SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
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 0-30270
CK WITCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2183153
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One American Lane, Greenwich, Connecticut 06831-2559
(Address of principal executive offices) (Zip Code)
(203) 552-2000
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
The number of shares of common stock outstanding is as follows:
Class Outstanding at October 31, 1999
Common Stock - $.01 par value 118,936,249
CK WITCO CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Accompanying Notes
Consolidated Statements of Operations (Unaudited) - Third
quarter and nine months ended 1999 and 1998 2
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 26, 1998 3
Consolidated Statements of Cash Flows (Unaudited)
-Nine months ended 1999 and 1998 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
CK WITCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Third quarter and nine months ended 1999 and 1998
(In thousands of dollars, except per share data)
Third quarter ended Nine months ended
1999 1998 1999 1998
Net sales $ 500,429 $ 442,768 $1,305,895 $1,394,324
Cost of products sold 329,630 279,600 825,507 874,156
Selling, general and
administrative 79,588 64,219 200,244 197,566
Depreciation and
amortization 30,459 20,164 67,962 60,651
Research and development 16,374 13,080 38,960 39,443
acquired in-process
research and development 195,000 - 195,000 -
Equity (income) loss 164 - (9,270) -
Operating profit (loss) (150,786) 65,705 (12,508) 222,508
Interest expense 17,611 17,916 43,718 62,034
Other (income) expense 2,465 (1,055) (37,790) (2,602)
Earnings (loss) before
income taxes and
extraordinary loss (170,862) 48,844 (18,436) 163,076
Income taxes 9,058 18,252 64,312 60,746
Earnings (loss) before
extraordinary loss (179,920) 30,592 (82,748) 102,330
Extraordinary loss on early
extinguishment of debt (208) (5,674) (1,293) (21,468)
Net earnings (loss) $(180,128) $ 24,918 $ (84,041) $ 80,862
Basic earnings (loss) per common share:
Earnings (loss) before
extraordinary loss $(2.21) $.41 $(1.15) $1.37
Extraordinary loss - (.07) (.02) (.28)
Net earnings (loss) $(2.21) $.34 $(1.17) $1.09
Diluted earnings (loss) per common share:
Earnings (loss) before
extraordinary loss $(2.21) $.40 $(1.15) $1.34
Extraordinary loss - (.07) (.02) (.28)
Net earnings (loss) $(2.21) $.33 $(1.17) $1.06
Dividends per common share $ - $ - $ .05 $ .05
See accompanying notes to consolidated financial statements.
CK WITCO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1999 (Unaudited) and December 26, 1998
(In thousands of dollars)
September 30, December 26,
1999 (a) 1998
ASSETS
CURRENT ASSETS
Cash $ 88,393 $ 12,104
Accounts receivable 522,117 173,668
Inventories 554,533 334,562
Other current assets 128,122 77,422
Total current assets 1,293,165 597,756
NON-CURRENT ASSETS
Property, plant, and equipment 1,312,968 473,403
Cost in excess of acquired net
assets 959,906 166,184
Other assets 311,107 171,550
$3,877,146 $1,408,893
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 16,884 $ 17,305
Accounts payable 277,087 117,338
Accrued expenses 444,836 139,401
Income taxes payable 99,629 103,179
Other current liabilities 14,622 17,149
Total current liabilities 853,058 394,372
NON-CURRENT LIABILITIES
Long-term debt 1,452,597 646,857
Postretirement health care
liability 225,289 142,727
Other liabilities 453,121 158,234
STOCKHOLDERS' EQUITY
Common stock 1,189 7,733
Additional paid-in capital 1,046,186 238,615
Accumulated deficit (103,298) (15,985)
Accumulated other comprehensive
loss (50,259) (37,571)
Treasury stock at cost - (125,246)
Deferred compensation (737) (843)
Total stockholders' equity 893,081 66,703
$ 3,877,146 $ 1,408,893
(a) The results of final valuations of property, plant and equipment
and intangible assets have not yet been completed, as well as
final estimates for severance and other charges related to the
merger integration.
See accompanying notes to consolidated financial statements.
CK WITCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended 1999 and 1998
(In thousands of dollars)
Nine months ended
Increase (decrease) in cash 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (84,041) $ 80,862
Adjustments to reconcile net earnings
(loss) to net cash provided by operations:
Acquired in-process research and development 195,000 -
Gain on sale of specialty ingredients (42,060) -
Extraordinary loss on early debt extinguishment 1,293 21,468
Depreciation and amortization 67,962 60,651
Equity income (9,270) -
Changes in assets and liabilities, net(a) (100,304) 2,503
Net cash provided by operations (a) 28,580 165,484
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of specialty ingredients 103,000 -
Capital expenditures (65,436) (42,084)
Acquired cash of Witco Corporation 236,658 -
Other investing activities (19,309) (5,547)
Net cash provided by (used in) investing
activities 254,913 (47,631)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of 11% and 12% notes - (352,802)
Proceeds (payments) on long-term borrowings (122,758) 259,438
Proceeds (payments) on short-term borrowings (3,031) 9,825
Premium paid on early extinguishment of debt (1,691) (22,984)
Treasury stock acquired (74,596) (20,922)
Dividends paid (3,272) (3,721)
Other financing activities (2,787) 10,669
Net cash used in financing activities (208,135) (120,497)
CASH
Effects of exchange rate changes on cash 931 840
Change in cash 76,289 (1,804)
Cash at the beginning of period 12,104 10,607
Cash at the end of period $ 88,393 $ 8,803
(a) 1999 includes a tax payment of $48 million relating to the
fourth quarter 1998 gain on the sale of Gustafson and 1998 includes
cash flow from operations for the Gustafson business of $11 million.
