1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333-17961
ARISTECH CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 25-1534498
(State of Incorporation) (I.R.S. Employer Identification Number)
210 Sixth Avenue, Pittsburgh, Pennsylvania 15222-2611
(Address of principal executive offices)
Registrant's Telephone Number: (412) 316-2747
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 [ ]
Common Stock outstanding at June 30, 2000: 14,908 shares
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INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Selected Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
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ARISTECH CHEMICAL CORPORATION
Consolidated Statements of Operations (Unaudited)
(Dollars in Millions)
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
------ ------ ------ ------
Sales $266.2 $191.8 $515.8 $375.7
Operating Costs:
Cost of sales 253.9 162.5 485.3 321.4
Selling, general and administrative expenses 12.3 14.6 24.5 31.1
Depreciation and amortization 18.7 14.0 37.1 27.7
------ ------ ------ ------
Total Operating Costs 284.9 191.1 546.9 380.2
------ ------ ------ ------
Operating Income (Loss) (18.7) 0.7 (31.1) (4.5)
Net Gain (Loss) on Disposal of Assets (0.4) 0.1 (0.4) 0.2
Other Income, Net 1.9 0.2 1.9 --
Interest Income 0.8 0.5 1.8 1.0
Interest Expense (13.1) (6.5) (26.0) (12.8)
------ ------ ------ ------
Loss Before Income Taxes (29.5) (5.0) (53.8) (16.1)
Benefit for Income Taxes (11.0) -- (20.3) (4.2)
------ ------ ------ ------
Loss Before Minority Interest (18.5) (5.0) (33.5) (11.9)
Minority Interest (0.8) (0.9) (1.6) (1.5)
------ ------ ------ ------
Net Loss $(19.3) $ (5.9) $(35.1) $(13.4)
====== ====== ====== ======
The accompanying selected notes are an integral part
of these financial statements.
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ARISTECH CHEMICAL CORPORATION
Consolidated Balance Sheets
(Dollars in Millions)
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 5.0 $ 22.5
Receivables (less allowance for doubtful accounts of $.4 and
$.3 at June 30, 2000 and December 31, 1999, respectively) 9.2 36.7
Subordinated note receivable - related party 41.3 24.2
Inventories 139.4 128.8
Other current assets 2.3 1.7
-------- --------
Total Current Assets 197.2 213.9
Property, plant and equipment, net 926.4 950.4
Long-term receivables 7.7 7.8
Excess cost over assets acquired 153.8 156.4
Deferred income taxes 8.2 8.2
Other assets 4.9 11.7
-------- --------
Total Assets $1,298.2 $1,348.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 109.9 $ 107.7
Accounts payable - related parties 5.7 5.6
Payroll and benefits payable 9.3 8.8
Accrued taxes 8.5 8.6
Deferred income taxes 3.3 3.3
Short-term borrowings 17.4 40.0
Long-term debt due within one year 0.9 0.7
Other current liabilities 23.8 26.0
-------- --------
Total Current Liabilities 178.8 200.7
Long-term debt - related parties 303.8 278.0
Long-term debt - other 315.7 315.3
Deferred income taxes 135.5 155.8
Other liabilities 43.2 43.9
-------- --------
Total Liabilities 977.0 993.7
-------- --------
Minority Interest 13.3 11.7
-------- --------
Common stock ($.01 par value, 20,000 shares authorized, 14,908
shares issued at June 30, 2000 and December 31, 1999) -- --
Additional paid-in capital 382.5 382.5
Retained deficit (74.6) (39.5)
-------- --------
Total Stockholders' Equity 307.9 343.0
-------- --------
Total Liabilities and Stockholders' Equity $1,298.2 $1,348.4
======== ========
The accompanying selected notes are an integral part of
these financial statements.
