• | our ability, following our emergence from bankruptcy, to successfully implement all of the post-emergence aspects of our plan of reorganization; | |
• | our ability to reduce our overall leveraged position; | |
• | the potential adverse impact of our Chapter 11 filing on our operations, management and employees, and the risks associated with operating businesses under Chapter 11 protection; | |
• | our ability to comply with the terms of our financing facilities or to increase, extend or refinance the facilities; | |
• | customer and vendor response to our Chapter 11 proceeding; | |
• | general economic, business and market conditions; | |
• | currency fluctuations; | |
• | interest rate fluctuations; | |
• | price increases or shortages of raw materials and energy; | |
• | disruption of operations; | |
• | exposure to product liability and other litigation, environmental remediation obligations and other environmental liabilities; | |
• | lower prices for our products or a decline in our market share due to competition or price pressure by customers; | |
• | ability to implement cost reduction initiatives in a timely manner; | |
• | ability to divest existing businesses; | |
• | efficacy of new technology and facilities; | |
• | limited access to capital resources; | |
• | changes in U.S. and foreign laws and regulations; | |
• | geopolitical instability; and | |
• | changes in pension and other post-retirement benefit plan assumptions. |
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![](https://capedge.com/proxy/8-KA/0000950123-08-000130/l29443al2907501.gif)
• | Saflex® —Solutia is the world’s largest manufacturer of polyvinyl butyral (PVB) interlayers marketed under the Saflex® brand name. Our Saflex® plastic interlayers are used for laminated safety glass, primarily used in automotive and architectural applications. We market our plastic interlayers to automotive glass laminators for use primarily in automobile windshields and to some degree in side, rear and roof windows of vehicles. Approximately 45% of our sales to the automotive sector are for aftermarket replacement windows. We also market Saflex® plastic interlayers to the growing architectural markets. With growing architectural use of glass in commercial buildings, we expect PVB demand for architectural applications to exceed use in automotive applications in the coming years, providing even greater diversification and stability to our business. Our European Saflex® operations are particularly well positioned to capture future growth in the architectural market. Saflex® sales in the U.S. residential architectural market are not significant. | |
• | CPFilms —CPFilms is the world’s largest manufacturer of custom-coated window films for aftermarket automotive and architectural applications. Our Llumar®, Vista®, and Gila® brands of window films are used primarily for aftermarket automotive and architectural applications. Llumar® is marketed to the professional aftermarket, and Gila® is marketed to the do-it-yourself customer. Vista® window films are marketed solely for professional architectural applications. | |
• | Flexsys —Flexsys is a global leader in high quality chemicals for the rubber industry. These chemicals help cure and protect rubber, increase durability and fatigue life, control color, and provide heat resistance. Our products are an important part of rubber products used in automobiles, aircraft, and truck tires, as well as in belts, hoses, and footwear. Under our Crystex® trade name, Solutia is the world’s leading supplier of insoluble sulfur vulcanizing agents. | |
• | Specialty Products & Other —Specialty Products is a portfolio of businesses that are characterized by market leadership positions, high margins and consistent cash flows. Our Therminol® heat transfer fluids are used in systems that provide for indirect heating or cooling of industrial and chemical processes. Our Skydrol® brand aviation hydraulic fluids are leading products supplied across the aviation industry. In addition, we manufacture plastic products including entrance matting and automotive spray suppression systems. |
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• | Nylon 6,6 —Solutia is one of the world’s few fully integrated producers of nylon 6,6. Our Vydyne® and Ascend® nylon polymers are sold to the engineered thermoplastic, apparel, textile and industrial fiber industries. Our nylon fibers are sold for carpet and industrial uses. Carpet fibers are sold under the Wear-Dated® brand for residential carpet and the Ultron® brand for commercial carpet, as well as under private labels. Over the past 4 years, we have converted 200 million pounds or 29% of our nylon capacity to manufacture nylon resins that target higher growth applications and markets for engineering thermoplastics. We expect to convert an additional 150 million pounds or 22% of capacity by early 2008. | |
• | Intermediate Chemicals —Our chemical intermediates, including adipic acid, hexamethylenediamine and acrylonitrile, are used internally as feedstock for resins and fiber production and are also sold on the merchant market for use in nylon, ABS plastic, acrylic fibers, synthetic resins, synthetic lubricants, polyurethanes, paper chemicals and plasticizers. Our large scale, capital-intensive operations, and the degree to which they are integrated, allows us to realize efficiencies and be highly competitive in these merchant markets. |
Polyvinyl Butryl (PVB) Saflex® | #1 Globally | |||
Premium PET Window Films-CPFilms | #1 Globally | |||
Insoluble Sulfur (Crystex®) | #1 Globally | |||
High Temperature Heat Transfer Fluids (Therminol®) | #1 Globally | |||
Flame Resistant Aviation Hydraulic Fluid (Skydrol®) | #1 Globally | |||
Integrated Nylon 6,6 Producer | #2 Globally |
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Revenue by End Market | Revenue by Geographic Region | |
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5
• | managing our businesses to enhance financial and operating performance including the utilization of the unique powers of a Chapter 11debtor-in-possession; | |
• | making changes to our asset portfolio to focus on high-potential businesses that could consistently deliver returns in excess of their cost of capital; | |
• | achieving a reallocation of the risk related to Legacy Liabilities; and | |
• | establishing the appropriate capital structure. |
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• | focusing our product portfolio through strategic business acquisitions (Akzo Nobel’s 50% interest in the Flexsys joint venture) and non-core business disposals (50% interest in Astaris joint venture, Pharmaceutical Services Business, Axio Research Corporation and Dequest® Business); | |
• | closing the nylon acrylic fibers business and converting industrial and carpet fiber assets in Pensacola to manufacture resins and compounds for the higher value nylon 6,6 growing plastics market; | |
• | renegotiating certain nylon commercial contracts to provide for raw material price pass through; | |
