________________________________________________________________________________
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, 1996
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: 1-12091
MILLENNIUM CHEMICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3436215
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
99 WOOD AVENUE SOUTH
ISELIN, NEW JERSEY 08830
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
908-603-6600
(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 _______ No __X__ (Registrant has
been subject to such requirements for fewer than 90 days)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 77,324,600 shares of Common
Stock, par value $.01 per share, as of November 12, 1996.
________________________________________________________________________________
MILLENNIUM CHEMICALS INC.
TABLE OF CONTENTS
PAGE(S)
-------
Part I
Item 1 Financial Statements................................................................... 2
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 14
Part II
Item 4 Submission of Matters to a Vote of Security Holders.................................... 21
Item 6 Exhibits and Reports on Form 8-K....................................................... 21
Signature....................................................................................... 22
Exhibit Index................................................................................... 23
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MILLENNIUM CHEMICALS INC.
COMBINED BALANCE SHEETS
(IN MILLIONS)
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1996 (NOTE 2) 1996 1995
------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 388 $ 388 $ 412
Trade receivables, net........................................ 514 514 502
Inventories................................................... 454 454 554
Other current assets.......................................... 75 115 221
Net assets of Discontinued Businesses sold to Hanson.......... -- 617 3,772
------------- ------------- ------------
Total current assets..................................... 1,431 2,088 5,461
------------- ------------- ------------
Property, plant and equipment, net................................. 1,977 1,977 2,262
Investments and other assets....................................... 336 336 278
Goodwill........................................................... 1,778 1,778 2,042
------------- ------------- ------------
Total assets............................................. $ 5,522 $ 6,179 $ 10,043
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES AND INVESTED CAPITAL
Current liabilities:
Notes payable................................................. $ 222 $ 222 $ 113
Current maturities of long-term debt.......................... 11 11 11
Trade accounts payable........................................ 134 134 178
Income taxes payable.......................................... 30 30 --
Accrued expenses and other liabilities........................ 443 443 575
------------- ------------- ------------
Total current liabilities................................ 840 840 877
Non-current liabilities:
Long-term debt................................................ 2,283 3,650 3,304
Deferred income taxes......................................... 129 225 171
Other liabilities............................................. 973 963 890
------------- ------------- ------------
Total liabilities........................................ 4,225 5,678 5,242
------------- ------------- ------------
Commitments and contingencies (Note 7)
Stockholders' Equity/Invested capital.............................. 1,297 501 4,801
------------- ------------- ------------
Total liabilities and invested capital................... $ 5,522 $ 6,179 $ 10,043
------------- ------------- ------------
------------- ------------- ------------
See notes to combined financial statements.
2
MILLENNIUM CHEMICALS INC.
COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- --------
(UNAUDITED) (UNAUDITED)
Net sales........................................................ $ 769 $ 872 $ 2,279 $2,939
Operating costs and expenses:
Cost of products sold....................................... 565 571 1,711 1,866
Depreciation and amortization............................... 50 59 152 180
Selling, development and administrative expenses............ 49 89 136 203
Asset impairment and related closure costs.................. 15 -- 75 --
--------- --------- --------- --------
Operating income....................................... 90 153 205 690
Interest expense, primarily to a related party................... 63 59 171 181
Interest income.................................................. (13) (5) (25) (20)
Gain on sale of Suburban Propane................................. -- -- (210) --
Equity in losses (earnings) of Suburban Propane.................. 5 -- (32) --
Other expense (income), net...................................... 12 (14) 31 65
--------- --------- --------- --------
Income from continuing operations before provision for income
taxes.......................................................... 23 113 270 464
Provision for income taxes....................................... (13) (42) (167) (188)
--------- --------- --------- --------
Income from continuing operations................................ 10 71 103 276
Income/(Loss) from discontinued operations (net of income taxes
of $17, $10, ($1,269) and $3).................................. 37 27 (3,167) --
--------- --------- --------- --------
Net income (loss)................................................ $ 47 $ 98 $(3,064) $ 276
--------- --------- --------- --------
--------- --------- --------- --------
See notes to combined financial statements.
3
MILLENNIUM CHEMICALS INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
------- -------
(UNAUDITED)
Cash flows from operating activities:
Income from continuing operations.................................................... $ 103 $ 276
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 152 180
Asset impairment and related closure costs...................................... 75 --
Provision for deferred income taxes............................................. 64 34
Gain on sale of Suburban Propane................................................ (210) --
Changes in assets and liabilities:
(Increase) decrease in trade receivables........................................ (12) 4
Decrease (increase) in inventories.............................................. 66 (61)
Decrease in other current assets................................................ 80 139
(Increase) decrease in investments and other assets............................. (66) 121
(Decrease) increase in trade accounts payable................................... (13) 43
(Decrease) increase in accrued expenses and other liabilities and income taxes
payable........................................................................ (50) 102
Increase (decrease) in other liabilities........................................ 91 (87)
------- -------
Net cash provided by operating activities....................................... 280 751
Cash flows from investing activities:
Capital expenditures................................................................. (223) (201)
Proceeds from sale of Suburban Propane............................................... 733 --
Proceeds from sale of fixed assets................................................... 7 26
------- -------
Cash provided by (used in) investing activities................................. 517 (175)
Cash flows from financing activities:
Dividend to parent................................................................... -- (1,617)
Net transactions with affiliates..................................................... (1,237) 1,506
Proceeds from long-term debt......................................................... 306 --
Repayment of long-term debt.......................................................... -- (5)
Increase (decrease) in notes payable................................................. 109 (111)
------- -------
Cash (used in) financing activities............................................. (822) (227)
------- -------
Effect of exchange rate changes on cash................................................... 1 14
(Decrease) increase in cash and cash equivalents.......................................... (24) 363
Cash and cash equivalents at beginning of period.......................................... 412 367
------- -------
Cash and cash equivalents at end of period(A)............................................. $ 388 $ 730
------- -------
------- -------
- ------------
(A) Excluding restricted cash of $111 and $85 classified in investments and
other assets at September 30, 1996 and 1995, respectively.
See notes to combined financial statements.
4
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN MILLIONS)
NOTE 1 -- BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY
In contemplation of the demerger (the 'Demerger') of the Chemicals Business
(as defined below) from Hanson PLC ('Hanson'), on October 1, 1996, all the
issued and outstanding common stock or net operating assets of Quantum Chemical
Corporation, SCM Chemicals, Inc., SCM Chemicals Limited, SCM Chemicals Ltd. and
Glidco Inc. and certain other assets and interests were transferred to
Millennium Chemicals Inc. (the 'Company'). The Company on October 1, 1996 issued
shares representing all of its then outstanding common stock, par value $.01 per
share, together with associated preferred stock purchase rights (collectively
the 'Common Stock'), to Hanson's shareholders on a pro rata basis. At September
30, 1996, the Company had no material assets or liabilities. These financial
statements are presented on a going concern basis and include only the
historical net assets and results of operations that are directly related to the
Company's operations. Consequently, the financial position, results of
operations and cash flows may not be indicative of what would have been reported
if the Company had been a separate entity. All significant intercompany accounts
and transactions have been eliminated.
