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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, 1998
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)
600 Grant Street, Pittsburgh, Pennsylvania 15219-2704
(Address of principal executive offices)
Registrant's Telephone Number: (412) 433-2747
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 July 31, 1998: 14,908 shares
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INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
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ARISTECH CHEMICAL CORPORATION
Consolidated Statements of Income (Unaudited)
(Dollars in Millions)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Sales $208.9 $232.1 $433.1 $458.4
Operating Costs:
Cost of sales 167.0 190.2 341.3 383.0
Selling, general and administrative expenses 15.2 13.6 29.6 26.6
Depreciation and amortization 13.0 12.1 26.0 24.2
--------- --------- --------- ---------
Total Operating Costs 195.2 215.9 396.9 433.8
--------- --------- --------- ---------
Operating Income 13.7 16.2 36.2 24.6
Gain (Loss) on Disposal of Assets 0.2 -- (1.2) --
Other Income (Expense), Net (0.3) (0.1) (0.3) (1.0)
Interest Income 0.5 -- 0.8 --
Interest Expense (7.2) (6.1) (13.9) (11.7)
--------- --------- --------- ---------
Income Before Taxes on Income 6.9 10.0 21.6 11.9
Provision for Taxes on Income 3.2 4.5 9.2 5.4
--------- --------- --------- ---------
Income Before Minority Interest 3.7 5.5 12.4 6.5
Minority Interest 0.7 -- 1.4 --
--------- --------- --------- ---------
Net Income $ 3.0 $ 5.5 $ 11.0 $ 6.5
========= ========= ========= =========
The accompanying 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,
1998 1997
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 5.3 $ 3.9
Receivables (less allowance for doubtful accounts of $.1
at June 30, 1998 and $.6 at December 31, 1997) 6.8 105.8
Receivables - related parties -- 8.4
Subordinated note receivable - related party 21.2 --
Inventories 125.2 123.5
Other current assets 1.3 1.4
---------- ----------
Total Current Assets 159.8 243.0
Property, plant and equipment, net of accumulated depreciation 751.6 662.8
Long-term receivables 8.1 7.9
Excess cost over assets acquired 164.8 167.4
Deferred income taxes 1.4 1.4
Other assets 17.8 15.0
---------- ----------
Total Assets $ 1,103.5 $ 1,097.5
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 64.5 $ 87.5
Accounts payable-related parties 3.8 1.6
Payroll and benefits payable 10.2 9.2
Accrued taxes 7.2 6.1
Deferred income taxes 3.9 3.9
Short-term borrowings 45.1 42.3
Long-term debt due within one year 0.6 0.6
Other current liabilities 14.2 16.9
---------- ----------
Total Current Liabilities 149.5 168.1
Long-term debt-related parties 202.0 187.0
Long-term debt-other 178.4 178.7
Deferred income taxes 160.8 162.9
Other liabilities 40.6 37.0
---------- ----------
Total Liabilities 731.3 733.7
---------- ----------
Minority Interest 4.4 3.0
---------- ----------
Common stock ($.01 par value, 20,000 shares authorized,
14,908 shares issued at June 30, 1998, and December 31, 1997) -- --
Additional paid-in capital 386.3 386.3
Retained deficit (18.5) (25.5)
---------- ----------
Total Stockholders' Equity 367.8 360.8
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,103.5 $ 1,097.5
========== ==========
The accompanying 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,
1998 1997
---- ----
Cash Flow From Operating Activities:
Net Income $ 11.0 $ 6.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 23.4 21.6
Amortization of excess cost over assets acquired 2.6 2.6
Deferred income taxes (2.1) (0.4)
Discount on sale of receivables 2.0 --
Loss on disposal of assets 1.4 --
(Increase) decrease in receivables 1.8 (18.4)
(Increase) decrease in inventories (1.7) 4.1
Increase (decrease) in accounts payable
and other current liabilities (23.5) 0.8
Minority interest in consolidated subsidiary 1.4 --
Other 3.3 (0.4)
-------- --------
Net Cash Provided by Operating Activities 19.6 16.4
Cash Flows From Investing Activities:
Capital expenditures (114.0) (39.9)
Other (0.1) (1.5)
-------- --------
Net Cash Used In Investing Activities (114.1) (41.4)
Cash Flows From Financing Activities:
Net increase in short-term borrowings 2.8 1.6
Repayment of long-term debt (0.3) (100.0)
Proceeds from issuance of long-term debt 15.0 131.0
Net proceeds from sale of receivables 82.4 --
Dividends paid (4.0) (8.3)
-------- --------
Net Cash Provided by Financing Activities 95.9 24.3
Net Increase (Decrease) in Cash and Equivalents 1.4 (0.7)
Cash and Equivalents, Beginning of Year 3.9 1.9
-------- --------
Cash and Equivalents, End of Period $ 5.3 $ 1.2
======== ========
The accompanying notes are an integral part of these financial statements.
