UNITED STATES
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
March 31, 2001
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 333-57170
Resolution Performance Products LLC
(Exact name of registrant as specified in its charter)
Delaware 76-0607613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Commission File Number 333-57170-01
RPP Capital Corporation
(Exact name of registrant as specified in its charter)
Delaware 76-0660306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1600 Smith Street, Suite 2400
Houston, Texas 77002
(888) 949-2502
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have 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
-------- ---------
At April 30, 2001, there were 1,000,000 outstanding membership units of
Resolution Performance Products LLC and 1,000 outstanding shares of
common stock of RPP Capital Corporation.
1
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2001 (unaudited) and
December 31, 2000 ................................................................... 3
Consolidated and Combined Statements of Income and Comprehensive Income
for the three month periods ended March 31, 2001 and 2000 (unaudited)................ 4
Consolidated Statement of Owner's Deficit for the three month period
ended March 31, 2001 (unaudited)..................................................... 5
Consolidated and Combined Statements of Cash Flows for each of the three
month periods ended March 31, 2001 and 2000 (unaudited).............................. 6
Notes to Consolidated and Combined Financial Statements (unaudited)...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders...................................... 20
Item 6. Exhibits and Reports on Form 8-K......................................................... 20
Signatures................................................................................................. 21
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED BALANCE SHEET
(in millions of U. S. dollars, except for Units)
March 31, December 31,
2001 2000
---------------- ------------
Assets (unaudited)
Current assets:
Cash and cash equivalents....................................... $ 7 $ 19
Receivables, less allowance of $3 and $3, respectively.......... 147 148
Due from related parties........................................ 4 3
Prepaid assets.................................................. 5 6
Inventories, less allowance of $6 and $7, respectively.......... 154 149
Deferred income taxes........................................... - 1
----------- ----------
Total current assets....................................... 317 326
Property and equipment, at cost, less accumulated depreciation...... 402 411
Intangible assets, at cost, less accumulated amortization........... 19 20
Investments in equity affiliates.................................... 8 10
Deferred income taxes............................................... 27 25
---------- ----------
Total assets............................................... $ 773 $ 792
========== ==========
Liabilities and Owner's Deficit
Current liabilities:
Accounts payable-trade.......................................... $ 138 $ 118
Other payables and accruals..................................... 28 27
Taxes payable................................................... 15 -
Current portion of long-term debt............................... 7 7
----------- ----------
Total current liabilities.................................. 188 152
Deferred income taxes............................................... 3 5
Interest rate swap obligation....................................... 2 -
Pensions and other retirement plan obligations...................... 30 27
Long-term debt...................................................... 622 674
---------- ----------
Total liabilities.......................................... 845 858
Commitments and contingencies (Note 8)
Owner's deficit
Member Interest, 1,000,000 units authorized, 1,000,000 units issued - -
Accumulated Deficit................................................. (37) (37)
Accumulated Other Comprehensive Loss................................ (35) (29)
---------- ----------
Total Owner's deficit ..................................... (72) (66)
---------- ----------
Total liabilities and owner's deficit ..................... $ 773 $ 792
========== ==========
See accompanying notes to consolidated and combinedfinancial statements.
3
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (unaudited)
(in millions of U.S. dollars)
Three months ended
March 31,
--------------------------
2001 2000
---------- ---------
As adjusted
(See Note 3)
Revenue.................................................................. $ 229 $ 227
Cost and expenses:
Purchase and variable product costs................................ 137 136
Operating expenses................................................. 37 40
Selling, general and administrative................................ 15 10
Depreciation and amortization...................................... 9 9
Research and development........................................... 7 5
Special charges.................................................... 8 1
---------- ----------
Total................................................... 213 201
---------- ----------
Operating income......................................................... 16 26
Income from equity investment............................................ - 1
Interest expense, net.................................................... 17 -
---------- ----------
Income (loss)before income taxes......................................... (1) 27
Income tax expense (benefit)............................................. (1) 11
---------- ----------
Net income .............................................................. $ - $ 16
========== ==========
Comprehensive income:
Net income .......................................................... $ - $ 16
Currency translation loss, net of tax................................ (4) (7)
Interest rate swap, net of tax....................................... (2) -
---------- ----------
Comprehensive income (loss).......................................... $ (6) $ 9
========== =========
See accompanying notes to consolidated and combined financial statements.
4
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED STATEMENT OF OWNER'S DEFICIT
(in million of U. S. dollars)
Accumulated Other
Member Accumulated Comprehensive
Units Deficit Loss Total
------ ---------- --------------- -------
Balance, December 31, 2000............. $ - $ (37) $ (29) $ (66)
Net income............................. - - - -
Other comprehensive loss, net of tax... - - (6) (6)
------ ---------- --------------- -------
Balance, March 31, 2001(unaudited)..... $ - $ (37) $ (35) $ (72)
====== ========== =============== =======
See accompanying notes to consolidated and combined financial statements.