See accompanying notes to consolidated financial statements.
CK WITCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
MERGER OF EQUALS
On September 1, 1999, the shareholders of Crompton and Knowles
Corporation (Crompton) and Witco Corporation (Witco) approved a tax-
free stock-for-stock merger of equals of Crompton and Witco (the Merger). The
terms of the Merger provided that (a) Crompton merge with and into
CK Witco Corporation (the "Company") and (b) immediately thereafter, Witco
merged with and into the Company, so that the Company is the surviving
corporation. Also, under the terms of the Merger, each share of Crompton's
common stock was automatically converted into one share of the Company's common
stock, and each share of Witco's common stock was exchanged for 0.9242 shares of
the Company's common stock.
The merger was accounted for as a purchase and accordingly, the results
of operations of Witco have been included in the consolidated financial
statements from the date of acquisition. A preliminary allocation of
the purchase price resulted in cost in excess of the estimated fair
value of net assets acquired (goodwill) of approximately $813 million. This is
being amortized on a straight-line basis over forty years. The results of final
valuations of property, plant and equipment and intangible assets have not yet
been completed, as well as final estimates for severance and other charges
related to the merger integration. Accordingly, related segment asset
information has also not yet been finalized.
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited results of operations for the nine
months ended 1999 and 1998, assume the merger had been consummated as
of January 1, 1998 and exclude the write-off of acquired in-process research and
development of $195 million:
Nine Months Ended
(In thousands of dollars, except per share data) 1999 1998
Net sales $2,635,188 $ 2,926,938
Earnings before extraordinary loss $ 124,373 $ 140,700
Net earnings $ 123,080 $ 119,232
Net earnings before extraordinary loss
per common share: Basic $1.04 $1.10
Net earnings before extraordinary loss
per common share: Diluted $1.03 $1.08
Net earnings per common share: Basic $1.03 $0.93
Net earnings per common share: Diluted $1.02 $0.92
Weighted average shares outstanding: Basic 119,650 127,579
Weighted average shares outstanding: Diluted 121,106 129,767
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired in-process research and development (IPR&D) represents the value
assigned in a purchase business combination to research and development projects
of the acquired business that had commenced, but had not yet been completed at
the date of acquisition, and which, if unsuccessful, have no alternative future
use in research and development activities or otherwise. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 2 "Accounting for
Research and Development Costs" as clarified by Financial Accounting Standards
Board (FASB) Interpretation No. 4, amounts assigned to purchased IPR&D that meet
the above stated criteria must be charged to expense as part of the allocation
of the purchase price of the business combination. Accordingly, charges totaling
$195 million were recorded in the third quarter of 1999 as part of the
allocation of the purchase price related to the acquisition of Witco.
The Company engaged an independent appraiser to provide a basis for allocating
a portion of the purchase price of Witco to the purchased IPR&D. The fair value
assigned to purchased IPR&D was determined by the independent appraiser applying
the income approach and a valuation model, incorporating revenue and expense
projections, probability of commercial and technological success, stage of
development and present value factors.
The more significant IPR&D projects were principally in the Polymer Additives
and OrganoSilicones segments. The following is a summary of the
IPR&D projects and the values assigned:
Projected
Business Percent Completion IPR&D Value
Segment Complete Date (In thousands)
Polymer Additives (a) 24-86% 2000-2003 $ 62,000
OrganoSilicones (b) 8-65% 2000-2001 106,000
Crop Protection (c) 21-37% 2000-2004 27,000
Total IPR&D $195,000
The IPR&D project descriptions are as follows:
(a) Includes the development of an internal anti-static agent for use
in acrylic sheets and pellets for extrusion and injection molding
($19,000), replacement of lead-based stabilizers utilized in
PVC ($15,000) and approximately 35 other projects ($28,000).
(b) Includes the development of a family of chemicals utilized in
finished tires, which are expected to provide improved compounding
and dispersion of silica in a single compounding pass ($11,000),
production of a chemical to be used in the manufacture of
silica tires, which are expected to provide tires with improved
performance and longer life ($20,000) and approximately 78 other
projects ($75,000).
(c) Includes approximately 29 projects.
Due to the uniqueness of each of the projects, the costs and effort required are
estimated based on the latest available information. Additionally, the
completion date reflects management's best estimate of the time that the company
will begin to benefit from cash inflows or cost reductions from the projects.
However, there is a risk that certain projects may not be completed successfully
for a variety of reasons including change in strategies, changes in market
demand or customer requirements, technology issues, etc. However, the projected
revenues, costs, and margins in the cash flow forecasts are substantially
consistent with projections utilized by management in evaluating the feasibility
of research and development projects.
PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The information in the foregoing consolidated financial statements is unaudited,
but reflects all of the adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of operations for the interim
periods presented.
Included in accounts receivable are allowances for doubtful accounts of $23.9
million at September 30, 1999 and $9.8 million at December 26, 1998.
Accumulated depreciation amounted to $452.8 million at September 30, 1999 and
$434.7 million at December 26, 1998.
Accumulated amortization of cost in excess of acquired net assets amounted to
$44.7 million at September 30, 1999 and $44.6 million at December 26, 1998.
It is suggested that the interim consolidated financial statements be read in
conjunction with the consolidated financial statements and notes included in
Crompton's and Witco's 1998 Annual Reports on Form 10-K.
Effective with the Merger, the Company adopted a fiscal year ending on December
31. Prior to the Merger, Crompton's fiscal year was the 52 or 53 weeks ending
on the last Saturday in December.
COMMON STOCK
As of September 30, 1999, there were 118,919,219 common shares issued
and outstanding at $.01 par value.