The accompanying combined financial statements include the combined
operations, assets and liabilities of the chemical businesses held by Hanson and
conducted by Quantum Chemical Corporation ('Quantum Chemical'), SCM Chemicals
Inc., SCM Chemicals Limited and SCM Chemicals Ltd. (collectively 'SCM
Chemicals') and Glidco Inc. ('Glidco') and certain other interests currently
owned, directly or indirectly, by Hanson (collectively, the 'Chemicals
Business'). See Note 2 for a description of the Demerger transactions and the
pro forma capitalization of the Company upon their completion.
In addition, the combined financial statements include the combined
operations and net assets of certain non-chemicals businesses ('Discontinued
Businesses') which the Company owned during the periods presented but which as
part of the transactions to effectuate the Demerger were sold to Hanson on
October 6, 1996. The Company sold the stock and net operating assets of the
Discontinued Businesses for cash aggregating their fair market value of $676,
net of assumed debt of $431. The Discontinued Businesses consist of the building
materials operations of HMB Holdings Inc. ('Cornerstone') and the materials
handling business of Grove North America ('Grove Worldwide'). Since these
operations were not part of the Company upon completion of the Demerger
transactions, their historical net assets and results of operations have been
presented in the accompanying financial statements as discontinued operations.
Any difference between the proceeds from these transactions and the underlying
carrying value of the net assets of these operations will be accounted for as a
capital transaction and, accordingly, will not affect the Company's results of
operations.
Combined herein are the net operating assets and results of operations of
Suburban Propane ('Suburban') which was acquired as a division of Quantum
Chemical on September 30, 1993. In March 1996, the Company sold a 73.6% interest
in Suburban through an initial public offering of 21,562,500 common units in a
new master limited partnership ('MLP'), Suburban Propane Partners, L.P., and
received aggregate proceeds from the sale of common units and issuance of
Suburban Propane notes of approximately $831 (including approximately $98 of
accounts receivable in which the Company retained ownership at the time of
sale), resulting in a pre-tax gain of $210. The Company retained a combined
subordinated and general partnership interest of 26.4% in Suburban Propane
Partners L.P., and has accounted for this continuing interest on an equity basis
effective January 1, 1996.
The accompanying financial statements at September 30, 1996 and 1995 and
all references made to the amounts for the periods then ended are unaudited and
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. They include all adjustments which the
Company considers necessary for a fair statement of the results of operations
and financial position for the interim periods presented. Such adjustments
consisted only of normal recurring items except as otherwise disclosed in Notes
4 and 5.
5
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 2 -- PRO FORMA FINANCIAL DATA (UNAUDITED)
Presented together with the historical Combined Balance Sheet at September
30, 1996 is a pro forma balance sheet of the Company as of that date giving
effect to the completion of a series of transactions in order to effectuate the
Demerger and the recapitalization of the Company assuming the repurchase of the
2.39% Senior Exchangeable Discount Notes Due 2001 (the 'Exchangeable Notes')
(see Note 9) and the anticipated issuance of new debt securities. Such
transactions include (i) the transfer of certain of the businesses and assets
intended to remain with Hanson but held by prospective subsidiaries of the
Company ('Non-Chemicals Businesses') to Hanson on September 30, 1996 and the use
of proceeds thereof, together with cash balances and bank debt, to repay the
Allocated Loan (as defined in Note 6), (ii) the transfer of the Discontinued
Businesses to Hanson on October 6, 1996 and the use of proceeds thereof,
together with cash balances and bank debt, to repay the Company's remaining
indebtedness to Hanson, (iii) a net capital contribution from Hanson pursuant to
the demerger agreement to arrive at combined debt of the Company, net of cash
(including restricted cash of $111 included in investments and other assets) and
cash equivalents, of $2,017 after giving effect to the sale of the Discontinued
Businesses and repurchase of the Exchangeable Notes, (iv) 100% acceptance of the
offer to repurchase the Exchangeable Notes and (v) the issuance of $750 of new
debt securities the net proceeds of which will be used, together with bank debt,
for such repurchase. These transactions will change the capitalization of the
Company upon Demerger. The following details the capitalization of the Company
on a historical and pro forma basis as of September 30, 1996.
AS OF SEPTEMBER 30, 1996
----------------------------
ACTUAL PROFORMA
----------- -------------
Short-term debt:
Notes payable................................................................... $ 222 $ 222
Other........................................................................... 11 11
----------- -------------
Total short-term debt...................................................... $ 233 $ 233
----------- -------------
----------- -------------
Long-term debt:
New Senior Securities........................................................... -- 750
Credit Facility................................................................. 300 1,497
Exchangeable Notes.............................................................. 1,036 --
Allocated Loan.................................................................. 2,250 --
Other........................................................................... 64 36
----------- -------------
Total long-term debt....................................................... $ 3,650 $ 2,283
----------- -------------
----------- -------------
Stockholders' equity:
Common Stock, 250,000,000 shares, par value $.01 per share, authorized,
77,324,600 shares issued and outstanding....................................... $ -- $ 1
Paid-in capital................................................................. -- 1,296
Invested capital................................................................ 501 --
----------- -------------
Total stockholders' equity................................................. $ 501 $ 1,297
----------- -------------
----------- -------------
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Inventories: Inventories are stated at the lower of cost or market value.
For certain U.S. operations cost is determined under the last-in, first-out
(LIFO) method. The first-in, first out (FIFO) method is
6
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
used by all other subsidiaries. Inventories valued on a LIFO basis were
approximately $30 and $22 less than the amount of such inventories valued at
current cost at September 30, 1996 and December 31, 1995, respectively.
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
Finished products.............................................. $ 234 $337
In-Process products............................................ 13 17
Raw materials.................................................. 146 144
Other inventories.............................................. 61 56
------ ------
$ 454 $554
------ ------
------ ------
Environmental Liabilities and Expenditures: Accruals for environmental
matters are recorded in operating expenses when it is probable that a liability
has been incurred and the amount of the liability can be reasonably estimated.
Accrued liabilities are exclusive of claims against third parties (except where
payment has been received or the amount of liability or contribution by such
other parties, including insurance companies, has been agreed) and are not
discounted. In general, costs related to environmental remediation are charged
to expense. Environmental costs are capitalized if the costs increase the value
of the property and/or mitigate or prevent contamination from future operations.
Dual Residence: The Company is organized under the laws of Delaware and is
subject to United States federal income taxation of corporations. However, in
order to obtain clearance from the U.K. Inland Revenue as to the tax-free
treatment of the distribution of Common Stock to effect the Demerger for U.K.
tax purposes for Hanson and Hanson shareholders, Hanson agreed with the U.K.
Inland Revenue that the Company will continue to be centrally managed and
controlled in the United Kingdom for at least five years following the date of
the Demerger (October 1, 1996). Hanson also agreed with the U.K. Inland Revenue
that the Company's Board of Directors will be the only medium through which
strategic control and policy making powers are exercised, and that board
meetings almost invariably will be held in the United Kingdom during such
five-year period. In an agreement with Hanson to effect the Demerger, the
Company agreed not to take, or fail to take, during such five-year period, any
action that would result in a breach of, or constitute non-compliance with, any
of the representations and undertakings made by Hanson in Hanson's agreement
with the U.K. Inland Revenue. The Company's By-Laws provide for similar
constraints.