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ARISTECH CHEMICAL CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Millions)
Six Months Ended
June 30,
2000 1999
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(35.1) $ (13.4)
Adjustments to reconcile net loss to net cash
(used in)/provided by operating activities:
Depreciation 34.5 25.1
Amortization of excess cost over assets acquired 2.6 2.6
Deferred income taxes (20.3) (2.9)
Discount on sale of receivables 4.0 3.0
(Gain) loss on disposal of assets 0.4 (0.2)
Increase in receivables (9.8) (5.3)
(Increase) decrease in inventories (10.6) 17.0
Increase (decrease) in accounts payable and
other current liabilities 3.7 5.0
Minority interest in consolidated subsidiaries 1.6 1.5
Other 0.1 3.7
------ -------
Net Cash (Used In)/Provided by Operating Activities (28.9) 36.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10.1) (126.1)
Proceeds from disposal of assets 0.1 --
Other 0.1 0.1
------ -------
Net Cash Used in Investing Activities (9.9) (126.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings (22.6) 22.9
Repayment of long-term debt (36.2) (56.0)
Principal repayments under capital leases (0.4) (0.3)
Proceeds from issuance of long-term debt 61.9 129.0
Net increase (decrease) in receivables financing facility 16.2 (4.8)
Dividends paid (3.6) --
Proceeds from corporate owned life insurance 6.0 2.1
------ -------
Net Cash Provided by Financing Activities 21.3 92.9
NET (DECREASE)/INCREASE IN CASH AND EQUIVALENTS (17.5) 3.0
Cash and Equivalents, Beginning of Year 22.5 1.1
------ -------
Cash and Equivalents, End of Period $ 5.0 $ 4.1
====== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 2000, the Company acquired property,
plant and equipment with a cost of $1.1 million financed through capital
lease obligations.
The accompanying selected notes are an integral part of
these financial statements.
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ARISTECH CHEMICAL CORPORATION
Selected Notes to the Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and generally accepted accounting principles
for interim financial reporting. They do not include all disclosures normally
made in financial statements contained in Form 10-K. In management's opinion,
all adjustments necessary for a fair presentation of the results of operations,
financial position and cash flows for the periods shown have been made. All such
adjustments are of a normal recurring nature. Results for the three months and
six months ended June 30, 2000 are not necessarily indicative of expected
results for the full year of 2000.
ORGANIZATION
Aristech Chemical Corporation ("Aristech") was incorporated under the laws of
the State of Delaware on October 14, 1986 as a wholly owned subsidiary of USX
Corporation ("USX"). On December 4, 1986, USX transferred substantially all of
the assets and liabilities of its USS Chemicals Division to Aristech, and
Aristech's common stock was offered and sold to the public. The USS Chemicals
Division was formed by USX in 1966. On March 7, 1990, Mitsubishi Corporation
("MC"), certain other investors and certain members of Aristech's management
acquired Aristech in a going-private transaction. The interest of certain of the
investors, including the management investors, has subsequently been reacquired
and MC beneficially owns 82.3% of Aristech's outstanding common stock. The
"Company" refers to Aristech and its majority-owned consolidated subsidiaries.
NATURE OF OPERATIONS
The Company is a producer and marketer of chemical and polymer products that are
generally sold for further processing by manufacturers of various products which
include automotive components, construction materials and consumer products.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Aristech include
the accounts of the Company and all intercompany accounts and transactions have
been eliminated in consolidation. Investments in unconsolidated subsidiaries
over which the Company does not exercise control are accounted for under the
equity method.
Certain reclassifications were made to the prior years' consolidated financial
statements to conform to the classifications used in the 2000 consolidated
financial statements.
ACCOUNTING CHANGES
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 as amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
is effective for fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet determined the effect of this standard on its financial
position or results of operations.