INVENTORIES
Components of inventories are as follows:
September 30, December 26,
(In thousands) 1999 1998
Finished goods 415,869 $ 226,663
Raw materials and supplies 138,664 107,899
$ 554,533 $ 334,562
EARNINGS PER COMMON SHARE
The computation of basic earnings per common share is based on the
weighted average number of common shares outstanding. The computation
of diluted earnings per common share is based on the weighted average number of
common and common equivalent shares outstanding. The following
is a reconciliation of the shares used in the computations:
(In thousands) Third quarter ended Nine months ended
1999 1998 1999 1998
Weighted average
common shares outstanding 81,619 74,460 71,788 74,331
Effect of dilutive stock
options and other
equivalents - 1,823 - 2,189
Weighted average common
and common equivalent
shares outstanding 81,619 76,283 71,788 76,520
BUSINESS SEGMENT DATA
The Company evaluates a segment's performance based on several factors,
of which a primary financial measure is operating profit. In computing
operating profit, the following items have been excluded: interest expense,
other (income) expense and income taxes.
(In thousands) Third quarter ended Nine months ended
1999 1998 1999 1998
Net Sales
Polymer Products
Polymer Additives $ 152,813 $ 94,673 $ 351,984 $ 298,318
Polymers 72,467 83,202 230,613 258,248
Polymer Processing
Equipment 61,485 90,446 231,724 255,207
Eliminations (981) - (981) -
285,784 268,321 813,340 811,773
Specialty Products
OrganoSilicones 38,331 - 38,331 -
Crop Protection 73,992 86,900 221,050 295,288
Other 102,322 87,547 233,174 287,263
214,645 174,447 492,555 582,551
Total net sales $500,429 $442,768 $1,305,895 $1,394,324
Operating Profit
Polymer Products
Polymer Additives $ 17,166 $ 12,182 $ 42,729 $ 41,529
Polymers 15,990 19,340 61,879 60,415
Polymer Processing
Equipment 1,998 12,368 18,899 33,088
35,154 43,890 123,507 135,032
Specialty Products
OrganoSilicones 4,267 - 4,267 -
Crop Protection 14,671 21,346 68,953 82,938
Other 4,219 7,742 19,495 31,691
23,157 29,088 92,715 114,629
General corporate expense
including amortization (14,097) (7,273) (33,730) (27,153)
Acquired in-process
research and development (195,000) - (195,000) -
Total operating
profit (loss) $(150,786) $ 65,705 $ (12,508) $222,508
COMPREHENSIVE INCOME (LOSS)
An analysis of the Company's comprehensive income (loss) follows:
Third quarter ended Nine months ended
(In thousands) 1999 1998 1999 1998
Net earnings (loss) $(180,128) $24,918 $(84,041) $80,862
Other comprehensive
income (expense):
Foreign currency
translation
adjustments (522) 11,690 (12,688) 7,151
Comprehensive income
(loss) $(180,650) $36,608 $(96,729) $88,013
The components of accumulated other comprehensive loss, net of related
tax, at September 30, 1999 and December 26, 1998 are as follows:
September 30, December 26,
(In thousands) 1999 1998
Foreign currency translation
adjustments $(49,306) $(36,618)
Pension minimum liability
adjustments (953) (953)
Accumulated other comprehensive
loss $(50,259) $(37,571)
SUBSEQUENT EVENTS
On October 28, 1999, the Company entered into a $600 million 364-day
senior unsecured revolving credit facility and a $400 million five-year
senior unsecured credit facility with a syndicate of lenders. Borrowings on
these facilities are at various rate options to be determined on the date of
borrowing. On October 29, 1999, the Company utilized $450 million of these
facilities to pay down and terminate its previously existing revolving credit
agreements.
On November 4, 1999, Uniroyal Chemical Company, Inc. (Uniroyal), a wholly
owned subsidiary of the Company, offered to purchase for cash any and all of
its outstanding 9% Senior Notes due 2000 and 10 1/2% Senior Notes due 2002.
In connection with the offers, Uniroyal commenced a consent solicitation
seeking the consent of the holders of those notes to certain proposed
amendments to the indentures under which the applicable series of notes were
issued. The consent solicitation with respect to each note will end on
November 18, 1999, and the offer with respect to each note will end on
December 6, 1999, unless either the offer or the related consent solicitation
with respect to either or both series of notes is extended at the Company's
discretion. If a majority of the aggregate principal amount of the
applicable series of notes has been tendered and consented to the proposed
amendments, promptly following the expiration of the applicable offer,
Uniroyal will acquire the tendered notes, eliminate certain covenants and
certain events of default, and amend certain other provisions of the
indentures. The Company expects the total funds required to purchase the
notes and to pay the related fees and expenses will be approximately $355
million, which will be funded by drawing on the Company's revolving credit
agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIRD QUARTER RESULTS
Overview
Consolidated net sales of $500.4 million for the third quarter of 1999
increased 13% from the comparable period in 1998. After adjusting 1998 net
sales to exclude $46.1 million from deconsolidated joint ventures and the
divestiture of the specialty ingredients business, and to include $144.1
million from Witco operations for the month of September 1998, net sales
decreased 7%. This decrease is primarily the result of lower sales in the
Polymer Processing Equipment and Crop Protection businesses. International
sales, including U.S. exports, were 42% of total sales, up from 41% in the
third quarter of 1998.
The net loss in third quarter was $180.1 million, or $2.21 per common share
diluted as compared to net earnings of $24.9 million, or $.33 per common
share diluted in the third quarter of 1998. Earnings before after-tax special
items were $15.1 million, or $.18 per common share diluted, as compared with
$30.6 million, or $.40 per common share diluted, in the third quarter of 1998.