• | reducing our liability exposure by approximately $1.3 billion by reducing and capping medical and life benefits, freezing domestic pension liabilities, eliminating legacy tort litigation, significantly reducing OPEB liability, and defining our environmental obligations moving forward; | |
• | contributing over $295 million through October 2007 to our domestic pension plan, with plans to contribute another $73 million at emergence, resulting in an 80% funded domestic pension plan; | |
• | launching a series of cost reduction initiatives throughout the Company in 2004 that yielded approximately $65 million in savings per year beginning in 2005; and | |
• | reducing worldwide headcount by 1,250 employees (excluding employees added by the Flexsys acquisition) to streamline operations and eliminate redundancy since filing. |
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• | On May 1, 2007, we purchased the remaining 50 percent interest in the Flexsys joint venture, a50/50 rubber chemicals joint venture between Akzo Nobel and Solutia. The financial data provided for the twelve months ended September 30, 2007 includes the financial results of Flexsys prior to our acquisition of the remaining 50 percent interest from Akzo Nobel on May 1, 2007. | |
• | The transactions to be consummated in connection with the Plan of Reorganization, including the satisfaction of allowed administrative, secured and general unsecured claims, the reallocation of legacy liabilities relating to litigation, environmental remediation, and certain post-retirement benefits, the elimination ofChapter 11-related reorganization items and the raising of new equity capital through the Creditor Rights Offering upon emergence from bankruptcy. | |
• | Adjustments made to our consolidated financial statements for fresh-start accounting and the related impact to our income statement. These adjustments were based on an assumed equity value of $1.2 billion before adjusting for fees relating to the Creditor Rights Offering and the Equity Rights Offering. |
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Pro Forma | ||||||||||||||||||||||||||||
as of and | ||||||||||||||||||||||||||||
for the | ||||||||||||||||||||||||||||
Twelve | ||||||||||||||||||||||||||||
Historical | Months | |||||||||||||||||||||||||||
Year | Nine Months | Ended | ||||||||||||||||||||||||||
Ended December 31, | Ended September 30, | Sept. 30, | ||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2006 | 2007 | 2007 | ||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Net sales | $ | 2,268 | $ | 2,529 | $ | 2,645 | $ | 2,795 | $ | 2,098 | $ | 2,574 | $ | 3,618 | ||||||||||||||
Cost of sales | 2,191 | 2,336 | 2,341 | 2,435 | 1,805 | 2,187 | 3,073 | |||||||||||||||||||||
Gross profit | 77 | 193 | 304 | 360 | 293 | 387 | 545 | |||||||||||||||||||||
Marketing, administrative and technological expenses | 332 | 273 | 266 | 272 | 199 | 212 | 315 | |||||||||||||||||||||
Amortization expense | 1 | 1 | 1 | 1 | 1 | 1 | 42 | |||||||||||||||||||||
Impairment of intangible assets | 3 | — | — | — | — | — | — | |||||||||||||||||||||
Operating income (loss) | (259 | ) | (81 | ) | 37 | 87 | 93 | 174 | 188 | |||||||||||||||||||
Equity earnings (loss) from affiliates | (133 | ) | (26 | ) | 96 | 38 | 28 | 12 | — | |||||||||||||||||||
Interest expense | (115 | ) | (108 | ) | (79 | ) | (100 | ) | (76 | ) | (93 | ) | (170 | ) | ||||||||||||||
Other income, net | 11 | — | 8 | 16 | 12 | 32 | 37 | |||||||||||||||||||||
Loss on debt modification | — | (15 | ) | — | (8 | ) | (8 | ) | (7 | ) | — | |||||||||||||||||
Reorganization Items | (1 | ) | (73 | ) | (49 | ) | (71 | ) | (51 | ) | (185 | ) | — | |||||||||||||||
Income (Loss) from Continuing Operations Before Income Tax Expense (Benefit) | (497 | ) | (303 | ) | 13 | (38 | ) | (2 | ) | (67 | ) | 55 | ||||||||||||||||
Income tax expense (benefit) | 396 | (7 | ) | 10 | 18 | 10 | 25 | 42 | ||||||||||||||||||||
Income (Loss) from Continuing Operations | (893 | ) | (296 | ) | 3 | (56 | ) | (12 | ) | (92 | ) | 13 | ||||||||||||||||
Income (Loss) from Discontinued Operations, net of tax | (77 | ) | (24 | ) | 8 | 58 | 59 | 29 | 28 | |||||||||||||||||||
Cumulative Effect of Change in Accounting Principle, net of tax | (5 | ) | — | (3 | ) | — | — | — | — | |||||||||||||||||||
Net income (loss) | $ | (975 | ) | $ | (320 | ) | $ | 8 | $ | 2 | $ | 47 | $ | (63 | ) | $ | 41 | |||||||||||
Balance Sheet (Continuing Operations) | ||||||||||||||||||||||||||||
Cash and cash equivalents(2) | $ | 159 | $ | 115 | $ | 107 | $ | 150 | $ | 154 | $ | 220 | $ | 31 | ||||||||||||||
Working capital(1) | 244 | 165 | 191 | 220 | 277 | 449 | 724 | |||||||||||||||||||||
Property and equipment, net | 854 | 790 | 760 | 784 | 770 | 1,026 | 1,446 | |||||||||||||||||||||
Total assets | 2,313 | 1,958 | 1,884 | 2,017 | 2,065 | 2,629 | 4,585 | |||||||||||||||||||||
Total debt(2) | 655 | 585 | 547 | 860 | 853 | 1,328 | 1,620 | |||||||||||||||||||||
Liabilities subject to compromise | 2,221 | 2,187 | 2,176 | 1,849 | 1,949 | 1,844 | — | |||||||||||||||||||||
Total shareholder’s equity | (1,100 | ) | (1,423 | ) | (1,433 | ) | (1,405 | ) | (1,410 | ) | (1,449 | ) | 1,194 | |||||||||||||||
Cash Flow Data (Continuing Operations): | ||||||||||||||||||||||||||||
Net cash provided by (used for): | ||||||||||||||||||||||||||||
Operating activities | ||||||||||||||||||||||||||||
Pension plan liabilities | $ | (46 | ) | $ | 20 | $ | 56 | $ | (196 | ) | $ | (153 | ) | $ | (89 | ) | ||||||||||||
Other postretirement benefit liabilities | (31 | ) | (83 | ) | (48 | ) | (102 | ) | (45 | ) | (27 | ) | ||||||||||||||||
Reorganization items | — | (44 | ) | (65 | ) | (65 | ) | (46 | ) | (58 | ) | |||||||||||||||||
Other operating activities | 26 | 132 | 18 | 176 | 30 | 104 | ||||||||||||||||||||||
Total operating activities | (51 | ) | 25 | (39 | ) | (187 | ) | (214 | ) | (70 | ) | |||||||||||||||||
Investing activities | (128 | ) | (86 | ) | 6 | (116 | ) | (85 | ) | (201 | ) | |||||||||||||||||
Financing activities | (155 | ) | 12 | 16 | 275 | 275 | 283 |
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Pro Forma | ||||||||||||||||||||||||||||
as of and | ||||||||||||||||||||||||||||
for the | ||||||||||||||||||||||||||||
Twelve | ||||||||||||||||||||||||||||
Historical | Months | |||||||||||||||||||||||||||
Year | Nine Months | Ended | ||||||||||||||||||||||||||
Ended December 31, | Ended September 30, | Sept. 30, | ||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2006 | 2007 | 2007 | ||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||
Segment Data | ||||||||||||||||||||||||||||
Performance Products Sales | $ | 876 | $ | 941 | $ | 1,003 | $ | 1,064 | $ | 802 | $ | 1,151 | $ | 1,760 | ||||||||||||||
Integrated Nylon Sales | 1,392 | 1,588 | 1,642 | 1,731 | 1,296 | 1,423 | 1,858 | |||||||||||||||||||||
Total sales | $ | 2,268 | $ | 2,529 | $ | 2,645 | $ | 2,795 | $ | 2,098 | $ | 2,574 | $ | 3,618 | ||||||||||||||
Performance Products Adjusted EBITDA(3) | 136 | 132 | 168 | 182 | 155 | 215 | 334 | |||||||||||||||||||||
Integrated Nylon Adjusted EBITDA(4) | 55 | 61 | 85 | 66 | 50 | 82 | 113 | |||||||||||||||||||||
Unallocated costs | ||||||||||||||||||||||||||||
Corporate expenses | (54 | ) | (48 | ) | (46 | ) | (47 | ) | (34 | ) | (37 | ) | (47 | ) | ||||||||||||||