Hanson's agreement with the U.K. Inland Revenue provides that if at any
time during the five-year period following the date of the Demerger, the Company
ceases to be regarded as centrally managed and controlled in the United Kingdom,
the distribution of Common Stock to effect the Demerger will no longer be
regarded as tax-free to Hanson under U.K. law (although it will continue to be
treated as tax-free under U.K. law to Hanson shareholders). The Company will
indemnify Hanson against any liability and penalties arising out of a breach of
the agreement between Hanson and the U.K. Inland Revenue referred to in the
preceding paragraph. The Company estimates that, if such indemnification
obligation were to arise prior to October 1, 1997, it would amount to
approximately $421. Such amount will decrease by $84.2 on each October 1 through
October 1, 2001.
If the Company ceases to be a U.K. tax resident at any time, the Company
will be deemed for purposes of U.K. corporation tax on chargeable gains to have
disposed of all of its assets at such time. In such a case, the Company would be
liable for U.K. corporation tax on chargeable gains on the amount by which the
fair market value of those assets at the time of such deemed disposition exceeds
the Company's tax basis in those assets. The tax basis of the assets would be
calculated in pounds sterling, based on the fair market value of the assets (in
pounds sterling at the time of acquisition of the
7
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
assets by the Company) adjusted for U.K. inflation. Accordingly, in such
circumstances, the Company could incur a tax liability even though it has not
actually sold the assets and even though the underlying value of the assets may
not have actually appreciated in US dollar terms (due to currency movements).
Since it is impossible to predict the future value of the Company's assets,
currency movements and inflation rates, it is impossible to predict the
magnitude of such liability, should it arise.
Fair Value of Financial Instruments: The fair value of all short-term
financial instruments are estimated to approximate their carrying value because
of their short maturity. The Company from time to time has utilized forward
exchange contracts, currency swaps or other derivative products to hedge its
risk in foreign or other operations.
Earnings per Share: Historical earnings per share are not presented because
there is no separate identifiable pool of capital for the periods prior to
incorporation upon which a per share calculation could be based.
Long-Term Incentive Plan: The Company has adopted a Stock Incentive Plan
for the purpose of enhancing the profitability and value of the Company for the
benefit of the stockholders. A maximum of 3,909,000 shares of Common Stock may
be issued or used for reference purposes pursuant to the Stock Incentive Plan.
The Stock Incentive Plan provides for the following types of awards: (i)
stock options, including incentive stock options and non-qualified stock
options; (ii) stock appreciation rights; (iii) restricted stock; (iv)
performance units; and (v) performance shares. On October 8, 1996 the
Compensation Committee of the Company's Board of Directors awarded restricted
stock having an aggregate undiscounted fair market value on the date of grant of
approximately $65 to 32 executive officers. The vesting schedule for the award
is as follows: (i) three equal tranches aggregating 25% of the total award will
vest in each of October 1999, 2000 and 2001; and (ii) three equal tranches
aggregating 75% of the total award will be subject to the achievement of
'economic value added' performance criteria established by the Compensation
Committee for each of three performance cycles commencing January 1, 1997 and
ending December 31, 1999, 2000 and 2001, respectively. If and to the extent such
criteria are achieved, half of the 25% tranche relating to a particular
performance cycle of the award will vest immediately and the remainder will vest
in five equal annual installments commencing on the first anniversary of the end
of the cycle.
In addition to the initial awards of restricted stock to the above
officers, it is expected that the Compensation Committee, upon recommendation of
management, annually will make awards of restricted stock to senior managers of
the Company that employ the same 'economic value added' performance concepts.
NOTE 4 -- IMPAIRMENT OF LONG-LIVED ASSETS AND RELATED CLOSURE COSTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (SFAS 121), 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.' SFAS 121
established guidelines for reviewing recoverability of long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less that the assets'
carrying amount. Impairment losses under SFAS 121 are measured by comparing the
estimated fair value of the assets to their carrying amount. Except for certain
assets of one of the Discontinued Businesses to be sold to Hanson, the effect of
adoption was not material. (See Note 5 -- Net Assets of Discontinued Business
Sold to Hanson).
During the nine months ended September 30, 1996, the Company recorded a $60
non-recurring charge ($39 after-tax) to reduce the carrying value of certain
property, plant and equipment employed in sulfate-process manufacturing of TiO2,
caused by changes in current market conditions. Intense price competition has
been experienced, and is expected to continue as customers of the anatase
products
8
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 4 -- IMPAIRMENT OF LONG-LIVED ASSETS AND RELATED CLOSURE COSTS -- CONTINUED
associated with the sulfate-process operations seek more cost efficient
manufacturing inputs to their applications. As a result of continued
deterioration of market conditions in the TiO2 industry, in July 1996 the
Company decided to implement a program which includes a reduction of its
sulfate-process manufacturing capacity both in the UK and US, rephasing
chloride-process expansion programs in the UK and Australia and announced
increases in global selling prices for TiO2 (which will not be realized during
the balance of 1996). The 10,000 tonne sulfate-process plant in Stallingborough,
England will be closed and production at its 66,000 tonne sulfate-process
facility in Baltimore, Maryland will be reduced by approximately one-third. The
carrying value of plant and equipment associated with sulfate-process
manufacturing has been reduced by $60 in the nine months ended September 30,
1996 as a result of evaluating the recoverability of such assets under the
unfavorable market conditions existing at that time. In addition, $15 of closure
costs associated with the implementation of this plan have been provided for in
the quarter ended September 30, 1996. The amount of the write-down related to
the reduction of asset carrying value was determined by comparison to the fair
value of the related assets as determined based on the projected discounted cash
flows identified to such assets.
NOTE 5 -- NET ASSETS OF DISCONTINUED BUSINESSES SOLD TO HANSON
Net assets of Discontinued Businesses sold to Hanson included the
historical net assets of the Cornerstone and Grove Worldwide businesses which
were not a part of the Company upon completion of the Demerger transactions.
Cornerstone is engaged in the production and sale of aggregates products and
concrete and in construction contracting. Grove Worldwide's business is the
manufacture and sale of hydraulic cranes. The stock and net assets of such
companies were sold to Hanson on October 6, 1996 and accordingly have been
reflected herein as Discontinued Operations. (See Note 1.) In January 1996,
Hanson announced its plan to demerge the Chemicals Businesses; such plan
included the sale of the Discontinued Businesses by the Company. Because
adoption of SFAS 121 on January 1, 1996 preceded the date this plan was
announced, the SFAS 121 charge predates the date at which such businesses may be
accounted for as discontinued operations under APB 30. As presented in the
accompanying combined balance sheets, the historical net assets of these
businesses are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
Current assets........................................................... $ 738 $ 710
Non-current assets....................................................... 2,078 7,126
Current liabilities...................................................... (378) (364)
Non-current liabilities.................................................. (1,821) (3,700)
------------- ------------
Net assets of Discontinued Businesses sold to Hanson................ $ 617 $ 3,772
------------- ------------
------------- ------------
The following represents the results of operations of the Discontinued
Businesses:
THREE MONTHS NINE MONTHS ENDED
ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1996 1995 1996 1995
---- ------- ------- ------
(UNAUDITED) (UNAUDITED)
Sales............................................................ $555 $ 481 $ 1,444 $1,216
---- ------- ------- ------
---- ------- ------- ------
Pre tax (loss) income............................................ 54 37 (4,436) 3
Tax (benefit) provision.......................................... 17 10 (1,269) 3
---- ------- ------- ------
Net (loss) income........................................... $ 37 $ 27 $(3,167) $ 0
---- ------- ------- ------
---- ------- ------- ------
9
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 5 -- NET ASSETS OF DISCONTINUED BUSINESSES SOLD TO HANSON -- CONTINUED
As discussed in Note 4, on January 1, 1996, the Company adopted SFAS 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of.' Prior to the adoption of this pronouncement, asset impairment
was evaluated at an operating company level based on the contribution of
operating profits and undiscounted cash flows being generated from those
operations. Under this policy, assets used in Cornerstone's operations, which
are comprised of approximately 20 separate operating companies, were evaluated
for impairment based on gross margins and cash flows generated by each separate
operating company in a given business cycle. Evaluation of Cornerstone's assets
at this level does not result in any impairment.