Gross margin as a percentage of sales decreased to 34.1% in the third quarter
of 1999 from 36.9% in the third quarter of 1998. The decrease was primarily
due to the impact of including one month of Witco results, lower pricing and
unfavorable product mix. Consolidated operating profit, excluding the $195
million charge for acqired IPR&D, declined 33% versus the third quarter of
1998. However, after further adjusting to exclude $2.7 million from
deconsolidated joint ventures and the divestiture of the specialty ingredients
business, and to include $10.2 million from Witco operations for the month of
September 1998, operating profit was down 40% versus the third quarter of 1998.
Third quarter ended
(In thousands) 1998 1998
Witco Deconsol-
1999 1998 Operations idated 1998
As As Month of Joint Divested 1998
Reported Reported September Ventures Business Adjusted
Net Sales
Polymer Products
Polymer Additives $152,813 $ 94,673 $ 58,396 $ - $ - $153,069
Polymers 72,467 83,202 - (10,128) - 73,074
Polymer Processing
Equipment 61,485 90,446 - - - 90,446
Eliminations (981) - - - - -
285,784 268,321 58,396 (10,128) - 316,589
Specialty Products
OrganoSilicones 38,331 - 36,037 - - 36,037
Crop Protection 73,992 86,900 12,599 (14,311) - 85,188
Other 102,322 87,547 37,051 - (21,635) 102,963
214,645 174,447 85,687 (14,311) (21,635) 224,188
Total net sales $500,429 $442,768 $144,083 $(24,439) $(21,635) $540,777
Third quarter ended
(In thousands) 1998 1998
Witco Deconsol
1999 1998 Operations -idated 1998
As As Month of Joint Divested 1998
Reported Reported September Ventures Business Adjusted
Operating Profit
Polymer Products
Polymer Additives $17,166 $12,182 $5,494 $ - $ - $17,676
Polymers 15,990 19,340 - (148) - 19,192
Polymer
Processing
Equipment 1,998 12,368 - - - 12,368
35,154 43,890 5,494 (148) - 49,236
Specialty Products
OrganoSilicones 4,267 - 7,327 - - 7,327
Crop Protection 14,671 21,346 340 (260) - 21,426
Other 4,219 7,742 1,487 - (2,197) 7,032
23,157 29,088 9,154 (260) (2,197) 35,785
General corporate expense
including
amortization (14,097) (7,273) (4,467) (102) - (11,842)
Total
operating
profit before
special items 44,214 65,705 10,181 (510) (2,197) 73,179
Acquired in-
process research
and
development (195,000) - - - - -
Total
operating
profit
(loss) $(150,786) $65,705 $10,181 $(510) $(2,197) $73,179
Polymer Products
Polymer Additives sales of $152.8 million were essentially unchanged from
adjusted 1998 sales of $153.1 million. Plastic additives sales were up 4%
primarily as a result of higher sales volume. Rubber chemicals sales were
down 1% primarily due to lower pricing partially offset by an increase in
sales volume. Urethane chemicals sales declined 12% compared to September
1998 primarily due to lower pricing and sales volume. Operating profit of
$17.2 million decreased 3% from an adjusted $17.7 million in 1998 primarily
as a result of lower pricing and an unfavorable sales mix.
Polymers sales of $72.5 million decreased 1% from an adjusted $73.1 million
in the third quarter of 1998. Urethane sales increased 10% primarily due to
increased demand for new products used in premium golf ball applications.
This increase was more than offset by an 8% decline in EPDM sales as a few
major customers reduced their normal third quarter requirements. Operating
profit of $16 million was $3.2 million lower than an adjusted 1998 primarily
as a result of higher raw material costs in EPDM and lower equity income for
our nitrile rubber joint venture.
Polymer Processing Equipment sales of $61.5 million decreased 32% from $90.4
million in the third quarter of 1998. The decline primarily reflects lower
sales volume and pricing as the plastics machinery market continues in its
current down cycle. Operating profit of $2 million was $10.4 million lower
than 1998 primarily as a result of lower sales volume, increased price
competition, and a sales shift toward lower margin equipment systems. The
backlog at the end of the quarter was $111 million versus $103 million at the
end of the second quarter and $118 million at the end of 1998.
Specialty Products
OrganoSilicones sales of $38.3 million increased 6% from an adjusted $36
million in September of 1998. The increase was primarily attributable to
higher sales volume. Operating profit of $4.3 million was $3.1 million lower
than September 1998 primarily due to issues in SAP implementation in the
third quarter of 1998 that resulted in a favorable impact on earnings that
was adjusted for in later periods, and higher consulting costs in 1999.
Crop Protection sales of $74 million decreased 13% from an adjusted $85.2
million in the third quarter of last year. The decrease was due primarily to
adverse weather conditions and continued weakness in the US and European farm
economies. Also, increased competition related to genetically engineered
seeds resulted in lower sales of herbicide products, and customer financing
difficulties in Eastern Europe reduced sales in that region. Operating
profit of $14.7 million declined $6.7 million from an adjusted $21.4 million
in the third quarter of 1998 primarily as a result of lower sales volume.
Other sales of $102.3 million were less than 1% lower than an adjusted $103
million in the third quarter of 1998. Colors and Glycerine/Fatty Acids sales
declined 11% primarily due to lower pricing. Refined Products and Petroleum
Additives sales rose 16% and 13%, respectively, primarily as a result of
higher sales volume. Operating profit of $4.2 million was $2.8 million lower
than an adjusted $7 million in the third quarter of 1998, primarily due to
lower pricing in the Colors business.
