Management Discussion and Analysis

Quarterly Results of Operations

Earnings increased 5% in the first quarter of 1998 to $109 million from $104 million in the first quarter of 1997. Diluted earnings per common share were $.58 compared to $.53 in the 1997 period. AtoHaas sales were excluded from first quarter 1998 results of operations while NorsoHaas and China results were consolidated. The sale of the interest in AtoHaas, the purchase of the remaining 50% of NorsoHaas, already 50%-owned, and the consolidation of China were effective January 1, 1998. On a comparable basis, volume increased 2%, sales decreased 1% and earnings increased 11%. The sales decrease on higher volume is primarily a result of weaker European and Asia-Pacific currencies. Strong European volume and a good performance in North America helped the company overcome poor business conditions in the Asia-Pacific region, where volume and sales decreased 4% and 18%, respectively. Earnings increased as a result of higher overall volume, lower raw material costs and smooth plant operations. In addition to higher earnings, the per share increase in the first, and all subsequent quarters in 1998, reflects the impact of the company's common share repurchase program.

Earnings increased 45% in the second quarter of 1998 to $170 million from $117 million in the second quarter of 1997. Diluted earnings per common share for the quarter were $.91 compared to $.61 in 1997. Included in the 1998 results is a one-time gain of $48 million, or $.26 per share, net of non-recurring items. This net gain affected all segments and regions, except Latin America, and was the net result of the sale of the company's interest in the AtoHaas and RohMax joint ventures, an early extinguishment of debt, the write-off of certain intangible assets in Europe and business realignment costs primarily in Asia. Volume decreased 2% for the quarter and sales decreased 9%. On a comparable-business basis, volume was flat and sales decreased 4%. In addition to the divestiture of two businesses, resulting in the exclusion of AtoHaas' sales from 1998 results, the remaining 50% of NorsoHaas was acquired and operations in China were consolidated in 1998. The sales decrease on flat volume was primarily a result of weaker European and Asia-Pacific currencies and slightly lower selling prices. Volume gains in Europe and Latin America, on a comparable basis, were overcome by volume losses due to poor business conditions in the Asia-Pacific region and flat volume in North America. In the Asia-Pacific region sales declined 16% on a 10% volume decrease. The company's earnings increased 4%, excluding non-recurring items, primarily as a result of lower raw material costs and efficient plant operations. Diluted earnings per common share excluding non-recurring items were $.65 for the second quarter, up 7% versus 1997.

Earnings for the third quarter of 1998 decreased 5% to $86 million from $91 million in the third quarter of 1997. Diluted earnings per common share for the quarter were $.48 unchanged from the 1997 quarter. Included in the 1998 results is an extraordinary after-tax charge of $3 million, or $.02 per share, related to an early extinguishment of debt. Volume increased 3% for the quarter and sales decreased 7%. On a comparable-business basis, volume increased 1% and sales decreased 3%, primarily as a result of lower selling prices and currency impacts. [See above paragraph for changes impacting the comparable-business basis results.] Volume gains in North America and in Latin America, on a comparable basis, carried the quarter to a 1% increase, despite volume losses due to poor business conditions in the Asia-Pacific region and flat volume in Europe. Asia-Pacific region sales declined 24% on a 14% volume decrease. The company's earnings decreased 2%, excluding the extraordinary item, as a result of lower selling prices, currency impacts and the absence of affiliate earnings from businesses divested in 1998, some of which was mitigated by lower raw material costs. Diluted earnings per common share excluding the non-recurring extraordinary item were $.50 for the third quarter, up 4% versus 1997.

Earnings in the fourth quarter of 1998 were $75 million, 23% lower than last year's results. Diluted earnings per common share were $.44, compared to $.52 in 1997. Fourth quarter 1997 earnings included a gain of $16 million after tax, or $.09 per common share, the result of remediation settlements with insurance carriers. Volume for the quarter was up 1% compared to the 1997 period. Sales decreased 7% to $884 million, due largely to the absence of AtoHaas sales in the 1998 period. On a comparable-business basis, volume decreased 1% while sales decreased almost 4%. The volume decline affected all businesses. The earnings impact of lower raw material costs and smooth plant operations were offset by slightly lower selling prices in the quarter and by the unfavorable Asian business environment.

See Quarterly Results of Operations (Unaudited) chart.

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