SFAS 121 requires the impairment review to be performed at the lowest level
of asset grouping for which there are identifiable cash flows which represents a
change from the level at which the previous accounting policy measured
impairment. In the case of Cornerstone, economic groupings of assets were made
based on local marketplaces and could consist of both active and inactive quarry
operations and hot mix asphalt facilities managed together as a single operating
unit. Evaluation of assets at this lower grouping level indicated an impairment
of certain of those assets. The impairment loss was measured based on the
difference between estimated discounted cash flows and the carrying value of
such assets. Considerable management judgment is necessary to estimate
discounted future cash flows and, accordingly, actual results could vary
significantly from such estimates.
The initial non-cash charge resulting from adopting the evaluation
methodology provided by SFAS 121 was $4,497 ($3,206 after income taxes),
principally related to certain of Cornerstone's aggregates-related assets.
NOTE 6 -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The debt included in the combined balance sheets reflects the obligations
directly related to the Company. Excluded from such amounts are other
obligations which, upon the Demerger, did not carryover to the Company as a
separate entity.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
The detail of long-term debt is as follows:
Credit Facility, due 2001. Interest at the bank's prime lending rate, or LIBOR
or NIBOR plus .225% at the option of the Company. Facility fee of .125% to be
paid quarterly............................................................... $ 300 $ --
2.39% Senior Exchangeable Discount Notes Due 2001 (net of unamortized discount
of $219 and $291)............................................................ 1,036 1,004
Allocated Loan payable to Hanson bearing interest at 7.0% Due 2003............ 2,250 2,250
Debt payable through 2007 at interest rates ranging from 4% to 11%............ 75 61
Less current maturities of long-term debt..................................... (11) (11)
------------- ------------
$ 3,650 $3,304
------------- ------------
------------- ------------
In July 1996, one of the Company's subsidiaries and the Company as
guarantor entered into a $2,250 senior unsecured revolving credit facility (the
'Credit Facility') with a facility fee based upon the ratings by S&P and
Moody's, maturing in July 2001. The proceeds from the borrowings are to be used
for providing working capital, for the repurchase of the Exchangeable Notes and
for the repayment of the Allocated Loan in connection with the Demerger. The
Credit Facility bears interest at the bank's prime lending rate, or LIBOR or
NIBOR plus a spread based upon the ratings by S&P and Moody's. The current
facility fee and spread are 0.125% and 0.225%, respectively.
The Credit Agreement contains covenants and provisions that restrict, among
other things, the ability of the Company and its material subsidiaries to: (i)
create liens on any of its property or assets,
10
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 6 -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS -- CONTINUED
or assign any rights to security interests in future revenues; (ii) engage in
sale and leaseback transactions; (iii) engage in mergers, consolidations and
sales of all or substantially all of their assets on a consolidated basis; (iv)
enter into agreements restricting dividends and advances by their subsidiaries;
and (v) engage in transactions with affiliates other than those based on
arm's-length negotiations. The Credit Agreement also restricts the ability of
subsidiaries of the Company (other than the Issuer) to incur indebtedness or
issue preferred stock. The Credit Agreement also requires the Company to satisfy
certain financial performance criteria.
The Exchangeable Notes have a stated interest rate of 2.39% per annum which
when combined with the implicit interest yield attributable to the original
issue discount to par ('OID') represent a yield to maturity of 6.0%. The notes
are not callable until March 1, 1999. Each holder of a note has a benefit of a
right (an 'ADS Right'), not separately tradeable, which is exercisable at the
holder's option until March 1, 2001 to cause the holder's notes to be exchanged
for ADSs, with each ADS representing five ordinary shares of 25 pence in the
capital of Hanson, currently set at 55.712 ADSs per $1,000 principal amount of
maturity of the notes. As of September 30, 1996, the fair market value of the
notes was $1,089 based upon the September 30, 1996 trading price of $867.50 per
$1,000 principal amount at maturity. As a consequence of the Demerger, as
required by the provisions of the indenture governing such notes, the Company's
subsidiary provided a notice to the holders of the Exchangeable Notes that it
will offer to repurchase such notes for cash at 101% of their accreted value
plus accrued interest from all holders who exercise their 'change-in-control
rights' under the indenture. (See Note 9 -- Subsequent Events).
In conjunction with the acquisition of Quantum Chemical, a subsidiary of
the Company established a long term financing agreement with Hanson under which
$2,250 was borrowed in October 1993 ('Allocated Loan'). The agreement, as
amended, provides for such borrowings to be repaid in October 2003, and bears
interest at 7.0% per annum payable annually. Such loan was repaid on October 1,
1996 using the proceeds from the sale of the Non-Chemicals Businesses on
September 30, 1996, borrowings under the Credit Facility and cash balances.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company has various contractual obligations to purchase raw materials
used in its production of polyethylene, titanium dioxide and aroma chemicals.
Commitments to purchase ethylene used in the production of polyethylene are
based on market prices and expire from 1996 through 2000. Commitments to
purchase ore used in the production of titanium dioxide are generally three to
eight year contracts with competitive prices generally determined at a fixed
amount subject to escalation for inflation. Total commitments to purchase ore
aggregate approximately $1,300 for titanium dioxide and expire between 1997 and
2002. Commitments to acquire crude sulfate turpentine, used in the production of
aroma and flavor chemicals, are generally pursuant to one to five year contracts
with prices based on the market price and which expire from 1996 through 2000.
The Company's Chemicals business is subject, among other things, to several
proceedings under the Federal Comprehensive Environmental Response Compensation
and Liability Act and other federal and state statutes or agreements with third
parties. These proceedings are in various stages ranging from initial
investigation to active settlement negotiations to implementation of the
clean-up or remediation of sites.
Additionally, certain of the Company's subsidiaries are defendants or
plaintiffs in lawsuits that have arisen in the normal course of business
including those relating to commercial transactions and product liability. While
certain of the lawsuits involve allegedly significant amounts, it is
management's opinion, based on the advice of counsel, that the ultimate
resolution of such litigation will not have a material adverse effect on the
Company's financial position or results of operations.
11
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
The Company believes that the range of potential liability for the above
matters, collectively, which primarily relates to environmental remediation
activities, is between $130 and $180 and has accrued $180 as of September 30,
1996.
