The following information should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto. In connection with the forward-looking statements that appear in the following information, the Cautionary Statements referred to in “Disclosure Concerning Forward-Looking Statements” on page 2 of this Quarterly Report on Form 10-Q should be reviewed carefully.
First quarter 2001 results were significantly impacted by the rising cost of natural gas. The largest impact was experienced in the Acetyls business segment, where natural gas is used as a feedstock. The Titanium Dioxide and Related Products and Fragrance and Flavors business segments were impacted to a lesser extent. In addition, reduced demand led the Company to reduce plant operating rates in all segments, which increased the Company’s per unit cost of products sold.
Net sales for the quarter ended March 31, 2001 increased 5% to $444 million from $423 million in the same period of 2000. The increased sales were due primarily to higher prices for acetyls, as volumes in all businesses were below prior year levels.
Operating income of $25 million for the quarter ended March 31, 2001 decreased $21 million or 46% from the first quarter of 2000.
The Company reported a net loss of $15 million or ($0.24) per share for the first quarter of 2001 compared to net income of $25 million or $0.38 per share for the same period last year. Although the Titanium Dioxide and Related Products and Fragrance and Flavors segments reported lower profits and Acetyls reported an operating loss, the main reason for the large decrease was the equity loss of $24 million from Equistar in the first quarter of 2001, compared to equity earnings of $14 million in the first quarter of 2000. The first quarter of 2001 includes an after-tax one-time charge of $4 million or $0.065 per share for the closure of Equistar’s Port Arthur, Texas plant and after-tax restructuring and other charges of $4 million or $0.065 per share related to the closing of the Company’s Cincinnati office and the reorganization of the Company’s management team. Excluding these charges the net loss would have been $7 million or ($0.11) per share.
SEGMENT ANALYSIS
Titanium Dioxide and Related Products
Three Months Ended
March 31,
2001 2000
-------------------------------
(In millions)
(Unaudited)
Net sales $ 319 $ 323
Operating income 29 32
First quarter 2001 operating income of $29 million decreased $3 million or 10% from the first quarter of 2000. Net sales of $319 million for the first quarter of 2001 decreased approximately 1% from the same period last year due to flat pricing and overall sales volumes that were 1% lower than the first quarter of 2000. The most significant reason for the decline in operating profit is the increase in per unit cost of products sold that resulted from reduced production rates.
The operating rate for the first quarter of 2001 was 88%, based on an annual effective capacity of 712,000 metric tons, compared to 96% for the comparable period last year, primarily because production was curtailed during the first quarter of 2001 in order to match production with reduced market demand.
Manufacturing costs per ton in the first quarter of 2001 increased 5% from the comparable period last year due to reduced operating rates and higher natural gas costs.
The Northern Hemisphere markets have not yet demonstrated the normal seasonal spring pick-up in demand. The Company plans to continue to match plant operating rates with demand. To the extent operating rates remain below prior year levels, unit cost of products sold will be higher than in 2000. However, cost-saving initiatives have generated over $5 million of selling, general and administrative savings, compared to last year’s first quarter. Second quarter results will depend on a return to historical levels of seasonal demand in Europe and North America.
Acetyls
Three Months Ended
March 31,
2001 2000
-------------------------------
(In millions, except share data)
(Unaudited)
Net sales $ 99 $ 69
Operating income (3) 7
The Acetyls business reported a first quarter 2001 operating loss of $3 million, a decrease of $10 million from the same period last year. Net sales for the first quarter of 2001 increased 43% from the first quarter of 2000 to $99 million, primarily due to increased prices.
First quarter higher natural gas prices increased costs $27 million over the first quarter last year. However, natural gas costs were highest in January, but then declined each month during the first quarter, with March natural gas prices averaging one-half of January’s natural gas prices, and the acetyls business returned to profitability for the month of March. Increased ethylene prices and increased cost per unit resulting from reduced rates of production accounted for the remainder of the decline in operating income.