LIFO adjustments | (17 | ) | (45 | ) | (39 | ) | (3 | ) | 1 | (20 | ) | (24 | ) | |||||||||||||||
Other income (expense), net | 2 | (1 | ) | — | 7 | 6 | 6 | 7 | ||||||||||||||||||||
(69 | ) | (94 | ) | (85 | ) | (43 | ) | (27 | ) | (51 | ) | (64 | ) | |||||||||||||||
Adjusted EBITDA(5) | $ | 122 | $ | 99 | $ | 168 | $ | 205 | $ | 178 | $ | 246 | $ | 383 | ||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||||
EBITDA(5) | $ | (339 | ) | $ | (101 | ) | $ | 206 | $ | 229 | $ | 215 | $ | 139 | $ | 424 | ||||||||||||
Cash interest expense(6) | 95 | 81 | 79 | 97 | 85 | 96 | 157 | |||||||||||||||||||||
Capital expenditures | 70 | 49 | 75 | 105 | 74 | 103 | 158 | |||||||||||||||||||||
Ratio of Total Debt to Adjusted EBITDA(6) | 4.23 | x | ||||||||||||||||||||||||||
Ratio of Adjusted EBITDA to cash interest expense(6) | 2.44 | x |
(1) | Working capital is defined as current assets (excluding cash and cash equivalents), less current liabilities (excluding short-term borrowings). | |
(2) | Total debt excludes $625 million as of December 31, 2003 and September 30, 2007 and $668 million as of December 31, 2004, 2005 and 2006 and September 30, 2006 of debt classified as subject to compromise in accordance withSOP 90-7. The summary financial data table assumes emergence as of September 30, 2007, which results in $31 million of cash and cash equivalents, $1,620 million of total debt, with no amounts outstanding on the revolver. The Company believes that $20 million of cash and cash equivalents is necessary to facilitate day to day operations. In contrast, the unaudited pro forma condensed consolidated financial statements presented herein includes $94 million of cash and cash equivalents, $1,671 million of total debt and expected revolver borrowings of $63 million at the time of emergence. The actual amount of revolver borrowing may differ depending on the timing of certain cash activity, including working capital, capital expenditures and emergence related cash flows. |
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(3) | The following table reconciles Performance Products Segment Profit to Segment EBITDA and Segment Adjusted EBITDA for the periods presented. Certain expenses and other items that are managed outside of the segment or cannot be directly attributable to the segment are excluded. These unallocated items consist primarily of corporate expenses, adjustments to the LIFO valuation reserve, certain equity earnings from affiliates, other income and expense items, reorganization items, gains and losses from asset dispositions and restructuring charges that are not directly attributable to the operating segment. There were no inter-segment sales in the periods presented below. |
Pro Forma | ||||||||||||||||||||||||||||
for the | ||||||||||||||||||||||||||||
Twelve | ||||||||||||||||||||||||||||
Historical | Months | |||||||||||||||||||||||||||
Year | Nine Months | Ended | ||||||||||||||||||||||||||
Ended December 31, | Ended September 30, | Sept. 30, | ||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2006 | 2007 | 2007 | ||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||
Performance Products Segment Profit | $ | 61 | $ | 74 | $ | 126 | $ | 130 | $ | 115 | $ | 173 | $ | 239 | ||||||||||||||
Depreciation and Amortization | 39 | 36 | 36 | 41 | 31 | 37 | 67 | |||||||||||||||||||||
Performance Products EBITDA | $ | 100 | $ | 110 | $ | 162 | $ | 171 | $ | 146 | $ | 210 | $ | 306 | ||||||||||||||
Adjustments to EBITDA: | ||||||||||||||||||||||||||||
Non-cash stock compensation expense | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 4 | ||||||||||||||
Equity earnings from affiliates | (1 | ) | (1 | ) | (2 | ) | (1 | ) | — | — | — | |||||||||||||||||
Reorganization items(a) | — | 1 | 7 | 8 | 7 | — | — | |||||||||||||||||||||
Tort litigation matters(b) | — | — | — | — | — | — | 2 | |||||||||||||||||||||
Restructuring charges(c) | 34 | 18 | 1 | 4 | 2 | 2 | 10 | |||||||||||||||||||||
Asset write-down and impairment charges(d) | 3 | — | — | — | — | — | 6 | |||||||||||||||||||||
Other non-recurring charges(e) | — | 4 | — | — | — | 3 | 6 | |||||||||||||||||||||
Performance Products Adjusted EBITDA | $ | 136 | $ | 132 | $ | 168 | $ | 182 | $ | 155 | $ | 215 | $ | 334 | ||||||||||||||
(a) | Reorganization items include items realized or incurred by Solutia due to the reorganization process under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items include adjustments to record certain prepetition claims at estimated amounts of the allowed claims, professional fees for services provided by debtor and creditor professionals directly related to the reorganization proceedings, and other reorganization charges primarily involving costs incurred with the shut-down of certain non-strategic businesses. | |
(b) | Settlement of Flexsys antitrust litigation prior to the May 1, 2007 acquisition. | |
(c) | Restructuring costs related principally to the closure of certain non-strategic operations including costs for decommissioning and dismantling activities, asset impairments, future costs for non-cancelable operating leases and severance and retraining costs. | |
(d) | In 2003, write-down of non-deductible goodwill in accordance with SFAS No. 142 for Axio Research Corporation within the Performance Products segment. In 2007, impairment of fixed assets charged to Flexsys operations prior to the May 1, 2007 acquisition. | |
(e) | In 2004, the Company incurred losses directly related to the hurricanes experienced in the U.S. resulting in the disruption of operations and property damage at Solutia’s Performance Products location in Martinsville, Virginia. These costs included primarily asset write-offs, repairs and maintenance costs. Also in 2004, loss on the sale of the assets of Axio Research Corporation. In 2007, charge resulting from thestep-up in basis of Flexsys’ inventory in accordance with purchase accounting and tolling charges on manufacturing operations incurred by Flexsys prior to the acquisition of Kashima manufacturing facilities on May 1, 2007. | |
(4) | The following table reconciles Integrated Nylon Segment Profit (Loss) to Segment EBITDA and Segment Adjusted EBITDA for the periods presented. Certain expenses and other items that are managed outside or cannot be directly attributable to the segment are excluded. These unallocated items consist primarily of corporate expenses, adjustments to the LIFO valuation reserve, certain equity earnings from affiliates, |
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other income and expense items, reorganization items, gains and losses from asset dispositions and restructuring charges that are not directly attributable to the operating segment. There were no inter-segment sales in the periods presented below. |
Pro Forma | ||||||||||||||||||||||||||||
for the | ||||||||||||||||||||||||||||
Historical | Twelve | |||||||||||||||||||||||||||
Nine Months | Months | |||||||||||||||||||||||||||
Year | Ended | Ended | ||||||||||||||||||||||||||
Ended December 31, | September 30, | Sept. 30, | ||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2006 | 2007 | 2007 | ||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||