Certain of the Discontinued Businesses have also been named as defendants,
PRP's or both in environmental proceedings or have contractual liabilities to
indemnify the purchasers of certain environmental liabilities. Hanson or a
Hanson subsidiary has agreed to indemnify the Company against any losses
relating to such liabilities.
NOTE 8 -- OPERATIONS BY INDUSTRY SEGMENT
The Company's principal operations (excluding its interest in Suburban
Propane) are grouped into five business segments: polyethylene and related
products, acetyls and alcohol and specialty polymer products, which are produced
by Quantum Chemical; TiO2 and related products, which are produced by SCM
Chemicals; and fragrance and flavor chemicals, which are produced by Glidco.
The following is a summary of the Company's continuing operations by
industry segment and geographic area:
THREE MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED
30, SEPTEMBER 30,
------------ ----------------
1996 1995 1996 1995
---- ---- ------ ------
Net sales:
Quantum Chemical
Polyethylene and related products......................................... $344 $344 $ 944 $1,115
Acetyls and alcohol....................................................... 91 103 294 366
Specialty polymer products................................................ 88 84 274 271
---- ---- ------ ------
Subtotal........................................................ 523 531 1,512 1,752
SCM Chemicals:
Titanium dioxide and related products..................................... 219 208 680 663
Glidco:
Fragrance and flavor chemicals............................................ 27 25 87 76
---- ---- ------ ------
769 764 2,279 2,491
Propane(1)..................................................................... -- 108 -- 448
---- ---- ------ ------
Total........................................................... $769 $872 $2,279 $2,939
---- ---- ------ ------
---- ---- ------ ------
Operating income:
Quantum Chemical:
Polyethylene and related products.................................... $ 68 $ 77 $ 112 $ 337
Acetyls and alcohol.................................................. 11 20 39 121
Specialty polymer products........................................... 9 11 32 47
---- ---- ------ ------
Subtotal........................................................ 88 108 183 505
SCM Chemicals(2)
Titanium dioxide and related products................................ (6) 50 (6) 136
Glidco:
Fragrance and flavor chemicals....................................... 8 7 28 23
---- ---- ------ ------
90 165 205 664
---- ---- ------ ------
Propane(1)................................................................ -- (12) -- 26
---- ---- ------ ------
Total........................................................... $ 90 $153 $ 205 $ 690
---- ---- ------ ------
---- ---- ------ ------
(footnotes on next page)
12
MILLENNIUM CHEMICALS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS)
NOTE 8 -- OPERATIONS BY INDUSTRY SEGMENT -- CONTINUED
(footnotes from previous page)
(1) Suburban Propane is reflected as a continuing operation of the Company
(i.e., division of Quantum Chemical) through December 31, 1995. In March
1996, the Company sold a 73.6% interest in Suburban Propane in an initial
public offering. The Company has accounted for its continuing investment
under the equity method effective January 1, 1996.
(2) The three and nine months ended September 30, 1996 include non-recurring
charges of $15 and $75 respectively, to provide for the closure costs of
certain sulfate-process production and to reduce the carrying value of
certain facilities employed in the sulfate-process manufacturing of TiO2 as
described in Note 4.
NOTE 9 -- SUBSEQUENT EVENTS
In October 1996, one of the Company's subsidiaries entered into forward
contracts to hedge exchange rate fluctuations on approximately `L'200 of its
sterling cash deposits and entered into interest rate protection agreements to
fix the interest costs on approximately $750 of borrowings under its credit
facility at an average rate of 5.7875% with terms expiring at various dates
through October 1998.
On October 18, 1996, as required by the Exchangeable Note indenture, a
subsidiary of the Company commenced a tender offer to repurchase any and all
Exchangeable Notes from holders who exercise their 'change in control' rights
under the indenture for cash of 101% of their accreted value plus accrued
interest. The tender offer will expire on December 17, 1996 unless required by
applicable law to be extended. If all outstanding Exchangeable Notes are
tendered and purchased on that date, the repurchase price will be approximately
$1.1 billion. It is anticipated that such repurchase will be funded with the net
proceeds of the issuance of senior debt securities and, to the extent necessary,
additional long-term borrowings under the Credit Facility.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
The Company had operating income of $90 million for the three months ended
September 30, 1996, a decrease of $63 million (41%) from the three months ended
September 30, 1995, and net sales of $769 million for the 1996 quarter, a
decrease of $103 million (12%) from the 1995 quarter. The Company recorded a
non-recurring charge of $15 million during the 1996 quarter to provide for the
closure costs of certain TiO2 sulfate-process production at SCM Chemicals'
Stallingborough, England and Baltimore, Maryland plants. In addition, as a
result of the Company's sale of a 73.6% interest in Suburban Propane through an
initial public offering in March 1996, the Company's interest in the results of
Suburban Propane's operations has been reflected as Equity in Earnings of
Suburban Propane in the Combined Financial Statements since January 1, 1996.
Suburban Propane contributed $108 million to net sales and generated an
operating loss of $12 million for the three months ended September 30, 1995.
Excluding Suburban Propane's results and the non-recurring charges referred to
above, the Company's net sales were relatively unchanged at $769 million and its
operating income decreased $60 million (36%) from the comparable quarter of the
prior year. These decreases are primarily due to lower average selling prices
for polyethylene, acetyls and specialty polymer product offerings and TiO2
resulting from a strong competitive environment in these markets coupled with
increasing costs for feedstocks for ethylene and TiO2 during the quarter.
QUANTUM CHEMICAL
Quantum Chemical's operating income for the quarter ended September 30,
1996 decreased $20 million (19%) to $88 million on a slight decrease in net
sales to $523 million. The decrease in Quantum Chemical's operating income was
primarily due to lower selling prices for all major product groups. Average
selling prices for polyethylene were 5% lower than the comparable period of 1995
as a result of sluggish economic conditions, excess industry capacity and lower
ethylene prices. Average selling prices for acetyls and alcohol and specialty
polymers also declined 1% and 5%, respectively, compared to the comparable
quarter of 1995. Somewhat mitigating the impact of decreased selling prices on
operating income was a 10% increase in overall unit sales volume.
Net sales of polyethylene and related products were $344 million for the
three months ended September 30, 1996, unchanged from 1995's quarter. Operating
income decreased $9 million to $68 million principally as a result of a 5%
reduction in average unit selling prices for polyethylene products. The lower
prices reflected competitive pressure arising from excess industry capacity. In
the 1995 period, industry ethylene inventories were extremely tight due to
unexpected industry outages causing ethylene and consequently polyethylene
prices to rise dramatically; this situation corrected itself towards the end of
1995.
Average unit costs for polyethylene were 13% higher than the prior year's
quarter as feedstock costs for ethylene rose dramatically as a result of
increased demand for natural gas. Unit costs for ethylene rose 7% during the
third quarter of 1996 from the second quarter.
Supported by the increasing cost of feedstocks, average selling prices in
the third quarter of 1996 were up 14% compared to the second quarter of 1996.
Due to competitive pressures and the decline in demand, price increases intended
to become effective in October 1996 have been postponed.
Polyethylene unit volumes for the period declined slightly to 752 million
pounds, principally from softening demand in the domestic markets as customers
begin to destock inventories in light of rising prices.