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ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Aristech
Chemical Corporation (the "Company") and its majority owned
subsidiaries. All intercompany accounts and transactions have been
eliminated. Certain amounts previously reported in financial statement
captions have been reclassified to conform with the 1998 presentation.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130 "Reporting Comprehensive Income" in 1997. Adoption had no effect
on the Company's financial position or results of operations.
In June 1997, SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" was issued. SFAS No. 131 is effective for
financial statements issued for periods beginning after December 15,
1997. The Company has not yet determined the effect of this standard on
its financial reporting.
In February 1998, SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" was issued. SFAS No. 132 is effective
for annual financial statements issued for periods beginning after
December 15, 1997. The Company has not yet determined the effect of this
standard on its financial reporting.
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has
not yet determined the effect of this standard on its financial
reporting.
In the opinion of management, the unaudited financial information
reflects all adjustments necessary to fairly state the results of
operations and the changes in financial position for such interim
period. Such adjustments are of a normal recurring nature.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount 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.
2. NATURE OF OPERATIONS
The Company's operations are conducted in one business segment, the
production and marketing of chemical and polymer products. The major
chemical products include phenol, acetone, bisphenol A, aniline,
phthalic anhydride, 2-ethylhexanol and plasticizers. Major polymer
products include polypropylene and acrylic sheet. Approximately 85% of
the total sales are of products that the Company considers to be
commodity chemicals. The Company's products are generally sold for
further processing by manufacturers of automotive components,
construction materials and consumer products.
The Company's product line provides it with a diverse revenue base. The
Company does not derive significant revenue from any single customer.
International sales are made primarily to Japan, Canada and Taiwan.
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ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
3. INVENTORIES
Inventories consist of the following at June 30, 1998, and December 31,
1997:
June 30, December 31,
1998 1997
---- ----
(Unaudited)
(In millions)
Raw materials $ 35.4 $ 35.9
Finished products 74.8 68.0
Supplies and sundry items 19.8 19.6
Lower of cost or market reserve (4.8) --
-------- --------
$ 125.2 $ 123.5
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4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at June 30,
1998, and December 31, 1997:
June 30, December 31,
1998 1997
---- ----
(Unaudited)
(In millions)
Land $ 14.1 $ 13.9
Buildings 60.1 54.8
Machinery and equipment 817.7 806.6
Construction in process 160.2 70.0
---------- --------
Total property, plant and equipment 1,052.1 945.3
Less accumulated depreciation 300.5 282.5
---------- --------
Net property, plant and equipment $ 751.6 $ 662.8
========== ========
5. DEBT
Debt consists of the following at June 30, 1998, and December 31, 1997:
Interest June 30, December 31,
Maturity Rate 1998 1997
-------- ---- ---- ----
(Unaudited)
(In millions)
Term Loan - MIC 2002 Variable $ 50.0 $ 50.0
Revolving Loan - MIC 2002 Variable 152.0 137.0
6-7/8% Notes 2006 6.875% 149.1 148.9
Note Payable to Avonite
Stockholder 2006 Variable 12.4 12.4
Priority Promissory Note 2006 Variable 1.2 1.2
Industrial Revenue Bond 2008 Variable 0.5 0.6
Capital lease obligations 1998-2017 15.8 16.2
-------- --------
381.0 366.3
Less amount due within one year 0.6 0.6
-------- --------
Total $ 380.4 $ 365.7
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ARISTECH CHEMICAL CORPORATION
Notes to the Consolidated Financial Statements
6. ACCOUNTS RECEIVABLE FINANCING
The Company participated in an accounts receivable financing program
under which the Company initially sold interest in a defined pool of
$112.0 million of trade accounts receivable on a nonrecourse basis to
Aristech Receivables Company LLC (hereinafter "ARC"), a Delaware limited
liability company in which Aristech holds a 100% ownership interest. ARC
sold an undivided interest in the trade receivables to Delaware Funding
Corporation (hereinafter "DFC") on a nonrecourse basis, which provided a
revolving financing facility for a maximum of $100.0 million. Initial
proceeds from the sale amounted to $91.5 million and were used primarily
to reduce the amount outstanding on the Revolving Loan - MIC. Generally,
an undivided interest in new accounts receivable are sold monthly as
existing accounts receivable are collected, creating a revolving credit
facility. Accounts receivable sold under the program, including related
party receivables of $5.3 million, are not included in the accompanying
balance sheet at June 30, 1998.