Integrated Nylon Segment Profit (Loss) | $ | (30 | ) | $ | (21 | ) | $ | (5 | ) | $ | (3 | ) | $ | (2 | ) | $ | 71 | $ | 83 | |||||||||
Depreciation and Amortization | 80 | 76 | 69 | 63 | 48 | 43 | 58 | |||||||||||||||||||||
Integrated Nylon EBITDA | $ | 50 | $ | 55 | $ | 64 | $ | 60 | $ | 46 | $ | 114 | $ | 141 | ||||||||||||||
Adjustments to EBITDA: | ||||||||||||||||||||||||||||
Non-cash stock compensation expense | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | ||||||||||||||
Reorganization items(a) | — | 1 | 21 | 6 | 4 | — | 2 | |||||||||||||||||||||
Deferred revenue recognition(b) | — | — | — | — | — | (22 | ) | (22 | ) | |||||||||||||||||||
Restructuring charges(c) | 5 | — | — | — | — | — | — | |||||||||||||||||||||
Other non-recurring charges(d) | — | 5 | — | — | — | (10 | ) | (10 | ) | |||||||||||||||||||
Integrated Nylon Adjusted EBITDA | $ | 55 | $ | 61 | $ | 85 | $ | 66 | $ | 50 | $ | 82 | $ | 113 | ||||||||||||||
(a) | Reorganization items include items realized or incurred by Solutia due to the reorganization process under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items include adjustments to record certain prepetition claims at estimated amounts of the allowed claims, professional fees for services provided by debtor and creditor professionals directly related to the reorganization proceedings, and other reorganization charges primarily involving costs incurred with the shut-down of certain non-strategic businesses. | |
(b) | Revenue resulting from a contract termination by a customer which resulted in the immediate recognition of deferred revenue. | |
(c) | Restructuring costs related principally to the closure of certain non-strategic operations including costs for decommissioning and dismantling activities, asset impairments, future costs for non-cancelable operating leases and severance and retraining costs. | |
(d) | In 2004, the Company incurred losses directly related to the hurricanes experienced in the U.S. resulting in the disruption of operations and property damage at Solutia’s operations in the Integrated Nylon chain located principally in the Southeastern part of the U.S. These costs included primarily asset write-offs, repairs and maintenance costs. In 2007, the Company recorded a $10 million gain resulting from the sale of land at manufacturing facilities in Alvin, Texas; and Pensacola, Florida. | |
(5) | We present EBITDA and Adjusted EBITDA because we believe these measures provide investors with important additional information to evaluate our operating performance. We believe EBITDA and Adjusted EBITDA are useful to investors because these measures are frequently used by securities analysts, investors and other interested persons in evaluating operating performance in comparison to other companies in our industry. These measures are also frequently provided for in indentures and credit agreements and similar measures will be used in the covenants in the indentures governing the notes and our senior secured credit facility. EBITDA and Adjusted EBITDA, however, are not measures of financial performance under GAAP and should not be considered alternatives to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities as measures of liquidity. Since EBITDA and Adjusted EBITDA are not measures determined in accordance with GAAP and thus are susceptible to varying interpretations and calculations, EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation from, or as a substitute for analysis of, our financial information prepared in accordance with GAAP. |
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Some of these limitations are: (a) they do not reflect cash outlays for capital expenditures or future contractual commitments; (b) they do not reflect changes in, or cash requirements for, working capital; (c) they do not reflect interest expense or the cash requirements necessary to service interest, or principal payments, on indebtedness; (d) they do not reflect income tax expense or the cash necessary to pay income taxes; (e) they do not reflect available liquidity to our company; and (f) other companies, including companies in our industry, may not use such measures or may calculate such measures differently than as presented in this offering memorandum, limiting their usefulness as comparative measures. The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented: |
Pro forma | ||||||||||||||||||||||||||||
for the | ||||||||||||||||||||||||||||
Historical | Twelve | |||||||||||||||||||||||||||
Nine | Months | |||||||||||||||||||||||||||
Year | Months Ended | Ended | ||||||||||||||||||||||||||
Ended December 31, | September 30, | Sept. 30, | ||||||||||||||||||||||||||
2003 | 2004 | 2005 | 2006 | 2006 | 2007 | 2007 | ||||||||||||||||||||||
(In millions of dollars) | ||||||||||||||||||||||||||||
Net income (loss) | $ | (975 | ) | $ | (320 | ) | $ | 8 | $ | 2 | $ | 47 | $ | (63 | ) | $ | 41 | |||||||||||
Interest expense, net | 115 | 108 | 79 | 100 | 76 | 93 | 170 | |||||||||||||||||||||
Income taxes | 396 | (7 | ) | 10 | 18 | 10 | 25 | 42 | ||||||||||||||||||||
Depreciation and amortization | 125 | 118 | 109 | 109 | 82 | 84 | 171 | |||||||||||||||||||||
EBITDA | $ | (339 | ) | $ | (101 | ) | $ | 206 | $ | 229 | $ | 215 | $ | 139 | $ | 424 | ||||||||||||
Adjustments to EBITDA: | ||||||||||||||||||||||||||||
(Income) Loss from Discontinued Operations, net of tax | $ | 77 | $ | 24 | $ | (8 | ) | $ | (58 | ) | $ | (59 | ) | $ | (29 | ) | $ | (28 | ) | |||||||||
Cumulative Effect of Change in Accounting Principle, net of tax | 5 | — | 3 | — | — | — | — | |||||||||||||||||||||
Reorganization items(a) | 1 | 73 | 49 | 71 | 51 | 185 | — | |||||||||||||||||||||
Non-cash stock compensation expense | — | — | — | — | — | — | 12 | |||||||||||||||||||||
Equity loss (earnings) from affiliates | 133 | 26 | (96 | ) | (38 | ) | (28 | ) | (12 | ) | — | |||||||||||||||||
Deferred revenue recognition(b) | — | — | — | — | — | (22 | ) | (22 | ) | |||||||||||||||||||
Tort litigation matters(c) | 99 | — | — | (20 | ) | (20 | ) | (21 | ) | (19 | ) | |||||||||||||||||
Environmental charges(d) | 47 | — | — | 9 | 9 | — | — | |||||||||||||||||||||
Restructuring charges(e) | 43 | 18 | 1 | 4 | 2 | 6 | 14 | |||||||||||||||||||||
Pension and OPEB curtailments and settlements(f) | 35 | 35 | 13 | — | — | — | — | |||||||||||||||||||||
Loss on debt modification(g) - | — | 15 | — | 8 | 8 | 7 | — | |||||||||||||||||||||
Asset write-down and impairment charges(h) | 3 | — | — | — | — | — | 6 | |||||||||||||||||||||
Other non-recurring charges(i) | 18 | 9 | — | — | — | (7 | ) | (4 | ) | |||||||||||||||||||
Adjusted EBITDA | $ | 122 | $ | 99 | $ | 168 | $ | 205 | $ | 178 | $ | 246 | $ | 383 | ||||||||||||||
(a) | Reorganization items include items realized or incurred by Solutia due to the reorganization process under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items include adjustments to record certain prepetition claims at estimated amounts of the allowed claims, professional fees for services provided by debtor and creditor professionals directly related to the reorganization proceedings, and other reorganization charges primarily involving costs incurred with the shut-down of certain non-strategic businesses. | |