The Company expects that the operating results of the polyethylene and
related products segment for the fourth quarter of 1996 will be below those for
the third quarter due to a slight deterioration in selling prices arising from
softening demand and the effect of continuing feedstock cost increases on
operating margins.
14
Net sales of acetyls and alcohol decreased 12% to $91 million in the third
quarter of 1996, while operating income decreased $9 million (45%) to $11
million. The decline in operating income resulted from a combination of volume
and selling price declines due to competitive pressures. Vinyl Acetate Monomer
experienced a 17% decline in average selling prices for the period as export
markets were affected by oversupply and weakened demand. Acetic Acid also
reflected a 34% reduction in volume for the period which coupled with increased
raw material and operating costs of the Syngas plant also contributed to the
decrease in operating income for this segment.
Net sales of specialty polymer products increased 5% to $88 million, while
operating income decreased 18% to $9 million. A 4% decline in average selling
prices resulting from lower polyethylene pricing compared to the third quarter
of 1995 offset the impact of sales volume growth in the wire and cable markets
during the quarter and slightly lower raw material costs (mainly propylene and
polyethylene).
SCM CHEMICALS
SCM Chemicals' operating loss for the third quarter of 1996 of $6 million
reflects a non-recurring charge of $15 million to provide for the closure costs
of certain sulfate production as more fully discussed below. Excluding this
non-recurring charge, operating income for the quarter decreased $41 million
(82%) compared to the prior year's quarter. Net sales for the third quarter of
1996 increased 5% to $219 million compared to $208 million for the third quarter
of 1995.
The TiO2 industry has been undergoing severe price competition and, as a
consequence, global pricing has been deteriorating since late 1995. The price
erosion is attributed to a confluence of market factors, including customer
de-stocking, consolidations in the paint and coatings industry, a weak paper
industry, increased TiO2 capacity, as well as a weak spring paint and coatings
season, which all contributed to greater competition for market share. These
factors have had severe effects on SCM Chemicals' TiO2 sulfate-process products
which have higher production costs and lower selling prices than its
chloride-process products. These conditions resulted in average TiO2 selling
prices in U.S. dollar terms to decline 12% from the prior year's quarter with
declines amounting to 8% in the United States, 15% in Europe and 24% in
Asia/Pacific.
In response to these deteriorating market conditions, in July 1996, SCM
Chemicals announced its intention to close its sulfate-process plant in
Stallingborough, England and scale back production of its 66,000 tonne
sulfate-process facility in Baltimore, Maryland by approximately one-third. In
addition, completion of the expansion of the chloride-process facility in the
United Kingdom will be delayed nine months until July 1998 and, while
preparatory work continues, expenditures for the 111,000 tonne expansion in
Australia are being rephased until market conditions and trends improve. SCM
Chemicals also announced global price increases for TiO2 to take effect on
October 1, 1996; however, due to competitive pricing pressures, the increases
will not be realized during the balance of 1996. Finally, SCM Chemicals will
undertake cost containment measures and reengineering efforts in certain of its
processes in order to reduce operating costs.
Also contributing to the decline in operating income are higher fixed and
variable costs resulting from lower operating rates and increased costs of
titanium ore feedstocks, coke and utilities. During the quarter ended September
30, 1996, SCM Chemicals' plants operated at 86.2% of capacity compared to 98%
during the quarter ended September 30, 1995.
Sales volume for the third quarter of 1996 increased 17% compared to the
third quarter of 1995 largely due to record and near-record sales in the United
States and Europe driven by strong demand in the coatings and plastics markets
with shipments to the slow paper market continuing to lag behind. The 1995
period was adversely affected by customer destocking.
GLIDCO
Glidco had net sales of $27 million and operating income of $8 million,
increases of 8% and 14%, respectively, for the three months ended September 30,
1996 compared to the comparable period of 1995. This continued growth reflects
Glidco's continued emphasis on higher-margin intermediate and upgrade products,
with gross margins increasing from 44% in the 1995 quarter to 46% in the 1996
15
quarter. The favorable impact of this product mix more than offset a 46%
increase in the cost of Glidco's principal raw material, crude sulphate
turpentine, on a unit basis.
Demand for Glidco's production of fragrance chemicals continued to match
capacity, even with the expansion of its plant capacity partially completed. To
continue to meet the growing worldwide demand for its products, Glidco's ongoing
20% expansion plans are progressing on target.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
The Company had operating income of $205 million for the nine months ended
September 30, 1996, a decrease of $485 million (70%) from the nine months ended
September 30, 1995, and net sales of $2.279 billion, a decrease of $660 million
(22%). The Company recorded non-recurring charges of $75 million during the 1996
period to reduce the carrying value of certain facilities employed in the
sulfate-process manufacturing of TiO2 products and to provide for the closure
costs of certain sulfate-process production. In addition, as a result of the
Company's sale of a 73.6% interest in Suburban Propane through an initial public
offering in March 1996, the Company's interest in the results of Suburban
Propane's operations have been reflected as equity in earnings of Suburban
Propane in the Combined Financial Statements since January 1, 1996. Suburban
Propane contributed $448 million to net sales and $26 million to operating
income for the nine months ended September 30, 1995. Excluding Suburban Propane
and the non-recurring charges referred to above, the Company's net sales
decreased $212 million (8.5%) and its operating income decreased $384 million
(58%) from the comparable period of the prior year. These decreases are
primarily due to lower average selling prices for polyethylene, acetyls and
specialty polymer product offerings as they declined from their 1995 peak levels
and declining selling prices for TiO2 as a result of excess capacity and
sluggish demand in the paper markets coupled with increasing costs for
feedstocks for ethylene (polyethylene's principal raw material) and TiO2 during
this period.
On a pro forma basis, earnings per share, based on 75,140,350 shares
outstanding (which includes the issuance of shares to Hanson shareholders on
October 1, 1996, the issuance of 728,067 shares of non-performance based
restricted common stock awarded to executive officers and key employees on
October 8, 1996 and the issuance of 4,026 shares to non-employee directors)
would have been $1.73. Such amount includes ($.62) and $1.14 per share impacts
from the non-recurring charges related to the TiO2 operations and the gain on
sale of the 73.6% interest in Suburban Propane, respectively.
QUANTUM CHEMICAL
Quantum Chemical's operating income for the nine months ended September 30,
1996 decreased $322 million (64%) to $183 million, and its net sales decreased
$240 million (14%) to $1.512 billion, compared to the comparable period in 1995.
The substantial decreases in Quantum Chemical's net sales and operating income
were due to lower selling prices for all major product groups. Average selling
prices for polyethylene fell from its peak highs in 1995 and were 23% lower than
the comparable period of 1995 as a result of industry inventory reductions,
excess inventory capacity and declining ethylene prices. Ethylene prices on the
spot market were 32% lower during the 1996 period compared to the 1995 period as
industry supply problems were resolved and inventories were rebuilt. Average
selling prices for the period for acetyls and alcohols and specialty polymers
also declined 16% and 10%, respectively, compared to the comparable period of
1995. Somewhat mitigating the impact of decreased selling prices on operating
income was a 10% increase in overall unit sales volume.
Net sales of polyethylene and related products were $944 million for the
nine months ended September 30, 1996, a decrease of $171 million (15%).