Other
Selling, general and administrative expenses of $79.6 million increased 24%
versus the third quarter of 1998 primarily due to the Merger, offset
partially by the impact of the deconsolidation of the joint ventures and the
divestiture of the specialty ingredients business. Depreciation and
amortization (up 51%) and research and development costs (up 25%) also
increased as a result of the Merger. Interest expense of $17.6 million
decreased 2% primarily due to lower levels of indebtedness prior to the
Merger, which more than offset the one month impact of the debt acquired in
the Merger. Other expense of $2.5 million compares to other income of $1.1
million in 1998, partially due to $1.5 million of fees in 1999 related to
accounts receivable securitization programs. The effective tax rate,
excluding the impact of acquired IPR&D, of 37.5% compares with 37.4% in the
comparable quarter of 1998.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales of $1,305.9 million for the first nine months of 1999
decreased 6% from the comparable period in 1998. After adjusting 1998 net
sales to exclude $177.8 million from deconsolidated joint ventures and the
divestiture of the specialty ingredients business and include $144.1 million
from Witco operations for the month of September 1998, net sales decreased
4%. This decrease is primarily the result of lower sales in the Colors,
Polymer Processing Equipment and Crop Protection businesses. International
sales, including U.S. exports, were 43% of total sales, up from 40% in the
nine months of 1998.
The net loss for the first nine months was $84 million, or $1.17 per common
share diluted, as compared to net earnings of $80.9 million, or $1.06 per
common share diluted in the first nine months of 1998. Earnings before after-tax
special items were $85.4 million, or $1.19 per common share diluted, as compared
with $102.3 million, or $1.34 per common share diluted in 1998.
Gross margin as a percentage of sales remained unchanged at 37% from the
first nine months of 1998. Consolidated operating profit, excluding the $195
million charge for acquired IPR&D, was down 18% versus the comparable period
of 1998. However, after further adjusting to exclude $18.2 million from
deconsolidated joint ventures and the divestiture of the specialty ingredients
business, and to include $10.2 million from Witco operations for the month of
September 1998, operating profit was down 15% versus the nine month period of
1998.
Nine months ended
(In thousands) 1998 1998
Witco Deconsol
1999 1998 Operations -idated 1998
As As Month of Joint Divested 1998
Reported Reported September Ventures Business Adjusted
Net Sales
Polymer Products
Polymer
Additives $351,984 $298,318 $58,396 $ - $- $356,714
Polymers 230,613 258,248 - (31,842) - 226,406
Polymer
Processing
Equipment 231,724 255,207 - - - 255,207
Eliminations (981) - - - - -
813,340 811,773 58,396 (31,842) - 838,327
Specialty Products
OrganoSilicones 38,331 - 36,037 - - 36,037
Crop
Protection 221,050 295,288 12,599 (76,190) - 231,697
Other 233,174 287,263 37,051 - (69,786) 254,528
492,555 582,551 85,687 (76,190) (69,786) 522,262
Total net
sales $1,305,895 $1,394,324 $144,083 $(108,032) $(69,786) $1,360,589
Nine months ended
(In thousands) 1998 1998
Witco Deconsol
1999 1998 Operations -idated 1998
As As Month of Joint Divested 1998
Reported Reported September Ventures Business Adjusted
Operating Profit
Polymer Products
Polymer
Additives $42,729 $41,529 $5,494 $ - $ - $47,023
Polymers 61,879 60,415 - (744) - 59,671
Polymer
Processing
Equipment 18,899 33,088 - - - 33,088
123,507 135,032 5,494 (744) - 139,782
Specialty
Products
OrganoSilicones 4,267 - 7,327 - - 7,327
Crop
Protection 68,953 82,938 340 (10,252) - 73,026
Other 19,495 31,691 1,487 - (7,195) 25,983
92,715 114,629 9,154 (10,252) (7,195) 106,336
General corporate expense
including
amortization (33,730) (27,153) (4,467) 16 - (31,604)
Total operating
profit before
special items 182,492 222,508 10,181 (10,980) (7,195) 214,514
Acquired
in-process
research and
development (195,000) - - - - -
Total operating
profit (loss) $(12,508) $222,508 $10,181 $(10,980) $(7,195) $214,514
Polymer Products
Polymer Additives sales of $352 million declined 1% from an adjusted $356.7
million for nine months of 1998. Plastic additives sales
rose 2% primarily as a result of increased sales volume. Rubber chemicals
sales were down 3% primarily due to lower pricing. Urethane chemicals sales
declined 12% compared to September 1998 primarily as a result of lower
pricing and an unfavorable sales mix. Operating profit of $42.7 million
declined 9% from an adjusted $47 million for the first nine months of 1998
primarily as a result of lower pricing in rubber chemicals.
Polymers sales of $230.6 million increased 2% from an adjusted $226.4 million
for the first nine months of 1998. Urethane sales increased 3% primarily as
a result of higher sales volume. EPDM sales were up 1% primarily a result of
higher pricing partially offset by a decline in sales volume. Operating
profit of $61.9 million rose 4% from an adjusted $59.7 million for the nine
months of 1998 primarily as a result of improved pricing.
Polymer Processing Equipment sales of $231.7 million decreased 9% from $255.2
million for the first nine months of 1998. The decline was primarily
attributable to lower sales volume and pricing which was reflective of the
continuing downward cycle currently being experienced by the plastics
machinery market. Operating profit of $18.9 million was $14.2 million lower
than the prior year primarily as a result of competitive pricing pressure,
lower sales volume, and a sales shift toward lower margin equipment.
Specialty Products
OrganoSilicones sales of $38.3 million increased 6% from an adjusted $36.0
million in September of 1998. The increase was primarily attributable to
higher sales volume. Operating profit of $4.3 million was $3.1 million lower
than September 1998 primarily due to issues in SAP implementation in the
third quarter of 1998 that resulted in a favorable impact on earnings that
was adjusted for in later periods, and higher consulting costs in 1999.