7. COMMITMENTS AND CONTINGENCIES
Contractual commitments for capital expenditures for property, plant and
equipment totaled $246.3 million at June 30, 1998, and $291.3 million at
December 31, 1997.
The Company is obligated to indemnify USX Corporation ("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 the Company in 1986, including liabilities under laws relating to the
protection of the environment and the workplace. Such liabilities have
been provided for in the consolidated financial statements.
As of June 30, 1998, and December 31, 1997, the Company had outstanding
irrevocable standby letters of credit in the amount of $4.8 million and
$5.6 million, respectively, primarily in connection with environmental
matters.
The Company is a defendant in a patent infringement suit filed by
Phillips Petroleum Company ("Phillips") in 1987, in the United States
District Court for the Southern District of Texas, captioned Phillips
Petroleum Company v. Aristech Chemical Corporation, Civil Action No.
H87-3445. The complaint alleges infringement of two patents related to
the production of polypropylene, which have since expired. The Company
and Phillips each filed motions for summary judgment which were referred
to a Special Master. The Special Master issued a lengthy recommendation
to find in the Company's favor, and Phillips filed a motion to reject
the Special Master's recommendation. A hearing on this motion was held
on October 21, 1996. On November 13, 1996, the District Court granted
the Company's motion for summary judgment and entered an order to that
effect on November 19, 1996. A final judgment was entered in Aristech's
favor on December 23, 1996. Phillips is appealing the judgment. The
Company believes that the outcome of this matter will not have a
material adverse effect on the Company.
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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.
Net sales decreased by $23.2 million or 10.0% from $232.1 million for the three
months ended June 30, 1997 to $208.9 million for the three months ended June 30,
1998. This reduction in sales, when compared to the same three month period for
1997, was caused primarily by decreases in the average selling prices for the
Company's chemical and polymer products of 12.8% and 25.3%, respectively,
despite overall increases in shipment volume of 2.8% and 7.8 %, respectively.
Cost of sales decreased by $23.2 million for the three months ended June 30,
1998 as compared with the same period in 1997, primarily due to lower feedstock
costs.
Selling, general and administrative expenses increased by $1.6 million for the
three months ended June 30, 1998 as compared with the three month period ended
June 30, 1997 and primarily reflects increased sales and marketing efforts and
costs associated with the Company's year 2000 readiness plan.
Operating income for the three month period ended June 30, 1998 decreased by
$2.5 million or 15.4% from the same three month period ended June 30, 1997. The
decrease was primarily due to the increased selling, general and administrative
expenses noted above and an increase in the depreciation expense of $0.9 million
due to the Company's increased capital spending.