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 and contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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ARISTECH CHEMICAL CORPORATION
Selected Notes to the Consolidated Financial Statements
NOTE B - INVENTORIES
Inventories consist of the following at June 30, 2000 and December 31, 1999:
June 30, December 31,
2000 1999
------ ------
(Unaudited)
(In Millions)
Raw materials $ 31.8 $ 36.8
Finished products 88.1 73.3
Supplies and sundry items 19.5 20.6
Lower of cost or market reserve -- (1.9)
------ ------
Total Inventory $139.4 $128.8
====== ======
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at June 30, 2000 and
December 31, 1999:
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
(In Millions)
Land $ 13.9 $ 13.9
Buildings 76.6 75.0
Machinery and equipment 1,194.2 1,160.9
Intangible assets 27.2 28.8
Construction in process 17.8 44.0
-------- --------
1,329.7 1,322.6
Accumulated depreciation (403.3) (372.2)
-------- --------
Property, Plant and Equipment, Net $ 926.4 $ 950.4
======== ========
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following at June 30, 2000 and December 31, 1999:
Interest June 30 December 31,
Maturity Rate 2000 1999
---------- ---------- ----------- --------------
(Unaudited)
(In Millions)
Revolving Loan 1 - MIC 2002 Variable $ 70.0 $ 70.0
Revolving Loan 2 - MIC 2001 Variable 44.8 28.0
Revolving Loan 3 - MIC 2001 Variable 9.0 -
Term Loan - MIC 2002 Variable 130.0 130.0
Term Loan - MIC 2002 Variable 50.0 50.0
Revolving Loan - GFC/BCC 2001 Variable 150.0 150.0
6 7/8% Notes 2006 6.875% 149.3 149.2
Capital lease obligations 2000-2017 16.0 15.3
Other 1.3 1.5
-------- --------
620.4 594.0
Less amount due within one year (0.9) (0.7)
-------- --------
Total Long-term Debt $ 619.5 $ 593.3
======== ========
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ARISTECH CHEMICAL CORPORATION
Selected Notes to the Consolidated Financial Statements
NOTE D - LONG-TERM DEBT (CONTINUED)
Effective as of March 6, 2000, the Company arranged for a third revolving loan
with MIC in the amount of $30.0 million ("Revolving Loan 3"). This is a
variable-rate loan with a current maturity date of March 31, 2001, subject to
renewal. Revolving Loan 3 utilizes a portion of the $190.0 million guarantee
commitment obtained from MC in November of 1999 that is effective until March
31, 2001. The outstanding balance as of June 30, 2000 on Revolving Loan 3 was
$9.0 million.
MC has agreed to lend up to $250.0 million to Aristech on or before March 31,
2001, for a period extending to March 31, 2002, for the purpose of refinancing
obligations due under the MIC and GFC/BCC facilities due on March 31, 2001. This
commitment is in place to the extent that Aristech is unable to obtain financing
from outside parties. Therefore, based on the Company's intent to refinance
these facilities, balances outstanding under these loans continue to be
classified as long-term debt on the June 30, 2000 balance sheet.
NOTE E - SEGMENT INFORMATION
Financial information about the Company's industry segments is summarized as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- ------ ------
(Unaudited) (Unaudited)
(In millions)
Sales:
Chemicals $ 132.6 $ 105.5 $262.1 $212.0
Polymers 137.4 88.4 261.0 168.3
Intersegment sales (3.8) (2.1) (7.3) (4.6)
-------- -------- ------ ------
$ 266.2 $ 191.8 $515.8 $375.7
======== ======== ====== ======
Operating income (loss):
Chemicals $ (11.9) $ 0.4 $(23.8) $ 0.9
Polymers (2.2) 7.2 1.8 9.5
Corporate (4.6) (6.9) (9.1) (14.9)
-------- -------- ------ ------
$ (18.7) $ 0.7 $(31.1) $ (4.5)
======== ======== ====== ======
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
Total assets:
Chemicals $ 660.9 $ 677.0
Polymers 637.3 671.4
-------- --------
$1,298.2 $1,348.4
======== ========
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ARISTECH CHEMICAL CORPORATION
Selected Notes to the Consolidated Financial Statements
NOTE F - COMMITMENTS AND CONTINGENCIES
Aristech is obligated to indemnify USX against certain claims or liabilities
which USX may incur relating to USX's prior ownership and operation of the
business and facilities transferred to Aristech in 1986, including liabilities
under laws relating to the protection of the environment and the workplace. Such
known liabilities have been provided for in the consolidated financial
statements.