5
RESOLUTION PERFORMANCE PRODUCTS LLC
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions of U. S. dollars)
Three months ended
March 31,
-------------------------------
2001 2000
---------- ----------
As adjusted
(See Note 3)
Cash flows provided by (used for) operating activities:
Net income........................................................ $ - $ 16
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization..................................... 9 9
Equity earnings in affiliates..................................... - (1)
(Increase) decrease in working capital:
Receivables, net......................................... (3) (7)
Due from related parties................................. (1) (35)
Prepaid assets........................................... 1 -
Inventories.............................................. (7) 32
Payables and accruals.................................... 28 20
Taxes payable............................................ 16 -
Deferred income taxes.................................... (3) 1
Pensions and other retirement plans obligation........... 3 -
---------- --------
Net cash provided by operating activities................ 43 35
---------- --------
Cash flows provided by (used for) investing activities:
Capital expenditures.............................................. (8) (2)
Purchase of France subsidiary..................................... (1) -
Distributions from equity affiliates.............................. 1 3
---------- --------
Net cash (used for) provided by investing activities..... (8) 1
---------- --------
Cash flows provided by (used for) financing activities:
Net cash distributions to owner................................... - (36)
Proceeds from long-term debt ..................................... 34 -
Repayments of long-term debt...................................... (81) -
---------- --------
Net cash used for financing activities................... (47) (36)
---------- --------
Net decrease in cash................................................... (12) -
Cash at beginning of period............................................ 19 0
---------- --------
Cash at end of period.................................................. $ 7 $ 0
========== ========
See accompanying notes to consolidated and combined financial statements.
6
RESOLUTION PERFORMANCE PRODUCTS LLC
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
March 31, 2001
1. Organization, Formation and Basis of Presentation
The consolidated and combined financial statements include the
consolidated operations of Resolution Performance Products LLC ("RPP LLC", or
the "Company"), and its wholly owned subsidiaries including RPP Capital
Corporation ("RPP CC") since November 1, 2000. Prior to November 1, 2000, the
financial statements include the operations of the resins business ("Resins
Business") of the Royal Dutch/Shell Group of Companies ("Shell"). RPP LLC is a
wholly owned subsidiary of Resolution Performance Products Inc. ("RPPI").
RPP CC is a wholly owned finance subsidiary of RPP LLC that was formed
in October 2000 to co-issue the 13-1/2% Senior Subordinated Notes jointly and
severally with RPP LLC. RPP CC has nominal assets and no operations.
On November 14, 2000, with an effective date of November 1, 2000, RPP
LLC acquired all of the Resins Business from Shell. On the same dates,
simultaneous with the above acquisition, RPPI was acquired by RPP Holdings LLC,
an affiliate of Apollo Management IV, L.P. ("Apollo") in a recapitalization
transaction.
The accompanying unaudited consolidated and combined financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States of America for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated and combined financial statements and notes thereto for the year
ended December 31, 2000 included in the Resolution Performance Products LLC
Registration Statement on Form S-4, as amended (file no. 333-57170), declared
effective by the Securities and Exchange Commission on May 11, 2001. Certain
amounts from prior periods have been reclassified to conform to the current
period presentation.
The accompanying unaudited consolidated and combined financial
statements have been prepared from Shell's historical accounting records and are
presented on a carve-out basis to include the historical operations applicable
to the Resins Business of Shell. In addition, the unaudited consolidated and
combined financial statements have been restated to reflect the accounting
change from LIFO to FIFO method of costing inventory.
In July 1999, Shell commenced a corporate restructuring program in
preparation for the sale of the Resins Business. Under this program, all of the
Resins Business manufacturing operations and certain of its marketing activities
were transferred into new legal entities within the Shell Group. This program
included the transfer of the manufacturing operations in The Netherlands, the
U.S. and the United Kingdom to Shell Epoxy Resins LLC and Shell Epoxy Resins
Holdings B.V. and its various non-U.S. subsidiaries. No gains or losses were
recognized on the transfer of assets and operations pursuant to this program,
given the related party nature of such transactions. The tax effects of these
transactions, resulting from changes to the tax bases of assets, have been
recorded through owner's net investment.
The unaudited consolidated and combined financial statements include
all revenues and costs directly attributable to the Resins Business, including
costs for facilities, functions and services used by the Resins Business at
shared Shell sites and costs for certain functions and services performed by
centralized Shell organizations and directly charged to the Resins Business
based on usage. The results of operations also include allocations of Shell's
general corporate expenses.
In addition, Shell provided cash management services to the Resins
Business through centralized treasury systems. As a result, all charges and cost
allocations for facilities, functions and services performed by Shell
organizations for the Resins Business are deemed to have been paid by the Resins
Business to Shell, in cash, during the
7
period in which the cost was recorded in the unaudited consolidated and combined
financial statements. Allocations of current income taxes receivable or payable
are deemed remitted, in cash, by or to Shell in the year in which the related
income taxes were recorded.
All of the allocations and estimates in the unaudited combined
financial statements are based on assumptions that Shell management believes are
reasonable under the circumstances. However, these allocations and estimates are
not necessarily indicative of the costs and expenses that would have resulted if
the Resins Business had been operated as a separate entity. It is not
practicable to estimate the costs and expenses that would have resulted on a
stand-alone basis.
The Company is engaged in manufacturing and marketing resins in the
U.S. and internationally. Resins include epoxy resins, versatic acids and
derivatives. Epoxy resins are chemicals primarily used in the manufacture of
coatings, adhesives, printed circuit boards, fiber reinforced plastics and
construction materials.
Products containing epoxy resins serve a wide range of end-users,
including automotive, aerospace, electrical, construction and industrial
maintenance. Versatic acid and derivatives are specialty products that
complement epoxy resins product offerings in the coatings, adhesives and
construction industries.