Operating income decreased $225 million (67%) to $112 million principally as a
result of a 23% reduction in average selling prices for polyethylene products.
The lower prices reflected competitive pressure arising from excess industry
capacity and the correction of ethylene inventory supplies during the first half
of 1996. In the 1995 period, industry ethylene inventories were extremely tight
due to unexpected industry outages causing ethylene and consequently
polyethylene prices to rise dramatically; this situation corrected itself
towards the end of 1995. Within the 1996 period, average selling prices
increased during the second and third quarters (with the third quarter
representing a 14% increase over the second quarter) due to significantly
increased domestic demand, strong exports and higher natural gas feedstock costs
as discussed below.
16
Notwithstanding these costs, operating margins also increased. Polyethylene unit
volumes for the 1996 period represented a 6.7% increase over the 1995 period.
Average unit costs for polyethylene increased due to increased feedstock
costs for ethylene. These costs rose dramatically as a result of colder than
normal winter temperatures experienced in late 1995 and early 1996, which
increased the demand for natural gas, and remained at high levels during the
1996 period. Unit costs for ethylene rose 7% during the third quarter of 1996
from the second quarter.
The Company expects that the operating results of the polyethylene and
related products segment for the fourth quarter of 1996 will be below those for
the third quarter due to a slight deterioration in selling prices arising from
softening demand and the effect of continuing feedstock cost increases on
operating margins. Due to competitive pressures and the decline in demand, price
increases intended to become effective in October 1996 have been postoned.
Net sales of acetyls and alcohol decreased $72 million (20%) to $294
million in the nine months ended September 30, 1996, while operating income
decreased $82 million (68%) to $39 million. The decline in operating income
primarily resulted from decreased average selling prices, which were 16% lower
than during the comparable period of 1995. This was primarily true for methanol,
which experienced historically high selling prices during 1995 due to strong
demand from reformulated gasoline producers to meet environmental requirements.
As some of these requirements were subsequently relaxed and additional capacity
became available, methanol prices fell 49%. Vinyl acetate also experienced a 24%
decline in average selling prices for the nine months ended September 30, 1996
as export markets were affected by oversupply and weakened demand.
Net sales of specialty polymer products were relatively flat compared to
1995 at $274 million for the 1996 period while operating income decreased $15
million (32%) to $32 million. The decline in operating income resulted from a
10% decline in average selling prices caused by lower polyethylene prices and
higher ethylene costs. Growth in the wire and cable markets was principally
responsible for a 12% increase in unit sales volume for the period. Unit costs
were slightly lower during the 1996 period primarily as a result of lower raw
material costs (mainly propylene and polyethylene).
During the nine months ended September 30, 1996, Quantum Chemical continued
to progress in its reengineering and cost reduction programs with savings during
the period of approximately $18 million toward a full year goal of $30 million.
The conversion of Quantum's Syngas plant from residuum oil to natural gas was
postponed until the end of 1996 in light of industry outages; when completed it
is expected to further improve the cost profile for acetic acid. In addition,
several expansion and improvement projects proceeded on target, with a restart
of 250 million pounds of LLDPE capacity at the Morris facility completed in June
1996, conversion of 300 million pounds of LLDPE production capacity to HDPE at
Port Arthur expected to be fully operational in February 1997 and a new 480
million pound LLDPE plant at the La Porte facility scheduled for start-up in
December 1996.
SCM CHEMICALS
SCM Chemicals' operating results for the first nine months of 1996
decreased $142 million (104%) from $136 million in the comparable period in
1995. This reflects non-recurring charges of $75 million to reduce the carrying
value of certain plant and equipment employed by SCM Chemicals in its
sulfate-process manufacturing of TiO2 and provide for the closure of certain
sulfate production facilities in light of the market conditions discussed below.
Excluding these non-recurring charges, operating income for the period decreased
$67 million (49%) compared to the 1995 period. Net sales for the first nine
months of 1996 increased 3% to $680 million compared to $663 million for the
first nine months of 1995.
The TiO2 industry has been undergoing severe price competition and, as a
consequence, global pricing has been deteriorating since late 1995. The price
erosion reflects a confluence of market factors, including customer destocking,
consolidations in the paint and coatings industry, a weak paper industry,
increased TiO2 capacity, and a weak spring paint and coatings season. These
conditions resulted in average TiO2 selling prices in U.S. dollar terms to be 4%
lower during the nine months ended September 30, 1996 compared to the comparable
period of 1995 as producers attempted to maintain volume and market share. For
the third quarter of 1996 alone, average prices declined 12% compared
17
to the third quarter of 1995, with declines amounting to 8% in the United
States, 15% in Europe and 24% in the Asia/Pacific region.
These conditions had severe effects on SCM Chemicals' TiO2 sulfate-process
products, which have higher production costs and lower selling prices than its
chloride-process products. In response to these deteriorating market conditions,
in July 1996, SCM Chemicals announced its intention to close its sulfate-process
plant in Stallingborough, England and scale back production of its 66,000 tonne
sulfate-process facility in Baltimore, Maryland by approximately one-third. In
addition, completion of the expansion of the chloride-process facility in the
United Kingdom was delayed nine months until July 1998 and, while preparatory
work continues, expenditures for the 111,000 tonne expansion in Australia were
being rephased until market conditions and trends improve. SCM Chemicals also
announced global price increases for TiO2 to take effect on October 1, 1996 ;
however, due to competitive pricing pressures, the increases will not be
realized during the balance of 1996. Finally, SCM Chemicals will undertake cost
containment measures and reengineering efforts for certain processes in order to
reduce operating costs.
Also contributing to the decline in operating income were higher fixed
costs resulting from lower operating rates and higher variable costs due to
increased costs of titanium ore feedstocks, coke and utilities.
During the nine months ended September 30, 1996, SCM Chemicals' plants
operated at 86.7% of capacity compared to 97.8% during the comparable period of
the prior year. Decreased operating rates reflect both current market conditions
and an increase in operating capacity. Sales volume for the nine months ended
September 30, 1996 increased 6% largely due to strong third quarter sales in the
United States and Europe. For the third quarter, sales volume increased 17%,
reflecting strong demand in the coatings and plastics markets with shipments to
the sluggish paper market continuing to lag behind.
GLIDCO
Glidco continued its growth trend with record operating income of $28
million for the nine months ended September 30, 1996, an increase of $5 million
(22%) compared to the comparable period in 1995. Net sales increased $11 million
(14%) to $87 million. This continued growth reflected a 2.6% increase in unit
sales volume over 1995 as worldwide demand for fragrance chemicals continued to
increase. The impact of this strong demand more than offset significant
increases in the cost of CST, Glidco's principal raw material (59% on a unit
basis, compared to the comparable period for 1995). Reflecting Glidco's
continued emphasis on higher-margin intermediate and upgrade products, gross
margins held steady at 46% in the first three quarters of both 1996 and 1995.
The price of CST is expected to continue to increase during the fourth quarter
of 1996.