(b) | Revenue resulting from a contract termination by a customer which resulted in the immediate recognition of deferred revenue. | |
(c) | In 2003, charge related to Solutia’s share of the Anniston litigation settlement and to increase certain other litigation accruals. In 2006, represents the reversal of a litigation reserve with respect to a matter that was decided favorably. In 2007, the net settlement gain resulting from FMC litigation in the second |
13
quarter (gain of $21 million) and settlement of Flexsys antitrust litigation prior to the May 1, 2007 acquisition (loss of $2 million). | ||
(d) | In 2003, one-time environmental charges related to Anniston, Alabama consent decree and the closure of the Nitro, West Virginia facility. In 2006, an environmental charge precipitated by the notification by a third-party of its intent to terminate a tolling agreement at one of Solutia’s facilities outside the U.S. that will likely result in the cessation of operations at the site. | |
(e) | In 2007, charge resulting from the termination of a third-party agreement at one of Solutia’s facilities. For 2003 through 2007, costs relating principally to the closure of certain non-strategic operations, including costs for decommissioning and dismantling activities, asset impairments, future costs for non-cancelable operating leases and severance and retraining costs. In 2007, costs relating principally to the closure of certain non-strategic operations and other headcount reductions at Flexsys prior to the May 1, 2007 acquisition. | |
(f) | Net pension and other postretirement benefit plan curtailments and settlements. | |
(g) | In 2004, loss due to the modification of Solutia’s Euronotes in January. In 2006 and 2007, write-off of debt issuance costs and to record the DIP facility as modified at its fair value in March 2006 and January 2007. | |
(h) | In 2003, write-down of non-deductible goodwill in accordance with SFAS No. 142 for Axio Research Corporation within the Performance Products segment. In 2007, impairment of fixed assets charged to Flexsys operations prior to the May 1, 2007 acquisition. | |
(i) | In 2003, prior to the filing for bankruptcy in December, the Company incurred significant professional services expense related to the attempted out-of-court restructuring initiative. These expenses were not allowed to be classified as reorganization items as they were incurred prior to filing for bankruptcy. Also in 2003, recovery of certain receivables, established prior to 1997, which had previously been written off. In 2004, the Company incurred losses directly related to the hurricanes experienced in the U.S. resulting in the disruption of operations and property damage at Solutia’s operations in the Integrated Nylon chain located principally in the Southeastern part of the U.S., and the Performance Products location in Martinsville, Virginia. These costs included primarily asset write-offs and repairs and maintenance costs. Also in 2004, loss on the sale of the assets of Axio Research Corporation. In 2007, charge resulting from thestep-up in basis of Flexsys’ inventory in accordance with purchase accounting and tolling charges on manufacturing operations incurred by Flexsys prior to the acquisition of Kashima manufacturing facilities on May 1, 2007, which were offset by a $10 million gain resulting from the sale of land at manufacturing facilities in Alvin, Texas; and Pensacola, Florida. | |
(6) | The summary financial data table assumes emergence as of September 30, 2007, which results in $31 million of cash and cash equivalents, $1,620 million of total debt, with no amounts outstanding on the revolver. The unaudited pro forma condensed consolidated financial statements presented herein includes $94 million of cash and cash equivalents, $1,671 million of total debt, inclusive of expected revolver borrowings of $63 million at the time of emergence. As a result, the pro forma cash interest expense for the twelve months ended September 30, 2007 in the summary financial data table is estimated at $157 million, which is less than the cash interest expense of $161 million assumed in the unaudited pro forma condensed consolidated financial statements. |
14
15
16
As of September 30, 2007
Historical | Reorganization | Fresh Start | Pro Forma | |||||||||||||
Solutia | Adjustments | Adjustments | Consolidated | |||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 220 | $ | (126 | )(a) | $ | — | $ | 94 | |||||||
Trade receivables, net | 442 | — | — | 442 | ||||||||||||
Miscellaneous receivables | 133 | — | — | 133 | ||||||||||||
Inventories | 417 | — | 301 | (j) | 718 | |||||||||||
Prepaid expenses and other assets | 56 | — | — | 56 | ||||||||||||
Assets of discontinued operations | 9 | — | — | 9 | ||||||||||||
Total Current Assets | 1,277 | (126 | ) | 301 | 1,452 | |||||||||||
Property, Plant and Equipment, net | 1,026 | — | 420 | (k) | 1,446 | |||||||||||
Investments in Affiliates | 1 | — | — | 1 | ||||||||||||
Goodwill | 144 | — | 385 | (l) | 529 | |||||||||||
Identified Intangible Assets, net | 53 | — | 903 | (l) | 956 | |||||||||||
Other Assets | 137 | 73 | (b) | — | (m) | 210 | ||||||||||
Total Assets | $ | 2,638 | $ | (53 | ) | $ | 2,009 | $ | 4,594 | |||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 305 | $ | — | $ | — | $ | 305 | ||||||||
Accrued liabilities | 294 | 26 | (c) | — | 320 | |||||||||||
Short-term debt | 963 | (899 | )(a)(d) | — | 64 | |||||||||||
Liabilities of discontinued operations | 8 | — | — | 8 | ||||||||||||
Total Current Liabilities | 1,570 | (873 | ) | — | 697 | |||||||||||
Long-Term Debt | 365 | 1,242 | (a)(d) | — | 1,607 | |||||||||||
Other Liabilities | 308 | 574 | (e) | 214 | (m) | 1,096 | ||||||||||
Liabilities Subject to Compromise | 1,844 | (1,844 | )(f) | — | — | |||||||||||
Shareholders’ Equity (Deficit): | ||||||||||||||||
Common stock | 1 | 1 | (g) | (1 | )(n) | 1 | ||||||||||
Additional contributed capital | 56 | 1,193 | (g) | (56 | )(n) | 1,193 | ||||||||||
Treasury stock, at cost | (251 | ) | — | 251 | (n) | — | ||||||||||
Net deficiency of assets at spinoff | (113 | ) | — | 113 | (n) | — | ||||||||||
Accumulated other comprehensive loss | (45 | ) | 119 | (h) | (74 | )(n) | — | |||||||||
Retained earnings (Accumulated deficit) | (1,097 | ) | (465 | )(i)(m) | 1,562 | (o) | — | |||||||||
Total Shareholders’ Equity (Deficit) | (1,449 | ) | 848 | 1,795 | 1,194 | |||||||||||
Total Liabilities and Shareholders’ Equity (Deficit) | $ | 2,638 | $ | (53 | ) | $ | 2,009 | $ | 4,594 | |||||||
17
For the Year Ended December 31, 2006
Historical | Historical | Reorganization | Fresh Start | Pro Forma | ||||||||||||||||
Solutia | Flexsys | Adjustments | Adjustments | Consolidated | ||||||||||||||||
Net Sales | $ | 2,795 | $ | 606 | $ | — | $ | — | $ | 3,401 | ||||||||||
Cost of goods sold | 2,435 | 456 | (17 | )(p)(q) | (6 | )(k)(v) | 2,868 | |||||||||||||
Gross Profit | 360 | 150 | 17 | 6 | 533 | |||||||||||||||
Total marketing, administrative, and technological expenses | 272 | 58 | 1 | (p)(q) | (3 | )(k)(v) | 328 | |||||||||||||
Amortization expense | 1 | — | — | 40 | (l) | 41 | ||||||||||||||