2. New Accounting Standards
Commencing January 1, 2001, the Company adopted SFAS 133 ( Accounting
for Derivative Instruments and Hedging Activities). SFAS 133, as amended by SFAS
138, requires that derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and if it is the type of
hedge transaction. The Company does not enter into derivative instruments for
trading purposes; however, interest rate swaps were entered into during the
current period in connection with the Company's credit facility. The Company
uses interest rate swaps to protect against interest rate fluctuation by fixing
the variable portion of interest rates in its credit facility. By using the
interest rate swaps to hedge interest rate cash flows, the Company exposes
itself to market risk; however market risk is managed through the setting and
monitoring of parameters that limit the types and degree of market risk which
are acceptable. As mentioned above, the Company entered into interest rate swap
agreements related to the term loan B for notional amounts of $50 million, $75
million and $100 million that fix the LIBOR portion of our interest rates at
5.41%, 5.29% and 5.41%, respectively. The duration of the interest rate swap
agreements range from 12 months to 24 months. The unaudited consolidated
statements of income for the three months ended March 31, 2001 includes interest
expense at the fixed rates stated above. The Company did not hedge interest rate
cash flows in the prior year period. At March 31, 2001, the Company recognized a
net $2 million charge in the unaudited consolidated statement of income and
comprehensive income, and consolidated statement of owner's deficit relating to
SFAS 133. This charge was primarily due to the change in the fair market value
of the Company's interest rate swaps as a result of declining interest rates.
3. Inventories of Products
Product inventories are valued at the lower of cost or net realizable
value, cost being determined using either a weighted-average or FIFO method.
Effective November 1, 2000, the Company changed its inventory accounting policy
in the U. S. from LIFO (Last In First Out) to FIFO (First In First Out). The
change was made to provide a better matching of revenues and expenses.
A retroactive restatement of prior period financial statements was made
to present financial results on a consistent basis. The change increased cost of
sales for the three months ended March 31, 2000 by $8 million.
Total inventories at March 31, 2001 and December 31, 2000 were
comprised of the following (in millions of U. S. dollars):
March 31, December 31,
2001 2000
---- ----
Raw materials............. $ 14 $ 17
Finished products......... 128 121
Materials and supplies.... 12 11
---- ----
Total............. $154 $149
==== ====
8
4. Long-term Debt
Long-term debt at March 31, 2001 and December 31, 2000 consisted of the
following (in millions of U. S. dollars):
March 31, December 31,
2001 2000
---------- -----------
Senior Subordinated Notes, net of discount............................. $ 197 $ 197
Term Loan A............................................................ 102 108
Term Loan B............................................................ 324 350
European Revolver...................................................... - 23
US Revolver............................................................ 6 3
---------- -----------
Total long-term debt.............................................. 629 681
Less current portion of long-term debt............................ (7) (7)
---------- -----------
$ 622 $ 674
========== ===========
5. Segment Information
Using guidelines set forth in SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has identified three
reportable segments based on geographic and customer information: (i) America,
(ii) Europe and Africa, and (iii) Asia Pacific and Middle East. Management
operates its business through geographic regions and is not organized nor does
it prepare discreet financial information by product line within the geographic
regions.
Selected financial data by geographic region are presented below (in
millions of U. S. dollars):
Asia
----
Pacific
-------
Europe And
------ ---
and Middle Inter-
--- ------ -----
America Africa East segment Total
------- ------ ---- ------- -----
As of and for the period ended
March 31, 2001:
Revenues from external customers........................ $ 119 $ 106 $ 4 $ -- $ 229
Intersegment revenues................................... 3 74 1 (78) --
Operating income........................................ 3 13 -- -- 16
Total assets............................................ 449 316 8 -- 773
As of and for the period ended
March 31, 2000:
Revenues from external customers........................ $ 129 $ 94 $ 4 $ -- $ 227
Intersegment revenues................................... 7 59 2 (68) --
Operating income........................................ 12 15 (1) -- 26
Total assets............................................ 406 326 11 743
Sales revenues are attributed to geographic regions based on the
location of the manufacturing facility and/or marketing company, and are not
based on location of customer. Intersegment amounts represent sales transactions
within and between geographic regions.
6. Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and
9
the tax basis of the assets and liabilities.
Prior to recapitalization of the Company, the Resins Business of Shell,
and the related tax effects thereof, are included in a number of tax returns
submitted by various Shell operating companies. There is no formal tax
allocation agreement between the various Shell operating companies and the
Resins Business. Accordingly, the tax amounts reflected in these Combined
Financial Statements have been allocated based on the amounts expected to be
paid or received from the various Shell operating companies filing tax returns
in which the Resins Business is included, with net operating loss and credit
carryforwards recorded in the event such benefits are expected to be realized by
the Shell operating companies. The provision for income taxes represents income
taxes deemed paid or received for the current year plus the change in deferred
taxes during the year, excluding effects related to Shell's corporate
restructuring program. The pro forma effect on the unaudited consolidated and
combined statement of income and comprehensive income, and owner's deficit of
reflecting the provision for income taxes on a separate return basis is not
material.
Deferred taxes result from differences between the financial and tax
bases assets and liabilities, and are adjusted for changes in tax rates and tax
laws when changes are enacted. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not
be realized by the relevant Shell operating company.
7. Special Charges
In connection with the recapitalization and related cost restructure
program, the Company expensed certain costs totaling $8 million. These costs
were primarily transitional costs that are non-recurring in nature and relate to
$3 million of severance costs and $5 million of exit/relocation costs.