In January 1996, a sales office and warehouse space were established in
Singapore to serve the growing market in the Pacific Rim. During the 1996
period, Glidco's ongoing 20% expansion plans are progressing on target.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1996, the Company financed its operations and capital
and other expenditures from a combination of cash generated from operations,
external borrowings and loans and invested capital provided by Hanson or its
United States affiliates. Since its demerger from Hanson, the Company has had to
meet all of its cash requirements through internally-generated funds and
external borrowings. The Company's ability to generate cash from operations and
the servicing and repayment of debt will depend upon numerous business factors,
some which are outside the control of the Company, including industry
cyclicality (resulting from industry-wide capacity additions, changes in general
economic conditions and other conditions) and price volatility of certain raw
materials.
Net cash provided by operating activities was $280 million for the nine
months ended September 30, 1996, compared with net cash provided of $751 million
for the comparable period of the prior year. The decrease results from a 63%
decrease in income from continuing operations including a non-recurring pre-tax
charge of $75 million to reflect an impairment of sulfate process assets
associated with the TiO2 and related products segment and related closure costs
for certain sulfate-process production.
18
Net cash provided by investing activities was $517 million for the nine
months ended September 30, 1996, compared with net cash used of $175 million for
the comparable period of 1995. The increase principally results from the sale of
a 73.6% interest in Suburban Propane for proceeds of $733 million, partly offset
by a $22 million increase in capital expenditures.
Net cash used in financing activities was $822 million for the nine months
ended September 30, 1996, compared with net cash used of $227 million for the
comparable period of 1995. The increase principally relates to changes in the
level of funding and other transactions between the Company and its affiliates,
offset by increased proceeds from short-term borrowings.
The Credit Facility: One of the Company's subsidiaries and the Company, as
guarantor, entered into a Credit Agreement, dated as of July 26, 1996, with Bank
of America National Trust and Savings Association, as administrative agent
('Bank of America'), The Chase Manhattan Bank, as documentation agent, and
various participating banks and other institutional lenders for the provision of
the Credit Facility to the Company.
The Credit Facility consists of a five-year unsecured revolving credit
facility in an amount up to $2.25 billion. Borrowings under the Credit Facility
may consist of standby loans (i.e. committed revolving credit loans) or
uncommitted competitive loans offered by syndicated banks through an auction
mechanism (or both, at the option of the Company). Standby loans and competitive
loans may be borrowed in either U.S. dollars or other currencies. The proceeds
of the Credit Facility may be used to provide working capital to the Company and
for general corporate purposes, including the repurchase of Exchangeable Notes
pursuant to the tender offer commenced on October 17, 1996 or otherwise. Certain
proceeds were previously used for repayment of portions of the Company's
indebtedness to Hanson.
The interest rates under the standby loans are based upon, at the option of
the respective Borrowing Subsidiaries, (i) the London interbank offered rate
('LIBOR'), (ii) the New York interbank offered rate ('NIBOR') or (iii) in the
case of U.S. dollar loans, the higher of Bank of America's prime rate or the
federal funds rate plus 0.5% ('ABR'). Interest rates based on LIBOR or NIBOR
will be increased by a spread of between 13.5 and 47.5 basis points depending
upon the actual ratings (the 'Ratings') by Standard & Poor's Ratings Group and
Moody's Investors Service Inc. of senior unsecured non-credit enhanced long-term
debt issued by the Issuer and guaranteed by the Company (or issued directly by
the Company) or, if there is no such debt, the indicative rating of the Company
by such rating agencies. Based on the current Ratings, the spread over LIBOR is
presently 22.5 basis points. No spread is charged on ABR loans. The interest
rates under the competitive loans will be obtained from those bids selected by
the applicable Borrowing Subsidiary.
A commitment fee is payable to the lenders under the Credit Facility on the
aggregate amount of the commitments, whether used or unused, at a rate per annum
of between 6.5 and 25 basis points depending upon the Ratings. Loans under the
Credit Facility may be repaid and then reborrowed. Based on the current Ratings,
the commitment fee is presently 12.5 basis points.
Exchangeable Notes: The demerger of the Company from Hanson resulted in a
change-in-control of one of the Company's subsidiaries within the meaning of the
indenture governing the Exchangeable Notes. Accordingly, on October 17, 1996,
one of the Company's subsidiaries commenced the repurchase of any and all
Exchangeable Notes. The offer to repurchase such notes will expire on December
17, 1996 unless required by applicable law to be extended. If all outstanding
Exchangeable Notes are tendered and purchased on that date, the repurchase price
will be approximately $1.1 billion. It is anticipated that such repurchase will
be funded with the net proceeds of the issuance of senior debt securities as
described below and, to the extent necessary, additional long-term borrowings
under the Credit Facility.
Effective as of September 18, 1996, the instruments governing the terms of
the Exchangeable Notes were amended to (i) specifically permit the Demerger
without compliance by the Issuer or Hanson, as the case may be, with certain
covenants relating to consolidations, mergers or transfers of assets, (ii)
specifically permit the prepayment by the Issuer of the Allocated Loan, (iii)
provide that the delivery by the Company of certain financial information shall
satisfy the covenant to deliver financial information in respect of the Issuer,
and (iv) eliminate the limitations on the grant of security interests in the
assets and properties of the Issuer or its Subsidiaries and the limitations on
incurrence of
19
additional indebtedness by subsidiaries of the Issuer. In connection with the
solicitation of consents for the foregoing amendments, the Issuer paid
consenting holders a consent fee aggregating $1.5 million. On October 1, 1996,
the indenture governing the Exchangeable Notes was further amended to provide
that the Issuer's obligations thereunder are guaranteed by the Company.
Proposed Offering: The Company has filed a registration statement for the
proposed public offering of $750 million aggregate principal amount of senior
debt securities of Millennium America Inc., the holding company for all the
Company's operating subsidiaries other than the subsidiaries that conduct the
Company's titanium dioxide operations in the U.K. and Australia. The proposed
debt securities will be guaranteed by the Company. If the offering is completed,
the net proceeds will be used, to the extent necessary, to repurchase
Exchangeable Notes tendered pursuant to the change-in-control tender offer.
20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is hereby made to 'Liquidity and Capital Resources -- the
Exchangeable Notes' in Part I, Item 2 of this Quarterly Report on Form 10-Q for
a description of the amendment of the instruments governing the 2.39% Senior
Exchangeable Discount Notes Due 2001 issued by Millennium America Inc. Consents
to such amendments were received from the holders of approximately 94% of the
aggregate stated value at maturity of such notes.
On May 23, 1996, by unanimous written consent, in lieu of a meeting, the
Company's three stockholders approved the Amended and Restated Certificate of
Incorporation of the Company which was filed as Exhibit 3.1 to the Company's
Registration Statement on Form 10 (File No. 1-12091) (the 'Form 10').
On August 20, 1996, by unanimous written consent, in lieu of a meeting, the
Company's three stockholders approved the Company's Long-Term Stock Incentive
Plan, which was filed as Exhibit 10.25 to the Form 10, for effectiveness as of
the date of the Demerger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule
(b) The following Current Report on Form 8-K was filed during the quarterly
period ended September 30, 1996 and through the date hereof:
DATE OF REPORT ITEM NO. FINANCIAL STATEMENTS
- -------------------------------------------------------------- -------- ---------------------
October 2, 1996............................................... 5 None
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1996 MILLENNIUM CHEMICALS INC.
/S/ JOHN E. LUSHEFSKI
.....................................
JOHN E. LUSHEFSKI
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(AS DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule
23