As of June 30, 2000 and December 31, 1999, the Company had outstanding
irrevocable standby letters of credit and surety bonds in the amount of $1.2
million, primarily in connection with workers' compensation coverage and the
Company's exporting activities.
The Company is subject to pervasive environmental laws and regulations
concerning the production, handling, storage, transportation, emission and
disposal of waste materials and is also subject to other federal and state laws
and regulations regarding health and safety matters. These laws and regulations
are constantly evolving, and it is impossible to predict accurately the effect
these laws and regulations will have on the Company in the future.
The Company is also the subject of, or party to, a number of other pending or
threatened legal actions involving a variety of matters. In the opinion of
management, any ultimate liability arising from these contingencies, to the
extent not otherwise provided for, should not have a material adverse effect on
the consolidated financial position, results of operations, or cash flows of the
Company.
NOTE G - SUBSEQUENT EVENTS
On June 29, 2000, the MC Board of Directors approved a debt to equity conversion
whereby MC will invest $200.0 million in preferred stock to be issued by
Aristech. The proceeds will be used to repay a like amount of outstanding debt
to MIC. The transaction is subject to approval by the stockholders of Aristech
and is expected to take place during the third quarter of 2000.
On July 21, 2000, Aristech voluntarily elected to terminate its $25.0 million,
unsecured, uncommitted line of credit with a commercial bank. Aristech utilized
existing borrowing availability on MIC Revolving Loan 2 to repay the outstanding
balance of $18.7 million on that date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or verbal
forward-looking statements, including any statements that may be contained in
the following "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and including statements contained elsewhere in this and
other Company filings with the Securities and Exchange Commission. The Company
does not undertake to update or revise any forward-looking statement to reflect
changed assumptions, the occurrence of unanticipated events or changes to
operating results over time. All statements which address operating performance,
events or developments that we expect or anticipate will occur in the future,
including statements relating to sales growth and earnings growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. These forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "projected," "contemplates" or "anticipates"
or other comparable terminology. The forward-looking statements are and will be
based on management's then current views and assumptions regarding future events
and operating performance. The following are some of the factors that could
cause actual results to differ materially from estimates contained in the
Company's forward-looking statements: The ability to generate sufficient cash
flows to support capital expansion plans and general operating activities.
Competitive product and pricing pressures. A change in laws and regulations,
including changes in accounting standards, taxation requirements (including tax
rate changes, new tax laws and revised tax law interpretation) and laws in
domestic or foreign jurisdictions. Fluctuations in the cost and availability of
raw materials to the Company or to the Company's vendors and the ability to
maintain favorable supplier arrangements and relationships. The ability to
achieve earnings forecasts, which are generated based on projected sales of
different product types, some of which are more profitable than others. There
can be no assurance that we will achieve the projected level or mix of product
sales. The effectiveness of our marketing programs, including the ability to
penetrate new markets. The uncertainties of litigation, as well as other risks
and uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings. The foregoing list of important factors is not
exclusive.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999.
During the three-month period ended June 30, 2000, when compared with the same
period for 1999, the Company's net sales increased by $74.4 million or 39% from
$191.8 million to $266.2 million. This increase was due to a 16% increase in
pounds shipped, primarily due to the capacity expansion projects completed in
late 1999 and early 2000, coupled with a 21% increase in the average selling
price per pound. Net sales for Chemicals increased by $27.1 million or 26% over
the three-month period ended June 30, 1999, primarily due to an 8% increase in
pounds shipped as a result of the completion of the third phenol unit at the
Company's Haverhill, Ohio plant in November of 1999. Also contributing to the
higher sales revenues for Chemicals was a 17% increase in the average selling
price per pound. Net sales for Polymers increased by $49.0 million or 55% over
the three-month period ended June 30, 1999, primarily due to a 32% increase in
pounds shipped. The increase in pounds shipped resulted from the completion of
the new polypropylene line at the LaPorte, Texas plant in September of 1999 and
the capacity expansion at Aristech Acrylics LLC completed in February of 2000. A
20% increase in the average selling price per pound for Polymers also
contributed to the increased sales figure in 2000.