8. Commitments and Contingencies
In the ordinary course of business, the Company is subject to various
laws and regulations and, from time to time, litigation. In the opinion of
management, compliance with existing laws and regulations will not materially
affect the financial position or results of operations of the Company.
Management is not aware of any pending actions against the Company.
The Company is also subject to various environmental laws and
regulations. Similar to other companies in the chemicals industry, the Company
incurs costs for preventive and corrective actions at facilities and waste
disposal sites, and those environmental costs of operations and remediation
activities are accrued on a basis consistent with the Company's accounting
policy. The Company may be obligated to take remedial action as a result of the
enactment of laws or the issuance of new regulations or to correct the effects
on the environment of disposal practices or releases of chemical substances.
Most of the expenditures to fulfill these obligations relate to facilities and
sites where past operations followed practices and procedures that were
considered appropriate under regulations, if any, existing at the time, but may
now require investigatory or remedial work to adequately protect the environment
or address new regulatory requirements. The Company has not incurred any
environmental costs in the current period.
The fact that no accrual was provided as of March 31, 2001 and
December, 31, 2000 is influenced by agreements associated with the transaction
whereby Shell will indemnify RPP LLC for environmental damages associated with
certain environmental conditions that occurred or existed before the closing
date of the recapitalization, subject to limitations. In addition, the Company
believes that it carries adequate insurance coverage, subject to certain
deductibles and limitations.
10
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Statement Regarding Forward-Looking Information
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other items in this Quarterly Report on Form 10-Q contain
forward-looking statements and information that are based on management's
beliefs, as well as assumptions made by, and information currently available to,
management. When used in this document, the words "believe", "anticipate",
"estimate", "expect", "intend", and similar expressions are intended to identify
forward-looking statements. Although management believes that the expectations
reflected in these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to have been correct. These
statements are subject to certain risks, uncertainties and assumptions,
including those discussed under the heading "-Cautionary Statements for Forward
Looking Information" and elsewhere in this report. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated. The
Company undertakes no obligation to release publicly any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in conjunction with the corresponding
sections included in the Company's Registration Statement on Form S-4 (File No.
333-57170), as amended, which was declared effective by the SEC on May 11, 2001.
The Form S-4, as amended, also includes the Company's audited consolidated and
combined financial statements and the notes thereto as of December 31, 2000 and
for each of the three years ended December 31, 2000, 1999 and 1998, as well as
other financial and operating information about our business.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated and combined statements of operations,
expressed as a percentage of revenue. Our historical results of operations for
the three months ended March 31, 2000 may not necessarily reflect what would
have occurred if our business, then owned by Shell, had been a separate,
stand-alone entity during that period. Accordingly, there can be no assurance
that the trends in the operating results will continue in the future.
Three months ended
March 31,
------------------------
2001 2000
------ ------
Revenue.................................................................. 100% 100%
Cost and expenses:
Purchase and variable product costs................................ 60 60
Operating expenses................................................. 16 17
Selling, general and administrative................................ 7 5
Depreciation and amortization...................................... 4 4
Research and development........................................... 3 2
Special charges.................................................... 3 -
----- -----
Total................................................... 93 88
Operating income......................................................... 7 12
----- -----
Income from equity investment............................................ - -
Interest expense, net.................................................... 7 -
----- -----
Income (loss) before income taxes........................................ - 12
Income tax expense (benefit)............................................. - 5
----- -----
Net income............................................................... - 7%
===== =====
Consolidated EBITDA (1).................................................. 14% 16%
===== =====
11
- ----------
(1) Consolidated EBITDA represents income (loss) before income taxes, interest
expense, net, special charges and depreciation and amortization. Consolidated
EBITDA for the periods presented corresponds with the identically titled
definition used as a measure in both the indenture and our credit agreement for
determining our compliance with covenants contained in those agreements. In
addition, Consolidated EBITDA is presented because it is used by investors to
analyze and compare operating performance and to determine a company's ability
to service and/or incur debt. However, Consolidated EBITDA should not be
considered in isolation or as a substitute for net income, cash flows or other
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or liquidity.
Consolidated EBITDA is not calculated under GAAP and therefore is not
necessarily comparable to similarly titled measures of other companies.
During the latter part of the fourth quarter of 2000 and continuing
through the current period, the United States economy began to experience a
slowdown in the manufacturing sectors. Significant portions of our customers in
the United States operate in these sectors. As a result, the U. S. chemical
industry in general and we, to a lesser extent, experienced softness in product
demand apart from expected seasonality. We believe that we experienced less
product demand softness than the U. S. chemical industry overall because epoxy
resins continue to substitute against other products as a result of its growing
number of new end-use applications. Further, the multitude of epoxy end-use
markets and the replacement of other materials with epoxy resins has served to
soften demand declines in any one end-use market. There can be no assurances
that this trend will not continue during the remaining 2001 period nor that we
will be able to realize margins we have historically achieved as feedstock costs
decline.
The following is a discussion of significant financial statement items
related to our consolidated and combined statements of income. See note 5 of the
consolidated and combined financial statements for segment information.
Revenue
Our revenue is primarily generated through the sale of our three main
product lines: (1) epoxy resins, (2) versatic acids and derivatives, and (3)
sales of BPA to third parties. In addition, we sell small amounts of ECH to
third parties. Revenue has historically been driven by volumes, market prices
and foreign currency fluctuations. Revenue also includes other income derived
primarily from royalty income and commission income.