VAM prices in the first quarter increased 31% compared to the first quarter last year, reflecting higher raw material costs. These increases, however, were unable to keep pace with increases in the cost of natural gas and ethylene. Acetic acid prices in the first quarter increased 35% from the comparable period last year. Methanol prices in the first quarter increased 133% compared to the first quarter last year, driven by very high natural gas costs. Sales volume for VAM increased 6% for the quarter ended March 31, 2001 versus the prior year quarter. Volumes were weak in acetic acid and methanol due to the slowdown in the U.S. economy and the reduction in export business, reflecting the competitive disadvantage for U.S. Gulf Coast producers as U.S. natural gas costs rose to unprecedented levels.
In the second quarter, the decline in natural gas costs, if sustained, should allow the acetyls business to return to profitability. In order to help manage the risk associated with the volatility of natural gas prices, the Company has fixed the price of natural gas for a majority of its 2001 requirements. However, an increase in overall economic activity will be required to return to year-earlier profit levels.
Fragrance and Flavor Chemicals
Three Months Ended
March 31,
2001 2000
-------------------------------
(In millions, except share data)
(Unaudited)
Net sales $ 26 $ 31
Operating income 4 7
The market for fragrance chemicals remained very competitive in the first quarter of 2001. Operating income of $4 million for the three months ended March 31, 2001 decreased $3 million, or 38%, from the first quarter of 2000. Net sales decreased $3 million, or 9%, from the same period last year.
Sales volumes, in total, were down 8% from last year’s first quarter. However, excluding sales of the lower margin products, sales volumes were down only 2%. The decline in operating income is primarily attibutable to a 1% decline in selling prices versus the prior year quarter. To a lesser extent, reduced sales volumes and increased cost per unit from reduced production and higher natural gas costs impacted operating income.
Average selling prices declined 1% compared to last year’s first quarter. The price of crude sulfate turpentine, the key raw material, remained unchanged from last year’s first quarter. We expect this difficult market to continue for the remainder of the year, although there are some signs of improvement.
Equistar
Three Months Ended
March 31,
2001 2000
-------------------------------
(In millions)
(Unaudited)
Equity in (loss) earnings $ (24) $ 14
Millennium’s 29.5% interest in Equistar reported a first quarter post-interest equity loss of $24 million compared to $14 million of equity income in the first quarter last year. Included in the first quarter of 2001 is a $6 million charge representing Millennium’s share of the severance and other costs associated with the shutdown of Equistar’s Port Arthur plant.
Ethylene prices increased 14% in the first quarter of 2001 over the first quarter of 2000, while volumes declined approximately 13%. The cost of ethylene increased 20% in the first quarter of 2001 over the first quarter of 2000. Polyethylene prices increased slightly, on average, but volumes declined 13% in the first quarter of 2001 compared to the first quarter of 2000. Heavy liquid feedstock costs increased 2% in the first quarter of 2001 over the first quarter of 2000. Natural gas liquids prices increased an average of 14% in the first quarter of 2001 over last year’s first quarter.
Ethylene contract prices settled down $0.01 per pound for March and $0.02 per pound for April. Market demand for polyethylene is low given both new industry capacity and uneasiness about the U.S. economy. A recovery in U.S. demand will be necessary before any substantial improvement in Equistar’s results occurs.
RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2001, the Company announced the realignment of its operating and management structure to take better advantage of the Company’s existing growth-oriented businesses, and achieve higher returns from its operations that have lower growth rates. In connection with the realignment, the Company announced the closure of its facilities in Cincinnati, Ohio and recorded restructuring and other charges of $5 million. These charges included $3 million of severance and other termination benefits related to the termination of about 35 employees involved in technical, marketing and administrative activities, as well as $2 million related to the write-down of assets, lease termination costs and other charges associated with the Cincinnati facility. The office in Cincinnati is expected to close at the end of the second quarter of 2001.
FOREIGN CURRENCY MATTERS
The functional currency of each of the Company’s non-United States operations (principally the TiO2 businesses in the United Kingdom, France, Brazil and Australia) is the local currency. The impact of currency translation in consolidating the results of operations and the financial position of such operations is included as a component of comprehensive income in the consolidated statement of changes in shareholders’ equity. Future events that may significantly increase or decrease the risk of future movements in foreign currencies in which the Company conducts business, can not be predicted.