Crop Protection sales of $221.1 million decreased $10.6 million from an
adjusted $231.7 million for the nine months of 1998. The
decline was primarily a result of lower third quarter sales volume
attributable to adverse weather conditions and a continuation of the general
weakness in the US and European farm economies. In addition, herbicide
product sales were adversely affected by increased competition related to
genetically engineered seeds, and customer financing difficulties in Eastern
Europe reduced sales in that region. Operating profit of $69.0 million was
$4.1 million lower than an adjusted $73.0 million in 1998 primarily as a
result of lower sales volume.
Other sales of $233.2 million decreased 8% from an adjusted $254.5 million
for the first nine months of 1998. Colors sales were down 15% primarily as a
result of reduced sales volume and lower pricing. Glycerine/Fatty Acids
sales declined 11% due primarily to lower pricing. Refined Products and
Petroleum Additives sales rose 16% and 8%, respectively, primarily a result
of increased sales volume. Operating profit of $19.5 million was $6.5
million lower than an adjusted $26 million for the prior year, primarily a
result of lower sales volume and lower pricing in the Colors business.
Other
Selling, general and administrative expenses of $200.2 million increased 1%
versus the nine months of 1998 primarily due to the Merger, offset partially
by the impact of the deconsolidation of the joint ventures and the
divestiture of the specialty ingredients business. Depreciation and
amortization (up 12%) increased primarily as a result of the Merger.
Research and development costs were down 1% from the nine months of 1998.
Equity income of $9.3 million for the first nine months of 1999 was
primarily attributable to the seed treatment joint venture. Interest expense
of $43.7 million decreased 30% primarily due to lower levels of indebtedness
and lower interest cost on borrowings used to redeem high cost debt in 1998.
Other income of $37.8 million for the nine months of 1999 includes a gain in
the amount of $42.1 million from the divestiture of the specialty
ingredients business offset partially by $3.7 million in fees related to the
accounts receivable securitization programs. The effective tax rate,
excluding the impact of IPR&D, of 36.4% compares favorably with 37.3% in the
same period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The September 30, 1999 working capital balance of $440.1 million increased
$236.7 million from the year-end 1998 balance of $203.4 million, while the
current ratio remained unchanged at 1.5. The increase in working capital was
primarily due to the Merger. Days sales in receivables averaged 44 days in
the nine month period in 1999, versus 55 days in the same period in 1998,
principally due to the impact of the accounts receivable securitization
programs. Inventory turnover averaged 3.1, compared to 3.2 in 1998.
Net cash provided by operations of $28.6 million decreased $136.9 million
from the net cash provided by operations of $165.5 million in the first nine
months of 1998, due to a $48.2 million income tax payment in 1999 related to
the 1998 Gustafson gain, lower earnings before after-tax special items of $17
million, 1998 cash flow provided by Gustafson of $11 million and the
remainder due to higher working capital requirements. Cash provided from
operations, the Witco merger and the sale of the specialty ingredients
business were used primarily to reduce borrowings under the Company's
revolving credit agreements, repurchase common shares, finance capital
expenditures, pay merger costs and make dividend payments. The Company's
debt to total capital decreased to 62% from 91% at year-end 1998 primarily as a
result of the Witco merger. The Company's liquidity needs, including debt
servicing, are expected to be financed from operations. At September 30,
1999, the Company had available revolving credit agreements providing for
borrowings of $1 billion through September 2003. Borrowings under the
agreement amounted to $475 million at September 30, 1999 and carried a
weighted average interest rate of 5.7%. In addition, the Company has
available accounts receivable securitization programs to sell up to $232
million of domestic accounts receivable to agent banks. As of September 30,
1999, $169 million of domestic accounts receivable had been sold under these
agreements.
On October 28, 1999, the Company entered into a $600 million 364-day senior
unsecured revolving credit facility and a $400 million five-year senior
unsecured credit facility with a syndicate of lenders. Borrowings on these
facilities are at various rate options to be determined on the date of
borrowing. On October 29, 1999, the Company utilized $450 million of these
facilities to pay down and terminate its previously existing revolving credit
agreements.
In September 1998, the Company announced a share repurchase program to buy
back 7.5 million shares or approximately 10% of the common shares then
outstanding. In January 1999, the Company announced another share repurchase
program for 6.8 million shares, or approximately 10% of the common shares
then outstanding. During the first nine months of 1999, the Company
repurchased 4.1 million common shares and from September 1998 to date, has
repurchased 9.5 million shares at an average price of $17.85 per share.
Capital expenditures for the first nine months of 1999 amounted to $65.4
million as compared to $42.1 during the same period of 1998. Capital
expenditures are expected to approximate $143 million in 1999, primarily
related to the Company's replacement needs and improvement of domestic and
foreign facilities.
YEAR 2000
State of Readiness
The Company is currently in the process of addressing date sensitive system
issues associated with the Year 2000. The Company's Year 2000 project is led
by Y2K project leaders for each of the former Crompton and Witco
organizations, and is managed by an executive steering committee of key
management personnel. The Company has assigned business teams, regional and
location coordinators and contracted third-party vendors to carry out the
Company's Year 2000 compliance plan. The Company's Board of Directors is
updated regularly regarding the Year 2000 compliance plan and its progress.
The Company's approach to mitigating the Year 2000 issue involves the
following five phases: awareness, assessment (including an inventory of
hardware, software, process control equipment and monitoring devices for
plants, safety systems and other non-information technology systems and
equipment), repair/replacement, testing and implementation.