Total operating costs increased by $93.8 million or 49% from $191.1 million for
the three months ended June 30, 1999 to $284.9 million for the three months
ended June 30, 2000. The increase in operating costs was primarily driven by
increases in cost of sales resulting from a 82% increase in the average cost per
pound for raw materials and the 16% increase in pounds shipped due to the
Company's expanded production capacity. Also contributing to the increase in
operating costs was a $4.7 million or 34% increase in depreciation expense as a
result of the plant additions completed in late 1999 and early 2000. The
Chemicals operating segment's average raw materials price per pound, which
includes primarily cumene, increased by 68%, while the Polymers average raw
materials price per pound, which includes primarily propylene, increased by
104%. Partially offsetting these increases, was a $2.3 million or 16% decrease
in selling, general and administrative expenses primarily as a result of
personnel reductions achieved through the voluntary early retirement and
involuntary separation programs implemented during 1999.
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The Company's total interest expense before interest capitalization was $13.1
million for the three-month period ended June 30, 2000, as compared to $10.6
million for the same period in 1999. This $2.5 million or 24% increase in
interest expense reflects a total net increase in borrowings of $44.6 million
since June 30, 1999, primarily to fund the Company's capacity expansion program.
Also contributing to the increase in interest expense were increased borrowings
under the securitized accounts receivable facility, reduced interest
capitalization and higher interest rates during the second quarter of 2000 as
compared to the second quarter of 1999. Increased borrowings of $22.7 million
under the securitized accounts receivable facility, the Company's lowest cost
source of funding, resulted from the increased sales volumes in 2000 coupled
with the increase in the maximum borrowing capacity under the facility from $90
million to $100.0 million in March of 2000. Due to the completion of the
capacity expansion projects by the end of the first quarter of 2000, the Company
did not capitalize any interest during the three-month period ended June 30,
2000, as compared with $4.1 million capitalized during the three-month period
ended June 30, 1999.
Net gain (loss) on disposal of assets decreased by $0.5 million from a gain of
$0.1 million for the three-month period ended June 30, 1999 to a net loss of
$0.4 million for the same period in 2000. The loss recorded in 2000 primarily
resulted from the write-off of leasehold improvements at the Company's former
corporate offices in the USX Tower in downtown Pittsburgh.
Other income, net increased by $1.7 million from $0.2 million for the three
months ended June 30, 1999 to $1.9 million for the three months ended June 30,
2000. The increase was primarily due to the recording of a $1.3 million gain on
natural gas futures contracts related to the supply of natural gas, primarily to
the Company's Haverhill plant.
The Company's benefit for income taxes increased by $11.0 million for the three
months ended June 30, 2000, as compared with the same period in 1999. This
increase was caused primarily by a $24.5 million increase in the loss before
income taxes for the three-month period ended June 30, 2000, over the same
three-month period in 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999.
During the six-month period ended June 30, 2000, when compared with the same
period for 1999, the Company's net sales increased by $140.1 million or 37% from
$375.7 million to $515.8 million. This increase was due to a 19% increase in
pounds shipped, primarily due to the capacity expansion projects completed
during the latter half of 1999 and early 2000, coupled with a 16% increase in
the average selling price per pound. Net sales for Chemicals increased by $50.1
million or 24% from the six-month period ended June 30, 1999, primarily due to a
11% increase in pounds shipped as a result of the completion of the third phenol
unit at the Company's Haverhill, Ohio plant in November of 1999. Also
contributing to the higher sales revenues for Chemicals was an 11% increase in
the average selling price per pound. Net sales for Polymers increased by $92.7
million or 55% over the six-month period ended June 30, 1999, primarily due to a
33% increase in pounds shipped. The increase in pounds shipped resulted from the
completion of the new polypropylene line at the LaPorte, Texas plant in
September of 1999 and the capacity expansion at Aristech Acrylics LLC completed
in February of 2000. A 19% increase in the average selling price per pound for
Polymers also contributed to the increased sales figure in 2000.