Operating Income | 87 | 92 | 16 | (31 | ) | 164 | ||||||||||||||
Equity earnings from affiliates | 38 | — | (37 | )(r) | — | 1 | ||||||||||||||
Interest expense | (100 | ) | (5 | ) | (61 | )(s) | — | (166 | ) | |||||||||||
Other income (loss), net | 16 | (1 | ) | — | — | 15 | ||||||||||||||
Loss on debt modification | (8 | ) | — | 8 | (t) | — | — | |||||||||||||
Reorganization items, net | (71 | ) | — | 71 | (u) | — | — | |||||||||||||
Income (Loss) From Continuing Operations Before Income Tax Expense | (38 | ) | 86 | (3 | ) | (31 | ) | 14 | ||||||||||||
Income tax expense | 18 | 20 | — | (w) | (7 | )(w) | 31 | |||||||||||||
Income (Loss) From Continuing Operations | $ | (56 | ) | $ | 66 | $ | (3 | ) | $ | (24 | ) | $ | (17 | ) | ||||||
18
For the Nine Months Ended September 30, 2007
Historical | Historical | Reorganization | Fresh Start | Pro Forma | ||||||||||||||||
Solutia | Flexsys | Adjustments | Adjustments | Consolidated | ||||||||||||||||
Net Sales | $ | 2,574 | $ | 207 | $ | — | $ | — | $ | 2,781 | ||||||||||
Cost of goods sold | 2,187 | 158 | (9 | )(p)(q) | (1 | )(k)(v) | 2,335 | |||||||||||||
Gross Profit | 387 | 49 | 9 | 1 | 446 | |||||||||||||||
Total marketing, administrative, and technological expenses | 212 | 15 | 2 | (p)(q) | (1 | )(k)(v) | 228 | |||||||||||||
Amortization expense | 1 | — | — | 30 | (l) | 31 | ||||||||||||||
Operating Income | 174 | 34 | 7 | (28 | ) | 187 | ||||||||||||||
Equity earnings from affiliates | 12 | — | (12 | )(r) | — | — | ||||||||||||||
Interest expense | (93 | ) | (1 | ) | (34 | )(s) | — | (128 | ) | |||||||||||
Other income (loss), net | 32 | (2 | ) | — | — | 30 | ||||||||||||||
Loss on debt modification | (7 | ) | — | 7 | (t) | — | — | |||||||||||||
Reorganization items, net | (185 | ) | — | 185 | (u) | — | — | |||||||||||||
Income (Loss) From Continuing Operations Before Income Tax Expense | (67 | ) | 31 | 153 | (28 | ) | 89 | |||||||||||||
Income tax expense | 25 | 5 | 17 | (w) | (9 | )(w) | 38 | |||||||||||||
Income (Loss) From Continuing Operations | $ | (92 | ) | $ | 26 | $ | 136 | $ | (19 | ) | $ | 51 | ||||||||
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For the Twelve Months Ended September 30, 2007
Historical | Historical | Reorganization | Fresh Start | Pro Forma | ||||||||||||||||
Solutia | Flexsys | Adjustments | Adjustments | Consolidated | ||||||||||||||||
Net Sales | $ | 3,271 | $ | 347 | $ | — | $ | — | $ | 3,618 | ||||||||||
Cost of goods sold | 2,817 | 272 | (13 | )(p)(q) | (3 | )(k)(v) | 3,073 | |||||||||||||
Gross Profit | 454 | 75 | 13 | 3 | 545 | |||||||||||||||
Total marketing, administrative, and technological expenses | 284 | 30 | 2 | (p)(q) | (1 | )(k)(v) | 315 | |||||||||||||
Amortization expense | 2 | — | — | 40 | (l) | 42 | ||||||||||||||
Operating Income | 168 | 45 | 11 | (36 | ) | 188 | ||||||||||||||
Equity earnings from affiliates | 21 | — | (21 | )(r) | — | — | ||||||||||||||
Interest expense | (117 | ) | (4 | ) | (49 | )(s) | — | (170 | ) | |||||||||||
Other income (loss), net | 37 | — | — | — | 37 | |||||||||||||||
Loss on debt modification | (7 | ) | — | 7 | (t) | — | — | |||||||||||||
Reorganization items, net | (205 | ) | — | 205 | (u) | — | — | |||||||||||||
Income (Loss) From Continuing Operations Before Income Tax Expense | (103 | ) | 41 | 153 | (36 | ) | 55 | |||||||||||||
Income tax expense | 33 | 3 | 17 | (w) | (11 | )(w) | 42 | |||||||||||||
Income (Loss) From Continuing Operations | $ | (136 | ) | $ | 38 | $ | 136 | $ | (25 | ) | $ | 13 | ||||||||
20
position and condensed combined statements of operations
(dollars in millions)
(a) | The Company’s cash and cash equivalents reflect the net use of $126 million to implement the Plan of Reorganization, summarized as follows: |
Cash Inflows | ||||
Exit financing package | $ | 1,663 | ||
Creditor Rights Offering | 250 | |||
Equity Rights Offering | 175 | |||
Total cash inflows | 2,088 | |||
Cash Outflows | ||||
Existing debt facilities not subject to compromise | 1,308 | |||
11.25% notes due 2009 (subject to compromise) | 209 | |||
Settlement of liabilities subject to compromise and other emergence related liabilities | 138 | |||
Distribution of proceeds to Monsanto from Equity Rights Offering | 175 | |||
VEBA Retiree Trust funding | 175 | |||
SFC LLC | 75 | |||
Pension funding | 73 | |||
Estimated debt issuance costs and debt discount | 61 | |||
Total cash outflows | 2,214 | |||
Total net cash outflow | $ | (126 | ) | |
(b) | Represents 1) the establishment of SFC LLC, a special purpose, tax-efficient, bankruptcy remote limited liability company subsidiary, funded with $75 million in proceeds from the Creditor Rights Offering, immediately reduced by a $25 million administrative claim paid to Monsanto to partially reimburse Monsanto for environmental expenses incurred during the Solutia bankruptcy; 2) debt issuance costs of $49 million related to the exit financing package; 3) the write-off of $14 million of insurance receivables associated with litigation liabilities which are not being retained by Solutia; and 4) the write-off of $12 million of debt issuance costs related to Solutia Europe S.A./N.V.’s Euro 200 million facility agreement and Flexsys’ debt facility which will be fully paid upon emergence from bankruptcy. | |
(c) | Represents the re-classification of retained accrued expenses previously classified as Liabilities Subject to Compromise of $28 million and accruals for emergence related liabilities to be paid after emergence from bankruptcy of $12 million. The liabilities retained by Solutia are environmental, litigation and workers’ compensation liabilities and the amount represents expected payments during the next twelve months. See Note (e) for further discussion on liabilities retained by Solutia. In addition, accrued liabilities will be reduced by the payment of $12 million in accrued interest on existing debt facilities and $2 million inChapter 11-related accrued expenses. |
21
position and condensed combined statements of operations — (Continued)
(d) | Represents the net effect of refinancing all debt at emergence, except for the Maryville Note on Solutia’s corporate headquarters building of $20 million. Debt upon emergence is expected to be comprised as follows: |
Expected to be | ||||||||
Available Facility | Drawn at Emergence | |||||||
Exit Financing: | ||||||||
Senior secured asset-based revolving credit facility | $ | 400 | $ | 63 | ||||
Senior secured term loan facility | $ | 1,200 | 1,200 | |||||
Senior unsecured notes offered hereby | $ | 400 | 400 | |||||
Less: Debt discount | (12 | ) | ||||||
1,651 | ||||||||
Maryville Note | 20 | |||||||
Total debt | 1,671 | |||||||
Less short-term debt and current maturities of long-term debt | (64 | ) | ||||||
Total long-term debt | $ | 1,607 | ||||||
(e) | In accordance with the Plan of Reorganization, Solutia will retain liabilities related to the domestic qualified pension plan liabilities, domestic other postretirement benefits liabilities, and certain environmental and litigation liabilities. A summary of the increase to Other Liabilities as a result of retaining these liabilities is as follows: |
Value | ||||