Purchases and Variable Product Costs
Purchases and variable product costs are primarily comprised of
feedstock costs. Feedstock costs are driven primarily by market conditions and
exchange rates as volumes are generally consistent year over year. The
significant feedstocks for which we are highly sensitive to the market prices
are phenol, acetone, propylene and chlorine. We purchase chlorine, a primary raw
material for ECH, under long-term supply contracts with third parties which
provide us with producer-like economics by allowing us to buy this raw material
at a margin above production cost and thereby lower our manufacturing costs. We
also purchase propylene, the other primary raw material for ECH, under long-term
supply agreements with Shell that are based on market price less negotiated
volume discounts. We purchase phenol and acetone, the primary raw materials for
BPA, under attractive supply contracts with Shell and other third parties that
are based on discounted market prices and input-cost formulae. Because we are
co-located with Shell at several of our facilities, our transportation and
logistics costs for certain raw materials which Shell provides us are reduced.
Variable manufacturing costs, which are primarily utilities, are also a
significant component of this line item. Purchases and variable product costs
are reduced by the sale of by-products generated during the manufacturing
process, primarily hydrochloric acid.
Operating Expenses
Operating expenses represents the costs associated with the
non-variable operations of our manufacturing facilities. Included in operating
costs are personnel related costs, manufacturing overhead and periodic
maintenance, or turnaround costs. Depreciation relating to manufacturing assets
is included within depreciation and amortization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are comprised primarily of
costs associated with non-manufacturing, non-research and development
operations, including management, accounting, treasury, information
12
technology, marketing and sales, and legal. This includes costs associated with
health, safety and environmental projects.
Depreciation and Amortization
Depreciation is computed on a straight-line basis over the estimated
useful lives of the respective assets. Estimated useful lives for plant and
equipment, office buildings, tanks and pipelines are twenty years and range from
three to ten years for other assets. Amortization is computed on a straight-line
basis for intangibles such as patents.
Research and Development Expenses
Research and development expenses are costs associated with product or
customer specific initiatives and costs associated with projects that seek
improvements in manufacturing processes. Primarily all of our research and
development expenses are generated in one of our three research facilities. To
improve the investment return on our significant research and development
expenditures and improve global sharing of ideas within our business, we intend
to centrally manage all such costs.
Special Charges
Special charges consist of non-recurring type costs such as
transaction, transition and severance costs related to restructuring or cost
reduction programs.
Income from Equity Investment
Income from equity investment is related to unconsolidated equity
investees.
Interest Expense, net
For periods after the recapitalization, interest expense, net consists
of interest expense with respect to borrowings under our credit agreement and
the notes, offset by our interest income from short term cash investments.
Interest expense also includes amortization of deferred financing costs and
amortization of the discount for the notes. Historically, as part of Shell, we
did not have any debt allocated to us except for operational accounts payable.
As such, we did not have any interest expense prior to November 14, 2000.
Income Taxes
Historically, our operations have been included in the tax returns
submitted by various Shell operating companies. The tax amounts reflected in our
historical results have been allocated based on the amounts expected to be paid
or received from the various Shell operating companies filing tax returns in
which our operations were included. As of March 31, 2001 and December 31, 2000,
we have accrued for income taxes and income taxes will consist of deferred and
current income taxes. Additionally, we have made a Section 338(h)(10) election
to allow our recapitalization to be treated as an acquisition of assets for tax
purposes. Accordingly, for tax purposes the bases of our U.S. assets will be
stepped-up to their fair market values, and we will be able to depreciate our
assets using higher bases than the historical amount. This tax basis step-up
will reduce cash payments for income taxes over the next five years.
Three months Ended March 31, 2001 Compared to Three months Ended March 31, 2000
- -------------------------------------------------------------------------------
Revenue
Revenue increased by $2 million, or 0.9%, to $229 million for the three
months ended March 31, 2001 from $227 million in the prior year period. The
increase in revenue is a result of increased prices, partially offset by lower
volume. The increase in prices was attributable to increases in BPA, ECH and
versatics, partially offset by decreases in resins. Overall average prices
increased by 3% from the prior year period. The increase in prices is primarily
driven by the Company's ability to negotiate and pass on increased costs of
feedstock. Overall volumes decreased by 3% from the prior year period. Decreased
volumes are primarily the result of a slowing economy in the United States and
Asia Pacific.
13
Purchases and Variable Product Costs
Purchases and variable product costs increased by $1 million, or 0.7%,
to $137 million from $136 million in the prior year period. This increase was
largely driven by higher prices for feedstocks due to the increasing price of
crude oil and related petrochemical products.
Operating Expenses
Operating expenses decreased by $3 million, or 7.5%, to $37 million
from $40 million in the prior year period. The decrease in operating expenses is
primarily a result of lower costs for maintenance associated with several
agreements with Shell that were not in place in the prior year period. In
addition, maintenance turnaround activity was higher in the prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5 million,
or 50%, to $15 million from $10 million in the prior year period. The increase
is primarily a result of costs related to become an independent entity that
exceeds the historical allocations in the prior year period.
Depreciation and Amortization
Depreciation and amortization remained unchanged at $9 million.
Research and Development Expenses
Research and development costs increased by $2 million, or 40% to $7
million from $5 million in the prior year period. The increase is primarily due
to increased personnel and the absence of cost allocations made by Shell to
other business units in the prior year period.