Total operating costs increased by $166.7 million or 44% from $380.2 million for
the six months ended June 30, 1999 to $546.9 million for the six months ended
June 30, 2000. The increase in operating costs was primarily driven by increases
in cost of sales resulting from a 73% increase in the average cost per pound for
raw materials and the 19% increase in pounds shipped due to the Company's
expanded production capacity. Also contributing to the increase in operating
costs was a $9.4 million or 34% increase in depreciation expense as a result of
the plant additions completed in late 1999 and early 2000. The Chemicals
operating segment's average raw materials price per pound, which includes
primarily cumene, increased by 64%, while the Polymers average raw materials
price per pound, which includes primarily propylene, increased by 87%. Partially
offsetting these increases was a $6.6 million or 21% decrease in selling,
general and administrative expenses primarily as a result of personnel
reductions achieved through the voluntary early retirement and involuntary
separation programs implemented during 1999.
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The Company's total interest expense before interest capitalization was $26.3
million for the six-month period ended June 30, 2000 as compared to $20.4
million for the same period in 1999. This $5.9 million or 29% increase in
interest expense reflects a total net increase in borrowings of $44.6 million
since June 30, 1999, primarily to fund the Company's capacity expansion program.
Also contributing to the increase in interest expense were increased borrowings
under the securitized accounts receivable facility, reduced interest
capitalization and higher interest rates during the first six months of 2000 as
compared to the same period in 1999. Increased borrowings of $22.7 million under
the securitized accounts receivable facility, the Company's lowest cost source
of funding, resulted from the increased sales volumes in 2000 coupled with the
increase in the maximum borrowing capacity under the facility from $90 million
to $100.0 million in March of 2000. Due to the completion of a significant
portion of the capacity expansion program in late 1999, the Company capitalized
only $0.3 million of interest during the six months ended June 30, 2000, as
compared with $7.6 million for the six months ended June 30, 1999.
Net gain (loss) on disposal of assets decreased by $0.6 million from a gain of
$0.2 million for the six-month period ended June 30, 1999 to a net loss of $0.4
million for the same period in 2000. The loss recorded in 2000 primarily
resulted from the write-off of leasehold improvements at the Company's former
corporate offices in the USX Tower in downtown Pittsburgh.
Other income of $1.9 million recorded for the six-month period ended June 30,
2000 primarily resulted from a $1.3 million gain on natural gas futures
contracts related to the gas supply, primarily to the Company's Haverhill plant.
There was no other income, net during the same period in 1999.
The Company's benefit for income taxes increased by $16.1 million for the six
months ended June 30, 2000, as compared with the same period in 1999. This
increase was caused primarily by a $37.7 million increase in the loss before
income taxes for the six-month period ended June 30, 2000, over the same period
in 1999.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 2000, the Company's working capital balance increased
by $5.2 million from $13.2 million at December 31, 1999 to $18.4 million at June
30, 2000. The increase in working capital was due primarily to the impacts of a
reduction in short-term borrowings and an increase in inventories, partially
offset by decreases in cash and equivalents and receivables. The decrease in
short-term borrowings was due to net repayments of $22.6 million on the
uncommitted line of credit with a commercial bank. Inventories increased during
the first six months of the year due to improved operational performance of the
new production lines completed in late 1999 and early 2000 and higher raw
material and finished product costs. The decrease in cash and equivalents
resulted from the repayments on the uncommitted line of credit and capital
expenditures during the first six months of 2000. The decrease in receivables
during 2000 was due to the receipt of an $18.4 million federal income tax refund
in January of 2000 coupled with the impacts of the increase from $90.0 million
to $100.0 million in the borrowing capacity under the trade receivables
financing facility effective March 29, 2000.