The Company's interest expense increased by $1.1 million or 18.0% from $6.1
million at June 30, 1997 to $7.2 million at June 30, 1998. The increase in
interest expense resulted from net cash proceeds of $82.4 million being
generated from the April 1998 discounted sale of undivided interests in a
revolving pool of the Company's outstanding trade receivables. These proceeds
were used primarily to finance the Company's production capacity expansions.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Net sales decreased by $25.3 million or 5.5% from $458.4 million for the six
months ended June 30, 1997 to $433.1 million for the six months ended June 30,
1998. This reduction was caused by the decrease in the average selling prices
for the Company's chemical and polymer products during the second quarter of
1998 as noted above, again despite overall increases in Company shipment volume
from the same period in 1997. However, the Company's operating income for the
six months ended June 30, 1998 increased by $11.6 million or 47.2% to $36.2
million for the six months ended June 30, 1998 from $24.6 million for the same
six month period ended June 30, 1998. The increase in operating income was
primarily due to certain increased product margins that occurred during the
first quarter of 1998.
Selling, general and administrative expenses as a percent of sales increased to
6.8% for the six months ended June 30, 1998 as compared with 5.8% for the same
period in 1997, and primarily reflects increased sales and marketing efforts and
costs associated with the Company's year 2000 readiness plan.
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Interest expense increased by $2.2 million or 18.8% to $13.9 million for the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997 due
primarily to the April 1998 sale of trade receivables to finance the Company's
production capacity expansions.
The provision for estimated taxes for the six months ended June 30, 1998 was
$9.2 million, compared to $5.4 million for the six months ended June 30, 1997.
However, the Company's effective tax rate decreased 2.8% to 42.6% at June 30,
1998 from 45.4% at June 30, 1997 as higher pre-tax income minimized the effect
of permanent tax differences in the calculation of the Company's effective tax
rate.
FINANCIAL CONDITION
Liquidity and Capital Resources
During the six month period ended June 30, 1998, the Company's working capital
balance decreased by $64.6 million from its December 31, 1997 balance of $74.9
million. The decrease in working capital resulted from net cash proceeds of
$82.4 million being generated from the aforementioned sale of trade receivables,
offset by a $18.6 million reduction in current liabilities.
Net cash provided by operations increased to $19.6 million for the six months
ended June 30, 1998 as compared to $16.4 million for the same period in 1997.
The increase in cash flows from operations was driven primarily by the $4.5
million increase in the Company's net income to $11.0 million for the six months
ended June 30, 1998 as compared to $6.5 million for the six months ended June
30, 1997. The cash flow provided by operations combined with the cash flow
provided by financing activities of $95.9 million was used primarily to fund the
Company's capital expenditures of $114.0 million for the six months ended June
30, 1998.
As of June 30, 1998, the Company has outstanding commitments through the fourth
quarter of 1999 for capital expenditures totaling $246.3 million. The Company
anticipates that future working capital needs and the balance of outstanding
commitments will be funded by additional cash flows from operations, additional
borrowings on the Company's revolving loan from Mitsubishi International
Corporation, and a recently established additional revolving loan with a
financial institution with a committed amount of $150.0 million.
Year 2000
The Company, like many owners of computer systems, will be required to modify
portions of its systems so that they will function properly in the year 2000. In
executing its year 2000 readiness plan, the Company is utilizing both internal
and external resources to identify, correct or reprogram, and test its systems
for year 2000 compliance. It is anticipated that all remediation efforts will be
complete allowing adequate time for testing. Maintenance or modification costs
will be expensed as incurred, while the cost of new software will be capitalized
and amortized over the software's useful life. The Company does not expect the
amount expensed to have a material effect on its financial position or results
of operations. The Company estimates that 45% of the systems are compliant
and anticipates that the readiness plan will be fully implemented by August
1999.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 1998, the Company was not a party to any material derivative
financial instruments or any other market risk sensitive instruments, other than
the trade accounts receivable and trade accounts payable that by their nature
mature within one year, inventory that is not subject to commodity price risk,
and the long-term debt which is discussed in Note 5 to the financial statements.
The Company's exposure to market risk is minimal with regards to its trade
accounts receivable, trade accounts payable, inventory and long-term debt.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 7 to the Financial Statements.
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
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
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/ MICHAEL J. PRENDERGAST
------------------------------
Michael J. Prendergast
Acting Chief Financial Officer
August 4, 1998
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