Domestic qualified pension plan(1) | $ | 143 | ||
Domestic other postretirement benefits(2) | 124 | |||
Environmental(3) | 295 | |||
Litigation | 31 | |||
Total | 593 | |||
Less current portion of environmental and litigation liabilities | (19 | ) | ||
$ | 574 | |||
(1) | The domestic qualified pension plan liability of $143 million represents the liability balance at September 30, 2007 of $216 million reduced by the expected funding by the Company at emergence of $73 million. | |
(2) | The domestic other postretirement benefits liability of $124 million represents the liability balance at September 30, 2007 of $449 million reduced principally by the reduction in accumulated postretirement benefit obligation related to plan amendments effective at emergence of $119 million and expected funding at emergence from the Creditor Rights Offering and the retirees’ allowed unsecured claim of $175 million and $24 million, respectively. | |
(3) | The environmental liability increase of $295 million represents the subject to compromise liability balance at September 30, 2007 retained of $59 million plus the environmental liability of the Company associated with remediation of site areas to be shared with Monsanto, as per the terms of the settlement agreement with Monsanto (the “Monsanto Settlement Agreement”), estimated at $236 million. |
(f) | Represents the elimination of Liabilities Subject to Compromise through reclassification of retained liabilities discussed in Notes (c) and (e) and settlement of allowed secured and unsecured claims through cash and stock settlements at emergence. |
22
position and condensed combined statements of operations — (Continued)
(g) | At emergence, 59.75 million shares of reorganized Solutia common stock and warrants to purchase 4.48 million shares of common stock will be issued with an estimated value of $1,200 million, less approximately $6 million of fees. | |
(h) | Represents the reduction in the domestic other postretirement benefits accumulated postretirement benefit obligation related to plan amendments effective at emergence of $119 million. | |
(i) | Represents the net effect of the settlement of liabilities subject to compromise in accordance with the Plan of Reorganization. | |
(j) | In accordance withSOP 90-7, inventory is recorded at fair value. In adjusting inventory to fair value, for book purposes, the Company has eliminated its LIFO reserve of $229 million in addition to adjusting remaining inventories to their fair value. Because of this adjustment, the Company expects cost of sales to increase approximately $72 million during the first inventory turn post emergence. This cost has been excluded from the pro forma condensed combined statement of operations because this amount will not continue. | |
(k) | In accordance withSOP 90-7, property, plant and equipment are recorded at fair value. In adjusting property, plant and equipment to fair value in accordance withSOP 90-7, the Company estimates net property, plant and equipment will be increased approximately $420 million. The Company currently estimates there will be no increase in pre-emergence depreciation expense as the increase relates primarily to buildings and manufacturing equipment, where asset lives will be extended to reflect projected remaining useful lives, and, to a lesser extent, land, which is not subject to depreciation. The estimated weighted average remaining useful lives on these asset classes range from 8 years to 16 years. | |
(l) | In accordance withSOP 90-7, existing goodwill is eliminated and excess reorganization value is recorded for amounts in excess of value allocable to identifiable assets. In adjusting the balance sheet accounts to fair value in accordance withSOP 90-7, the Company estimates an increase in value of identified intangible assets of $903 million. The identified intangible assets include customer relationships, trademarks, tradenames, technology, and patents. Some of the identified intangible assets are expected to have indefinite lives. For all others, the estimated average remaining useful lives on these identified intangible assets range from 10 years to 21 years. The adjustment to identified intangible assets will result in an increase in annual amortization expense of approximately $40 million. The amortization expense recorded for the nine months ended September 30, 2007 represents three quarters of the estimated annual expense. For every $25 million change in the value of identified intangible assets at emergence, annual amortization expense fluctuates an estimated $1 million. | |
(m) | Represents deferred tax assets and liabilities recorded for future tax effects of the adjustments related to emergence from Chapter 11: |
(1) | Reorganization Adjustments — As a result of emerging from Chapter 11, Solutia will adjust its balance sheet for certain adjustments related to the reorganization. These adjustments are attributable to the U.S. Since Solutia has significant U.S. Net Operating Losses and a full valuation allowance against the deferred tax assets related to these losses, the reorganization adjustments will be taxed at a zero tax rate. Therefore, no tax effects will be recorded for these adjustments on the balance sheet. | |
(2) | Fresh Start Adjustments — In accordance withSOP 90-7, certain assets of Solutia are recorded at fair value as part of the reorganization. The deferred tax assets or liabilities related to the fresh-start adjustments have been recorded at the statutory tax rate of the various tax jurisdictions of the entities to which the adjustments are attributable. |
(n) | Represents the elimination of Solutia’s equity balances in accordance withSOP 90-7. | |
(o) | Represents the amount to eliminate Solutia’s accumulated deficit at emergence in accordance withSOP 90-7. | |
(p) | Represents pro forma adjustments related to Solutia’s postretirement benefits expense resulting from increased pension and other postretirement benefits plan assets and reduction in other postretirement |
23
position and condensed combined statements of operations — (Continued)
benefits accumulated postretirement benefit obligation. Solutia’s debt level reflects the significant pension contributions made during the year ended December 31, 2006 and the nine months ended September 30, 2007 and to be contributed at emergence. Additionally, in accordance with the Plan of Reorganization, funds will be contributed to a VEBA Retiree Trust from the Creditor Rights Offering and the retirees’ allowed unsecured claim. If those contributions were made as of January 1, 2006, the pro forma expected return on pension and other postretirement benefits plan assets is expected to have increased as presented below. The increase was determined using an expected return on pension and other postretirement benefits plan assets of 8.75% and 4.50%, respectively. In addition, the pro forma postretirement benefits expense decreased due to plan amendments implemented in 2006 and in accordance with the plan at emergence totaling $159 million. The pro forma effect for the year ended December 31, 2006 and the nine months ended and twelve months ended September 30, 2007 are as follows: |