Special Charges
Special charges increased by $7 million to $8 million from $1 million
in the prior year period. Transition costs for the current period consisted of
$3 million for severance costs and $5 million for exit and relocation costs
related to the cost restructure program compared to $1 million in the prior year
period. The prior year period reflects the commencement of the transition to
become an independent entity.
Operating Income
Operating income decreased by $10 million, or 38%, to $16 million from
$26 million in the prior year period. The decrease was primarily due to the
increases in purchases and variable product costs, selling, general and
administrative expenses, research and development and special charges, partially
offset by increased revenue and lower operating expenses.
Interest Expense, Net
Interest expense, net, increased by $17 million primarily due to the
increase in long-term debt resulting from the leveraged buy out
recapitalization. No debt was outstanding in the prior year period.
Income (loss) before Income Taxes
Income (loss) before taxes decreased by $28 million to a loss of $1
million from income of $27 million in the prior year period. The decrease is due
to the decrease in operating income and increased interest expense, net.
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Income Tax Expense (benefit)
Income tax expense (benefit) decreased by $12 million to a benefit of
$1 million from income tax expense of $11 million in the prior year period. The
decrease is primarily related to decreased taxable income resulting from
increased interest expense, net and increased special charges.
Net Income
Net income decreased by $16 million from net income of $16 million in
the prior year period. The decrease was due to decreased income before income
taxes, partially offset by decreased income tax expense.
Consolidated EBITDA
Consolidated EBITDA decreased $4 million to $33 million, or 11%, from
$37 million in the prior year period. The decrease was primarily related to the
increases in purchases and variable product costs, selling, general and
administrative expenses, research and development expenses, partially offset by
increased revenue and lower operating expenses. Consolidated EBITDA has not been
adjusted by the annual $7 million of previously announced projected cost
savings. During the first quarter ended March 31, 2001, we achieved $1 million
of these projected cost savings and project that we would have achieved an
additional $1 million of cost savings if these cost savings programs were in
effect at the beginning of the quarter. Including the effect of the previously
announced cost savings, Consolidated EBITDA would have been $34 million. This
financial information is being presented because it is an important measure
that, (i) management uses to analyze the business, (ii) is used in the
calculation of the covenants under the indenture and the credit facility, and
(iii) is relevant to the bondholders and lenders to analyze our financial
performance. This financial information should not be construed as being more
important than the GAAP financial data included in this filing.
Liquidity and Capital Resources
Prior to the consummation of the recapitalization, we financed our
operations through net cash provided by operating activities and contributions
and advances from Shell. We also had participated in Shell's centralized
treasury management system whereby all of our cash receipts were remitted to
Shell and all of our cash disbursements were paid by Shell. While we were owned
by Shell, we did not incur any long-term debt to fund our operations.
After the consummation of the recapitalization, we established our own
centralized treasury management system. Instead of making distributions of our
excess operating cash flow to Shell as done previously, we have been able to
retain all of our operating cash flow to finance the working capital and other
needs of our business. During the first quarter of 2001, our operating cash flow
was more than our working capital needs, and we used this excess cash to make a
$25.0 million voluntary principal payment that reduced the amount of long-term
debt outstanding under the credit agreement. We expect to continue to finance
our operations through net cash provided by operating activities, existing cash
on hand and borrowings under our revolving credit facility. As a result of the
high level of debt incurred as part of the recapitalization, we will have to
generate significant cash flows to meet our new debt service requirements.
In November 2000, RPP LLC and RPP CC issued $200 million aggregate
principal amount of 13-1/2% Senior Subordinated Notes due 2010 in a private
offering pursuant to Rule 144A under the Securities Act of 1933. The notes were
issued to bondholders at a discount of $3 million, and accordingly, we received
gross proceeds of $197 million from the offering of the notes. Subsequently, the
Company registered an identical series of notes with the Securities and Exchange
Commission and completed an exchange of the notes for the registered notes. The
notes may be redeemed in whole at any time or in part from time to time, on and
after November 15, 2005, at specified redemption prices.
The notes are senior subordinated unsecured obligations ranking junior
in right of payment to all of our existing and future senior debt and all
liabilities of our subsidiaries that do not guarantee the notes. The proceeds
from the issuance of the notes were used to finance in part the recapitalization
and related transaction costs and expenses. Interest on the notes is payable
semi-annually in cash on each May 15 and November 15, beginning May 15, 2001.
The notes
15
mature on November 15, 2010.
On November 14, 2000, RPP Inc., RPP LLC, RPP CC and Resolution
Nederland B.V. entered into a $600 million credit agreement with a syndicate of
financial institutions. The credit agreement provides for a six-year euro
equivalent $100 million (at issuance) A term loan and an eight-year $350 million
B term loan. Each term loan was fully drawn on November 14, 2000 and used to
finance the recapitalization, including certain related costs and expenses. In
addition, the credit agreement provides for a six-year $150 million revolving
credit facility, the euro equivalent of which is also available, to be used for,
among other things, working capital and general corporate purposes of us and our
subsidiaries, including without limitation, certain permitted acquisitions. The
revolving credit facility also includes a sub-limit for letters of credit in an
amount not to exceed $50 million. At March 31, 2001, we had incurred $6 million
under the revolving credit facility and had additional borrowing capacity of
$144 million.
