust, referred to as a "rabbi" trust, to fund benefit payments under this pension plan. Rabbi trust assets are subject to creditor claims under certain conditions and are not the property of employees. Therefore, they are accounted for as corporate assets and are classified as other non-current assets. Assets held in trust at December 31, 1998 and 1997, totaled $30 million and $25 million, respectively.

The status of this plan at year end was as follows:

Pension benefit obligations for this plan were determined from actuarial valuations using an assumed discount rate of 6.5% and 7% at December 31, 1998 and 1997, respectively, and an assumed long-term rate of compensation increase of 4% in 1998 and 5% in 1997.

In 1997, the company instituted a nonqualified savings plan for eligible employees in the United States. The purpose of the plan is to provide additional retirement savings benefits beyond the otherwise determined savings benefits provided by the Rohm and Haas Company Employee Stock Ownership and Savings Plan (the "Savings Plan"). Each participant's contributions will be notionally invested in the same investment funds as the participant has elected for investment in his or her Savings Plan account. For most participants, the company will contribute a notional amount equal to 60% of the first 6% of the amount contributed by the participant. The company's matching contributions will be allocated to deferred stock units. At the time of distribution, each deferred stock unit will be distributed as one share of Rohm and Haas Company common stock. Contributions to this plan were $2 million in 1998. There were no contributions in 1997.

Note 8: Employee Benefits

The company provides health care and life insurance benefits under numerous plans for substantially all of its domestic retired employees, for which the company is self-insured. In general, employees who have at least 15 years of service and are 60 years of age are eligible for continuing health and life insurance coverage. Retirees contribute toward the cost of such coverage.

The status of the plans at year end was as follows:

The accrued postretirement benefit obligation is recorded in "accrued liabilities" (current) and "employee benefits" (non-current).

Net periodic postretirement benefit cost includes the following components:

The calculation of the accumulated postretirement benefit obligation assumes 5% and 6% annual rates of increase in the health care cost trend rate for 1998 and 1997, respectively. The company's plan limits its cost for health care coverage to an increase of 10% or less each year, subject ultimately to a maximum cost equal to double the 1992 cost level. Increases in retiree health care costs in excess of these limits will be assumed by retirees. The change in the annual rates of increase reflects lower expected health care inflation, improved health care utilization and lower per capita cost experience.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have approximately the following effects:

The weighted average discount rate used to estimate the accumulated postretirement benefit obligation was 6.5% at December 31, 1998, and 7% at December 31, 1997.

Note 9: Accounts Receivable, Net

Note 10: Inventories

Inventories amounting to $391 million and $430 million were valued using the LIFO method at December 31, 1998 and 1997, respectively. The excess of current cost over the stated amount for inventories valued under the LIFO method approximated $77 million and $127 million at December 31, 1998 and 1997, respectively. Liquidation of prior years' LIFO inventory layers in 1998, 1997 and 1996 did not materially affect cost of goods sold in either year.

Note 11: Prepaid Expenses and Other Assets

Note 12: Land, Buildings and Equipment, Net

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).

Gross book values of assets depreciated by accelerated methods totaled $1,011 million and $1,115 million at December 31, 1998 and 1997, respectively. Assets depreciated by the straight-line method totaled $3,307 million and $3,230 million at December 31, 1998 and 1997, respectively.

In 1998, 1997 and 1996 respectively, interest costs of $9 million, $12 million and $15 million were capitalized and added to the gross book value of land, buildings and equipment. Amortization of such capitalized costs included in depreciation expense was $15 million in 1998 and $14 million in 1997 and 1996.

Note 13: Other Assets, Net

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