In connection with Witco's 1996 restructuring plans and other initiatives,
Witco began a worldwide business process redesign and SAP implementation
project (SAP Project). It is anticipated that the implementation of the new
SAP systems, which are Year 2000 compliant, will replace substantially all
of the Company's existing information technology (IT) business application
systems. All of the Company's other IT business application systems, which
are not part of the SAP Project, and all non-IT systems and equipment
(collectively non-SAP) will be made compliant through the efforts of internal
resources and third-party vendors. In order to assess the readiness of its
SAP and non-SAP systems and equipment with the Year 2000 issue, the Company
has completed an inventory of hardware, software, process control equipment
and monitoring devices for plants, safety systems and other non-IT systems
and equipment. Regarding both the SAP and non-SAP projects, the Company has
completed the awareness and the assessment phases, is nearly 100 percent
complete with respect to the repair/replacement phase and is nearly 100
percent complete with respect to each of the testing and implementation
phases. Completion of the critical repair/replacement, testing and
implementation phases was done during the third quarter of 1999. The
repair/replacement, testing and implementation phases will be completed by the
end of November 1999.
The Company's Polymer Processing Equipment business currently sells equipment
controls containing programs and microchips. The Company believes that these
products which are used in the operation of extrusion machinery are Year 2000
compliant.
The Company has identified critical raw material suppliers, service providers
and major customers and has initiated communications with these third parties
in an effort to assess their plans and progress in addressing the Year 2000
issue. The Company is 100 percent complete with its evaluation of critical
raw material suppliers, service providers and major customers. The Company
has identified high-impact suppliers whose failure to deliver raw materials
could cause disruption to operations and a loss of business. The Company has
obtained information from key service providers with respect to their Year
2000 readiness and has considered their Year 2000 compliance status such that
long-term disruptions in the services provided are not anticipated at this
time. The Company has also surveyed its major customers regarding their Year
2000 compliance status. The Company will closely monitor the Year 2000
readiness of its high-impact suppliers, key service providers and major
customers throughout 1999.
Costs
The Company expects total costs associated with the SAP Project and the non-
SAP systems and equipment to approximate $16 million (including approximately
$11 million of capital expenditures), of which $10.7 million has been
incurred ($6.1 million capitalized and $4.6 million expensed) to date.
Expenditures of $5.9 million were made during the first nine months of 1999
($4.2 million capitalized and $1.7 million expensed). Prior to the Merger,
Witco incurred $119.3 million of costs ($102.8 million capitalized and $16.5
million expensed) related to the SAP and non-SAP projects. Substantially all
of these costs are associated with the SAP Project. The costs associated with
the third-party evaluation initiative are not expected to be significant.
Risks and Contingency Plans
The Company has ascertained that failure to alleviate the Year 2000 issues
within its SAP and non-SAP projects could result in possible system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, produce
products and engage in similar normal business activities, with a
corresponding impact on the Company's results of operations. The Company has
completed its contingency plans for its critical SAP and non-SAP activities,
which involve, among other actions, manual and/or external processing and
building inventories. Reviews and revisions of such plans have been made
throughout 1999 as circumstances warrant.
To the extent that the operations of critical raw material suppliers, service
providers, and major customers are impacted by their failure to address their
Year 2000 issues, such disruption may have a direct impact on the Company's
results of operations. Contingency plans are being developed and will
include, but will not be limited to, building inventories, switching
suppliers, managing production levels and finding alternate methods of
transportation. The Company is 100 percent complete with respect to the
development of its third-party contingency plans for raw material suppliers
and service providers. Reviews and revisions of such plans will be made
throughout the remainder of 1999 and the first quarter of 2000 as
circumstances warrant.
The Company has determined that failure to implement systems that are able to
process both the Euro and participating countries national currency may cause
disruptions to operations including, among other things, a temporary
inability to process transactions, send invoices or engage in normal business
activities. These problems could be substantially alleviated with manual
processing. However, this would cause delays in certain normal business
activities.
The Company is confident that the Year 2000 issues will be resolved by the
implementation of the SAP and non-SAP projects and the completion of the
third-party initiative. If the measures associated with the SAP and non-SAP
projects, as well as the efforts associated with critical raw material
suppliers, service providers, and major customers, were to fail, the
contingency plans would be implemented. The amount of potential liability and
lost revenue associated with the failure to alleviate the Year 2000 issues or
implement appropriate contingency plans cannot be reasonably estimated at
this time.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" which
delays the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company plans to adopt the provisions of this statement
in the first quarter of 2001.
ENVIRONMENTAL MATTERS
The Company is involved in claims, litigation, administrative proceedings and
investigations of various types in a number of jurisdictions. A number of
such matters involve claims for a material amount of damages and relate to or
allege environmental liabilities, including clean-up costs associated with
hazardous waste disposal sites, natural resource damages, property damage and
personal injury. The Company and some of its subsidiaries have been
identified by federal, state or local governmental agencies, and by other
potentially responsible parties (PRP) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or comparable
state statutes, as a PRP with respect to costs associated with waste disposal
sites at various locations in the United States. In addition, the Company is
involved with environmental remediation and compliance activities at some of
its current and former sites in the United States and abroad.
The Company continually evaluates and reviews estimates for future
remediation and other costs to determine appropriate environmental reserve
amounts. For each site, a determination is made of the specific measures
that are believed to be required to remediate the site, the estimated total
cost to carry out the remediation plan, the portion of the total remediation
costs to be borne by the Company and the anticipated time frame over which
payments toward the remediation plan will occur. As of September 30, 1999,
the Company's reserves for environmental remediation activities totaled
$179.6 million. It is reasonably possible that the Company's estimates for
environmental remediation liabilities may change in the future should
additional sites be identified, further remediation measures be required or
undertaken, the interpretation of current laws and regulations be modified or
additional environmental laws and regulations be enacted.