The Company's net cash provided by operating activities decreased $65.0 million
from $36.1 million for the six months ended June 30, 1999, to cash used in
operations of $28.9 million for the six months ended June 30, 2000. The decrease
in operating cash flows in 2000 primarily resulted from the increase in the
Company's net loss in 2000 versus the same period in 1999 and an increase in
inventories in 2000 versus a significant reduction of inventories during the
same period in 1999.
Net cash provided by financing activities decreased by $71.6 million from $92.9
million for the six months ended June 30, 1999 to $21.3 million for the six
months ended June 30, 2000. This decrease was primarily due to net borrowings
during the first six months of 1999 of $95.6 million, versus $2.7 million for
the six months ended June 30, 2000. The additional borrowings during the first
half of 1999 were utilized to fund the Company's capacity expansion program.
Partially offsetting the impact of the net decrease in borrowings was a $21.0
million increase in proceeds from the sale of receivables under the receivables
financing facility during the first six months of 2000 as compared to the same
period in 1999. This increase was due to the increased sales activity during the
first half of 2000, as a result of the capacity expansions completed in late
1999 and
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early 2000, and the increase in the total borrowing capacity on the receivables
financing facility from $90.0 million to $100.0 million in March of 2000. The
receivables financing facility is renewed annually with the next renewal date
scheduled for March 28, 2001. Upon successful completion of the renewal process,
the facility would be extended for additional periods not to exceed 364 days
from the extension date.
The Company anticipates that outstanding fixed capital commitments and future
working capital requirements will be funded by cash flows from operations or, if
necessary, additional borrowings from existing or replacement credit facilities.
At June 30, 2000, there was approximately $43.8 million of additional borrowing
capacity available under existing credit facilities.
CAPITAL EXPENDITURES
Capital expenditures decreased by $116.0 million from $126.1 million for the six
months ended June 30, 1999 to $10.1 million for the six months ended June 30,
2000. During the first six months of 1999, significant capital expenditures were
made related to the Company's capacity expansion program. The capacity expansion
program included plant additions within the phenol product line at the
Haverhill, Ohio plant, the polypropylene product line at the LaPorte, Texas
plant and the acrylic sheet product line at Aristech Acrylics LLC's Florence,
Kentucky plant. Capital expenditures during the first six months of 1999 were
funded by cash flows from operations and net cash provided by the Company's
financing activities in the form of additional net borrowings. The majority of
the capacity expansion projects were either completed or nearing completion by
the end of 1999, resulting in the significant decrease in capital spending
during the first six months of 2000. Capital expenditures during 2000 were
primarily funded through cash and equivalents on hand at December 31, 1999. At
June 30, 2000, the Company had outstanding fixed commitments for capital
expenditures totaling $7.1 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On an annual basis, approximately 85-90% of the Company's sales are sold
domestically, with the remaining 10-15% representing export sales. Sales in
currencies other than the US dollar are insignificant thereby minimizing any
market risk exposure due to changes in foreign exchange rates.
The Company does not currently engage in any significant investing activities as
available funds are used for business expansion, thereby eliminating any
investment-related market risk exposure.