The credit agreement is secured by substantially all current and future
assets of RPP LLC, including a pledge of 100% of the stock of our domestic
subsidiaries and 66 2/3% of the stock of our foreign subsidiaries. Our
borrowings and those of our subsidiaries under the credit agreement are
guaranteed by RPPI and borrowings by our indirect subsidiary, Resolution
Nederland B.V., are also guaranteed by us. The credit agreement requires us to
maintain certain minimum financial covenants including a minimum interest
coverage ratio and a maximum total leverage ratio. Consolidated EBITDA is a
measure used in the calculation of certain covenants under the credit agreement
and the indenture. See the "Results of Operations" section for a discussion of
Consolidated EBITDA. As of March 31, 2000, we were in compliance with each of
our financial covenants under the credit agreement. In addition, the credit
agreement is not subject to advance rates or a borrowing base limits on
availability.
Borrowings that are maintained as dollar term loans or loans under the
revolving credit facility denominated in dollars, accrue interest at either
Citibank's prime lending base rate or the eurodollar rate plus, in each case, a
margin ranging from 1.25% to 3.75%, which margin is dependent upon our leverage,
as determined on a quarterly basis. Interest rates on the borrowings maintained
as euro term loans or loans under the revolving credit facility denominated in
euros, accrue interest at the euro rate plus associated costs plus, in each
case, a margin ranging from 2.25% to 3.0% depending our leverage, as determined
on a quarterly basis.
Interest period elections generally range from one to six months, or to
the extent available, nine or twelve months for eurodollar and euro rate loans.
With respect to eurodollar loans and euro rate loans, interest is payable at the
end of each interest period or, for interest periods longer than three months,
at least every 3 months. During the current period, the Company entered into
interest rate swap agreements related to the term loan B for notional amounts of
$50 million, $75 million and $100 million that fix the LIBOR portion of our
interest rates at 5.41%, 5.29% and 5.41%, respectively.
With respect to base rate loans, interest is payable quarterly on the
last business day of each fiscal quarter. Calculation of all interest expense is
based on the actual number of days elapsed in a year comprising 360 days. For
each drawn letter of credit, we are required to pay a per annum fee equal to the
spread over the eurodollar rate for the revolving credit facility, a fronting
fee equal to 1/4 of 1% on the aggregate daily stated amount of each letter of
credit, plus administrative charges. Additionally, we will pay a commitment fee
ranging from 0.375% to 0.500% per annum, depending on our leverage ratio, which
commitment fee is payable quarterly on the unused available portion of the
revolving credit facility.
Each term loan under the credit agreement requires quarterly principal
reductions beginning on March 31, 2001. Also, we may be required to make
mandatory additional principal reductions, based on our excess cash flow and
other events described in the credit agreement.
For the period ended March 31, 2001, we generated net cash provided by
operating activities of $43 million, used cash in investing activities of $8
million and used cash in financing activities of $47 million. Investing
activities for all periods primarily consisted of expenditures for property,
plant and equipment. For the period ended March 31, 2000, we generated net cash
provided by operating activities of $35 million, provided cash in investing
activities of $1 million and used cash in financing activities of $36 million.
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Expenditures for property, plant and equipment totaled $8 million and
$2 million for the periods ending March 31, 2001, and 2000, respectively. Of the
$8 million, $2 million was related to maintenance and $6 million was for
projects related to growth and improved profitability, primarily related to an
investment in our versatics business to improve the quality of these
manufacturing assets. In addition, the Company spent $1 million in connection
with the purchase of Shell Epoxy Resins France SAS.
Because we have an established infrastructure in place, our capital
expenditures are generally not for the building of new plants but for their
maintenance and occasional incremental expansion where justified by the expected
return on investment. Capital expenditures for maintenance have historically
been relatively low at $9 million to $16 million per year, and we expect this to
continue for the next three to five years.
The high level of debt incurred as a result of the recapitalization may
preclude us from borrowing any more funds. Based on our current level of
operations and anticipated growth and cost savings, management believes that our
cash flow from operations, together with existing cash and cash equivalents on
hand and future borrowings under our revolving credit facility, if necessary,
will be sufficient to fund our working capital needs and expenditures, for
property, plant and equipment and debt service obligations, although no
assurance can be given in this regard.
Environmental
Our business is subject to various federal, state, local and foreign
laws and regulations which govern environmental health and safety-related
matters. Compliance with these laws and regulations requires substantial
continuing financial commitments and planning. Moreover, the laws and
regulations directly affect how we operate our business.
As of March 31, 2001, the Company has assessed that an environmental
liability accrual is not needed based on the current available facts, present
laws and regulations, and current technology. The Company accrues for
environmental liabilities when the liability is probable and the costs are
reasonably estimable. Expensed environmental costs were less than $1 million in
2000, 1999 and 1998.
The fact that no accrual was provided as of March 31, 2001 is
influenced by agreements associated with the recapitalization whereby Shell
generally will indemnify us for environmental damages associated with certain
environmental conditions that occurred or existed before the closing date of the
recapitalization, subject to certain limitations. In addition, management
believes that we maintain adequate insurance coverage, with deductibles, for
environmental remediation activities.
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Inflation and Seasonality
Certain of our expenses, such as feedstocks and other raw materials
used in the production of final products, supplies, maintenance and repairs and
compensation and benefits, are subject to normal inflationary pressures.
Although to date we have been able to offset inflationary cost increases through
operating efficiencies and price increases, there can be no assurance that we
will be able to offset any future inflationary cost increases through these or
similar means. Our revenues and earnings are moderately seasonal, with the
second and third quarters generally providing stronger results. Such seasonality
has also been customary in the chemical industry in general, and we expect this
trend to continue in future periods.