Year Ended | Nine Months Ended | Twelve Months Ended | ||||||||||
December 31, 2006 | September 30, 2007 | September 30, 2007 | ||||||||||
Increase in expected return on pension plan assets | $ | 11 | $ | 7 | $ | 11 | ||||||
Increase in expected return on other postretirement benefits plan assets | 8 | 4 | 5 | |||||||||
Decrease in other postretirement benefits interest cost | 9 | 5 | 7 | |||||||||
Total | $ | 28 | $ | 16 | $ | 23 | ||||||
Reduction in postretirement benefits expense is allocated between cost of goods sold and marketing, administrative, and technological expenses based on historical classification. | ||
(q) | In accordance with the Plan of Reorganization, Solutia will issue stock options to purchase 3.0 million shares and 1.2 million shares of restricted stock. The pro forma compensation expense recognized in the year ended December 31, 2006 and the nine months ended and twelve months ended September 30, 2007 related to these share-based payment plans is $12 million, $9 million and $12 million, respectively. Stock compensation expense is allocated between cost of goods sold and marketing, administrative, and technological expenses based on management’s best estimate. | |
(r) | Represents adjustment to eliminate equity income recognized by Solutia related to Flexsys prior to Flexsys becoming a 100% owned subsidiary of Solutia on May 1, 2007. | |
(s) | The table below sets forth adjustments to interest expense resulting from the extinguishment of debt and issuance of new debt: |
Year Ended | Nine Months Ended | Twelve Months Ended | ||||||||||
December 31, 2006 | September 30, 2007 | September 30, 2007 | ||||||||||
Interest expense on pro forma borrowings: | ||||||||||||
Exit financing package(1) | $ | 156 | $ | 120 | $ | 159 | ||||||
Maryville note(2) | 1 | 1 | 1 | |||||||||
Amortization of debt issuance costs and debt discount(3) | 9 | 7 | 9 | |||||||||
Total interest expense on pro forma borrowings | 166 | 128 | 170 | |||||||||
Less: historical Solutia and Flexsys interest expense | (105 | ) | (94 | ) | (121 | ) | ||||||
Total adjustment to interest expense | $ | 61 | $ | 34 | $ | 49 | ||||||
(1) | Represents interest expense on the $1,663 million borrowed on the exit financing package. The debt consists of facilities with variable interest rates and fixed interest rates. Interest expense was calculated |
24
position and condensed combined statements of operations — (Continued)
using an average interest rate of 9.38% for the year ended December 31, 2006 and 9.62% for the nine months and twelve months ended September 30, 2007. |
(2) | Represents interest expense on the $20 million Maryville Note related to Solutia’s corporate headquarters building. The interest expense was calculated using a fixed interest rate of 7.18% for the year ended December 31, 2006 and for the nine months and twelve months ended September 30, 2007. | |
(3) | Represents debt issuance costs and debt discount on the exit financing package of $61 million. The debt issuance costs and debt discount are amortized on a straight-line basis over a weighted average term of 7 years. |
(t) | Represents the elimination of the loss on debt modification related to the DIP credit facility amendments in March 2006 and January 2007. | |
(u) | Represents the elimination of items of income, expense, gain, or loss that were realized or incurred by Solutia because it was in reorganization under Chapter 11 of the Bankruptcy Code. | |
(v) | Represents the elimination of the amortization of actuarial losses and prior service gains in postretirement benefits expense of $9 million, $2 million and $4 million for the year ended December 31, 2006 and the nine months ended and twelve months ended September 30, 2007, respectively. Reduction in postretirement benefits expense is allocated between cost of goods sold and marketing, administrative, and technological expenses based on historical classification. | |
(w) | Represents the adjustment to income tax expense resulting from the pro forma Reorganization and Fresh Start Adjustments. The adjustments are calculated as follows: |
(1) | Reorganization Adjustments — As a result of emerging from Chapter 11, the Company will eliminate items of income, expense, gain or loss that were recognized or incurred by Solutia, which will require the appropriate tax expense or benefit to be recorded on these adjustments. No tax benefit was recognized by Historical Solutia for net operating losses incurred in the U.S. during 2006 and 2007. On a pro forma basis, these periods are treated as post Chapter 11 emergence periods. In the nine months ended September 30, 2007 post-emergence pro forma period, Solutia has positive pre-tax net income in the U.S. after giving effect to pro forma adjustments and tax expense is being provided at the 35% U.S. tax rate on the reorganization adjustments shown above. In the December 31, 2006 post-emergence period, Solutia has negative U.S. pre-tax net income after giving effect to pro forma adjustments and due to the U.S. loss position, tax expense is not being provided on the reorganization adjustments for this period. Therefore, in the twelve months ended September 30, 2007 post-emergence pro forma period, Solutia recognized the pro forma income tax adjustment related to the nine months ended September 30, 2007. | |
(2) | Fresh Start Adjustments — In accordance withSOP 90-7, certain assets of Solutia are recorded at fair value as part of the reorganization. In the September 30, 2007 post-emergence period, the income tax benefit of the fresh-start adjustments has been recorded at the statutory tax rate of the various tax jurisdictions to which the adjustments are attributable, including the U.S. at a 35% rate. In the December 31, 2006 post-emergence period, the income tax benefit of the fresh-start adjustments have been recorded at the statutory tax rate of the various tax jurisdictions to which the adjustments are attributable, except for the U.S. which has an overall net loss after giving effect to the adjustments and, therefore, the adjustments attributable to the U.S. are benefited at a zero percent rate. Therefore, in the twelve months ended September 30, 2007 post-emergence pro forma period, the pro forma income tax adjustment consists of (i) the fresh-start adjustments related to the three months ended December 31, 2006 benefited according to the year ended December 31, 2006 post-emergence period and (ii) the nine months ended September 30, 2007 pro forma income tax adjustments. |
25
The Company plans to undertake an internal restructuring of the ownership of group companies in the United States, Belgium, Holland, Germany and the United Kingdom immediately following its emergence from Chapter 11. The restructuring is expected to significantly reduce future cash tax payments in Belgium, Germany and the United Kingdom. The restructuring is not expected to result in any material current tax payments in any jurisdiction nor to materially impact operations. We intend to consummate this restructuring promptly after our emergence from bankruptcy; however, there can be no assurance about when or if we will be able to obtain all of the expected tax benefits.
26