The Company does, however, focus on its interest rate risk management primarily
to manage the overall cost of funding provided to the Company. The Company has
strategically financed its business expansion with diverse and cost-effective
debt instruments at both fixed and variable interest rates. The majority of the
Company's variable rate long-term debt is currently based on the London
Interbank Offered Rate ("LIBOR"). During 1999, in an effort to further manage
the overall cost of borrowing, the Company entered into three interest rate swap
agreements with an aggregate notional principal amount of $100.0 million with a
commercial bank. The swap structure involves the exchange of interest cash flows
for a minimum of three years and potentially a maximum of seven years. For the
first three years beginning November 15, 1999, the Company will pay a weighted
average fixed interest rate of 6.185% in exchange for receiving a fixed interest
rate of 6.875%, resulting in a savings to the Company over the first three years
of approximately $2.1 million. Accordingly, interest expense was reduced by
approximately $0.4 million for the six months ended June 30, 2000. Subsequently,
for the last four years of the agreements, the Company is obligated to pay a
variable interest rate equal to the six-month LIBOR in exchange for receiving a
fixed interest rate of 6.875%. The swap counterparty has the option to terminate
the agreements on selected dates during the final four years of the agreements.
A hypothetical 1% increase in the interest rate for the Company's variable rate
long-term debt would increase annual interest expense by approximately $4.5
million. Actual changes in interest rates may differ from hypothetical changes.
This analysis does not take into effect other changes that might occur in the
economic environment due to such changes in short-term interest rates. The
Company's debt instruments are monitored continually to mitigate, to the extent
possible, any significant interest rate risk exposure. The carrying amount of
the Company's long-term debt as of June 30, 2000 was $620.4 million.
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The Company does not enter into any material fixed purchase or fixed supply
contracts with its suppliers or customers, or engage in any material hedging
activities to mitigate any related commodity price risk. The Company, through
its natural gas manager and agent, does utilize the purchase of natural gas
futures contracts to help lock in a portion of the Company's overall cost of
natural gas. As of June 30, 2000, the Company had natural gas futures contracts
outstanding with a notional amount of $0.8 million and a net gain position of
$0.1 million. A 10% increase/decrease in the market price for gas futures would
have a $0.1 million favorable/unfavorable impact to the Company based on the
open futures contracts at June 30, 2000.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company becomes involved from time to time in various claims and
lawsuits incidental to the ordinary course of its business. A
discussion of certain of these matters is included in Note F to the
Consolidated Financial Statements.
Aristech is involved, often along with other defendants, in product
liability lawsuits filed in federal and state courts in several
jurisdictions; many of these cases involve multiple plaintiffs.
Although Aristech is sometimes a named defendant, more typically
Aristech has assumed the defense for USX Corporation in these cases as
a result of contractual obligations to do so for claims arising out of
the business of the former USS Chemicals Division of USX Corporation. A
majority of these cases have typical and similar factual allegations,
that during the course of the plaintiffs' employment with other
companies they were exposed to benzene or benzene-containing products
manufactured by the various defendants, including the former USS
Chemicals Division of USX Corporation or Aristech. Plaintiffs contend
that the alleged exposures caused physical injuries. Plaintiffs in
these cases typically seek relief in the form of monetary damages,
often in unspecified amounts. The claimed monetary damages in these
cases, when taken in the aggregate may be substantial; however,
Aristech does not believe that the claimed monetary damages are a
realistic measure of either the cost to defend or resolve the cases.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
Effective June 30, 2000, the Change in Control Agreements between
Aristech and each of Dennis R. Henderson, Edwar S. Shamshoum, Gary C.
Reed, and David Siporin were relinquished by these officers and
replaced with Executive Employment Contracts. Also effective June 30,
2000, the Company entered into Executive Employment Contracts with
Gregory Cummings and Matthew C. Cairone.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits below are numbered in accordance with the Exhibit
Table of Item 601 of Regulation S-K.
10.14 Executive Employment Contract between Gary C. Reed and
the Company dated June 30, 2000.
10.15 Executive Employment Contract between Edwar S. Shamshoum
and the Company dated June 30, 2000.
10.16 Executive Employment Contract between David Siporin and
the Company dated June 30, 2000.
27 Article 5 of Regulation S-X, Financial Data Schedule
(filed electronically with SEC only).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 2000.
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.
Aristech Chemical Corporation
By /s/ GREGORY CUMMINGS
--------------------
Gregory Cummings
Vice President and
Chief Financial Officer
August 11, 2000
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