Cautionary Statements for Forward-Looking Information
Certain information set forth in this report contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements include statements
concerning our plans, objectives, goals, strategies, future events, future
revenues or performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, business trends, and other information that
is not historical information in particular, appear under the heading "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations". When used in this report, the words "estimates," "expects,"
"anticipates," "forecasts," "plans," "intends," "believes" and variations of
such words or similar expressions are intended to identify forward-looking
statements. We may also make additional forward-looking statements from time to
time. All such subsequent forward-looking statements, whether written or oral,
by us or on our behalf, are also expressly qualified by these cautionary
statements.
All forward-looking statements, including, without limitation,
management's examination of historical operating trends, are based upon our
current expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them. However, there can be no assurance that management's
expectations, beliefs and projections will result or be achieved. All
forward-looking statements apply only as of the date made. We undertake no
obligation to publicly update or revise forward-looking statements which may be
made to reflect events or circumstances after the date made or to reflect the
occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our
actual results to differ materially from the forward-looking statements
contained in or contemplated by this report. Such risks, uncertainties and other
important factors include, among others:
o general economic and business conditions;
o industry trends;
o increases in our leverage;
o changes in our ownership structure;
o restrictions contained in our debt agreements;
o the cost of developing our own stand-alone systems and infrastructure;
o the continuity or replacement of systems and services being provided
to us by Shell or its affiliates;
o changes in business strategy, development plans or cost savings plans;
o competition;
18
o changes in distribution channels or competitive conditions in the
markets or countries where we operate;
o the highly cyclical nature of the end-use markets in which we
participate;
o the loss of any of our major customers;
o raw material costs and availability;
o ability to attain and maintain any price increases for our products;
o changes in demand for our products;
o availability of qualified personnel;
o foreign currency fluctuations and devaluations and political
instability in our foreign markets;
o the loss of our intellectual property rights;
o availability, terms and deployment of capital;
o changes in, or the failure or inability to comply with, government
regulation, including environmental regulations; and
o increases in the cost of compliance with laws and regulations,
including environmental laws and regulations.
These risks and certain other uncertainties are discussed in more
detail in our Registration Statement on Form S-4, as amended (File No.
333-57170), which was declared effective by the SEC on May 11, 2001. There may
be other factors, including those discussed elsewhere in this report, that may
cause our actual results to differ materially from the forward-looking
statements. Any forward-looking statements should be considered in light of
these factors.
19
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk
We are engaged in manufacturing and marketing resins in the U. S.
and internationally. As a result, the Company is exposed to certain market
risks that include financial instruments such as foreign currency,
short-term investments, trade receivables, and long-term debt. The Company
does not enter into derivative instruments for trading purposes, however,
Interest Rate Swaps were entered into during the current period in
connection with the Company's credit facility. The Interest Rate Swap
protects the Company against interest rate fluctuation by fixing the credit
facility interest rate from a variable interest rate. The credit facility
balance includes $207 million at March 31, 2001 that is subject to variable
interest rates. Assuming no change in credit facility borrowings, a one
hundred basis point changes in interest rates would impact net interest
expense by approximately $2.1 million per year.
Effects of Currency Fluctuations
We conduct operations in countries around the world. Therefore, our
results of operations are subject to both currency transaction risk and currency
translation risk. We incur currency transaction risk whenever we enter into
either a purchase or sales transaction using a currency other than the local
currency of the transacting entity. With respect to currency translation risk,
our financial condition and results of operations are measured and recorded in
the relevant domestic currency and then translated into U.S. dollars for
inclusion in our consolidated and combined financial statements. Exchange rates
between these currencies and U.S. dollars in recent years have fluctuated
significantly and may do so in the future. The majority of our revenues and
costs are denominated in U.S. dollars, with euro-related currencies also being
significant. For the three months ended March 31, 2001, 48% of our total
revenues and 45% of our total expenses were from companies incorporated outside
the United States. For the three months ended March 31, 2000, 43% of our total
revenues and 42% of our total expenses were from companies incorporated outside
the United States. The net depreciation of the Netherlands Guilder against the
U.S. dollar and other world currencies since 1997 has had a negative impact on
our earnings, as reported in U.S. dollars in our consolidated and combined
financial statements. Historically, we have not undertaken hedging strategies to
minimize the effect of currency fluctuations. Significant changes in the value
of the Netherlands Guilder relative to the U.S. dollar could also have an
adverse effect on our financial condition and results of operations and our
ability to meet interest and principal payments on euro-denominated debt,
including certain borrowings under the credit agreement, and U.S. dollar
denominated debt, including the Notes and certain borrowings under the credit
agreement.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
By Written Action of Sole Shareholder in Lieu of Meeting dated
March 2, 2001, RPP LLC, as sole shareholder of RPP CC, adopted resolutions
electing Marvin O. Schlanger as a Director of RPP CC. All votes were cast in
favor of Mr. Schlanger, and there were no broker non-votes with respect to this
matter, which was the only action to be taken by the sole shareholder.
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits filed with this report
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOLUTION PERFORMANCE PRODUCTS LLC
Date: May 14, 2001 By: /s/ J. Travis Spoede
-------------------------------------
J. Travis Spoede, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
RPP CAPITAL CORPORATION
Date: May 14, 2001 By: /s/ J. Travis Spoede
-------------------------------------
J. Travis Spoede, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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