In addition, the Company buys materials and sells products in a variety of currencies in various parts of the world. Its results are therefore impacted by changes in the relative value of currencies in which it deals. The Company’s primary market risk relates to exposure to foreign currency exchange rate fluctuations on transactions made by the Company’s foreign operations. The Company currently uses forward exchange contracts to mitigate the effect of foreign exchange rate movements on the Company’s operating results.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the three months ended March 31, 2001 was $6 million compared to $34 million provided for the three months ended March 31, 2000. The decrease was due primarily to lower profitability, a decrease in trade accounts payable and other liabilities, and an increase in investments and other assets.
Cash used in investing activities was $26 million compared to $19 million in the first three months of 2000 due to increased capital expenditures.
Cash used in financing activities was $27 million in the first three months of 2001 compared to $35 million used in the first three months of 2000. The 2001 period reflects a net $18 million repayment of debt while the 2000 period reflects a net repayment of debt of $3 million and $23 million for the repurchase of shares.
The Company expects to spend approximately $100 million in 2001 for capital expenditures, of which $28 million was spent during the first quarter.
The Company is in the process of refinancing outstanding borrowings under its revolving bank credit facility, which matures in late July 2001. As a result of conditions in the current credit markets, the Company’s replacement borrowings are expected to have a higher interest cost than the indebtedness currently outstanding under the existing bank credit facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion under the caption “Foreign Currency Matters” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of this Quarterly Report is incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | | Exhibits |
| |
| | 11.1 | Statement re: computation of per share earnings |
| |
| (b) | | No Current Reports on Form 8-K were filed during the quarter ended March 31, 2001 and through the date hereof. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | MILLENNIUM CHEMICALS INC. |
| | | |
| | | |
| | | |
| Date: May 15, 2001 | | |
| | | John E. Lushefski |
| | | Senior Vice President and Chief Financial Officer |
| | | (as duly authorized officer and principal financial officer) |
EXHIBIT INDEX
-------------
11.1 Statement re: computation of per share earnings
COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1
WEIGHTED
BASIC AVERAGE
- ----------- # OF EARNINGS
SHARES SHARES PER SHARE
-------------- ------------- ---------------
Shares of common stock outstanding
at December 31, 1999 66,508,567 66,508,567
Shares repurchased:
March (1,382,300) (460,767)
Shares issued:
January 10,594 10,594
February 220,378 145,449
-------------- -------------
Shares of common stock outstanding
at March 31, 2000 65,357,239 66,203,843
============== =============
Income from continuing operations 25,000,000
---------------
Weighted average shares outstanding 66,203,843
Basic earnings per share 0.38
Shares of common stock outstanding
at December 31, 2000 63,493,175 63,493,175
Shares repurchased:
February (5,601) (3,734)
Shares issued:
February 30,204 20,136
-------------- -------------
Shares of common stock outstanding
at March 31, 2001 63,517,778 63,509,577
============== =============
Income from continuing operations (15,235,000)
---------------
Weighted average shares outstanding 63,509,577
Basic earnings per share (0.24)
COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1
WEIGHTED
DILUTED AVERAGE
- --------------------- # OF EARNINGS
SHARES SHARES PER SHARE
-------------- ------------- ---------------
Shares of common stock outstanding
at December 31, 1999 66,508,567 66,508,567
Shares repurchased:
March (1,382,300) (460,767)
Shares issued:
January 10,594 10,594
February 220,378 145,449
Options 538,000 -
Time vested restricted stock 608,624 405,363
Performance based restricted stock 228,224 142,095
-------------- -------------
Shares of common stock outstanding
at March 31, 2000 66,732,087 66,751,301
============== =============
Income from continuing operations 25,000,000
---------------
Weighted average shares outstanding 66,751,301
Diluted earnings per share 0.37
Shares of common stock outstanding
at December 31, 2000 63,493,175 63,493,175
Shares repurchased:
February (5,601) (3,734)
Shares issued:
February 30,204 20,136
Options 604,000 -
Time vested restricted stock 196,578 -
Performance based restricted stock 801,016 -
-------------- -------------
Shares of common stock outstanding
at March 31, 2001 65,119,372 63,509,577
============== =============
Income from continuing operations (15,235,000)
---------------
Weighted average shares outstanding 63,509,577
Diluted earnings per share (0.24)