The Company intends to assert all meritorious legal defenses and all other
equitable factors which are available to it with respect to the above
matters. The Company believes that the resolution of these environmental
matters will not have a material adverse effect on its consolidated financial
position or liquidity. While the Company believes it is unlikely, the
resolution of these environmental matters could have a material adverse
effect on the Company's consolidated results of operations or cash flows in
any given year if a significant number of these matters are resolved
unfavorably.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union adopted
the Euro as their common legal currency. Between January 1, 1999 and January
1, 2002, transactions may be conducted in either the Euro or the
participating countries national currency. However, by July 1, 2002, the
participating countries will withdraw their national currency as legal tender
and complete the conversion to the Euro.
The Company conducts business in Europe and does not expect the conversion to
the Euro to have an adverse effect on its competitive position or
consolidated financial position. The Company believes that the implementation
of SAP will allow the Company to conduct business transactions in
both the Euro as well as the participating countries' national currency.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-Q are forward looking statements
that involve risks and uncertainties. These statements are based on
currently available information and the Company's actual results may differ
significantly from the results discussed. Investors are cautioned that
there can be no assurances that the actual results will not differ materially
from those suggested in such forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk
The fair market value of long-term debt is subject to interest rate risk.
The Company's long-term debt amounted to $1,452.6 million at September 30,
1999. The fair market value of such debt was $1,469.7 million, and with
respect to notes, has been determined based on quoted market prices.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
(1) Reference is made to page 15 of the Crompton 1998 Annual Report
on Form 10-K for information pertaining to consolidated litigation brought by
the Beacon Heights and Laurel Park Coalitions seeking contribution for
remediation costs at the Beacon Heights and Laurel Park sites, respectively.
On September 22, 1999, the United States District Court for the District of
Connecticut set aside the Report and Recommendations of the Special Master
and issued an order allowing recovery against various municipalities by the
Beacon Heights Coalition in the amount of approximately $3,955,000 and the
Laurel Park Coalition in the amount of approximately $1,000,000. Motions to
Alter and Amend and for Reconsideration and Rehearing on the ruling have been
filed by various parties to the litigation.
(2) Reference is made to page 5 of the Witco Quarterly Report on
Form 10Q for the quarter ended June 30, 1999, for information pertaining to
Witco as a defendant in four similar actions arising out of Witco's
involvement in the polybutylene resin manufacturing business in the 1970's.
In August 1999, Witco Corporation settled two of the actions, East Bay
Municipal Utility District v. Mobil Oil Corporation, et al., filed in
November 1993 and pending in Superior Court for the County of San Mateo,
California for the amount of $3,850,000 and City of Austin v. Shell Oil
Company, et al., filed in June 1996, and pending in the District Court of
Travis County, Texas for the amount of $1,850,000.
ITEM 4. Submission of Matters to Vote of Security Holders
(a) A Special Meeting of the Crompton Stockholders was held
on September 1, 1999.
(b) Proxies for the Special Meeting were solicited pursuant
to Regulation 14A under the Securities and Exchange Act
of 1934.
(c) A brief description of the matters submitted to a vote
at the Special Meeting, and the results of voting, are
as follows:
Approval of the Agreement and Plan of Reorganization, dated as of May 31, 1999,
by and among Witco Corporation, a Delaware corporation, CK Witco Corporation
(formerly known as Park Merger Co.), a Delaware corporation and wholly owned
subsidiary of Crompton, and Crompton, and the completion of the transactions
contemplated by the merger agreement, which will also constitute approval of an
amendment to Crompton's 1998 Long Term Incentive Plan to increase the number of
shares of common stock reserved for issuance thereunder.
Votes
For Against Abstain
48,362,336 shares 3,804,085 shares 69,937 shares
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
(4.1)* $600,000,000, 364-Day Credit Agreement dated
as of October 28, 1999, among the
Registrant, certain subsidiaries of the
Registrant, various banks, The Chase
Manhattan Bank, as Syndication Agent,
Citibank, N.A., as Administrative Agent and
Bank of America, N.A. and Deutsche Bank
Securities Inc., as Co-Documentation Agents.
(4.2)* $400,000,000, Five-Year Credit Agreement
dated as of October 28, 1999, among the
Registrant, certain subsidiaries of the
Registrant, various banks, The Chase
Manhattan Bank, as Syndication Agent,
Citibank, N.A., as Administrative Agent and
Bank of America, N.A. and Deutsche Bank
Securities Inc., as Co-Documentation Agents.
(27)* Financial Data Schedule
(b) During the fiscal third quarter of 1999, the
Registrant filed the following Reports on Form 8-K:
On September 2, 1999, the registrant filed a Current
Report on Form 8-K reporting on Item 5, Other Events
and Item 7, Financial Statements and Exhibits.
On September 15, 1999, the Registrant filed a Current
Report on Form 8-K12G3 reporting on Item 2,
Acquisition or Disposition of Assets, Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.
On September 28, 1999, the Registrant filed a Current
Report on Form 8-K12G3/A reporting on Item 7,
Financial Statements and Exhibits (including Financial
Statements of Businesses Acquired).
On September 30, 1999, the Registrant filed a Current
Report on Form 8-K reporting on Item 5, Other Events
and Item 7, Financial Statements and Exhibits.
* Copies of these Exhibits are annexed to this report on Form
10-Q provided to the Securities and Exchange Commission.
CK WITCO CORPORATION
Signatures
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.
CK WITCO CORPORATION
(Registrant)
/s/ Peter Barna
Date: November 15, 1999 Peter Barna
Senior Vice President and
Chief Financial Officer
/s/ John T. Ferguson II
Date: November 15, 1999 John T. Ferguson II
Senior Vice President,
General Counsel and
Secretary