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: 1-14601
Arch Chemicals, Inc.
(Exact name of registrant as specified in its charter)
Virginia 06-1526315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
501 Merritt 7, Norwalk, CT 06851
(Address of principal executive offices) (Zip Code)
(203) 229-2900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO
----- -----
As of April 30, 2001, there were 22,183,572 outstanding shares of the
registrant's common stock.
ARCH CHEMICALS, INC.
INDEX
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Page Numbers
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PART I. FINANCIAL INFORMATION:
---------------------
Item 1. Financial Statements.......................................... 2
Condensed Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000......................................... 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2001 and 2000.......................... 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000.......................... 4
Notes to Condensed Consolidated Financial Statements.......... 5-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 17
PART II. OTHER INFORMATION:
-----------------
Item 6. Exhibits and Reports on Form 8-K............................... 18
Signatures.............................................................. 19
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCH CHEMICALS, INC.
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
Unaudited
March 31, December 31,
2001 2000
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 10.9 $ 19.1
Accounts receivable, net 236.2 212.7
Inventories, net 156.9 164.7
Other current assets 40.9 39.2
Assets held for sale 77.8 80.1
-------- --------
Total current assets 522.7 515.8
Investments and advances - affiliated
companies at equity 32.1 32.6
Property, plant and equipment, net 325.6 330.8
Goodwill 172.4 172.8
Other assets 19.7 21.6
-------- --------
Total assets $1,072.5 $1,073.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 249.5 $ 95.8
Accounts payable 114.3 143.5
Accrued liabilities 95.6 104.2
-------- --------
Total current liabilities 459.4 343.5
Long-term debt 129.1 247.6
Other liabilities 67.3 62.7
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share,
Authorized 100.0 shares:
22.2 shares issued and outstanding
in 2001 (22.1 in 2000) 22.2 22.1
Additional paid-in capital 423.8 423.3
Retained earnings 11.0 6.5
Accumulated other comprehensive loss (40.3) (32.1)
-------- --------
Total shareholders' equity 416.7 419.8
-------- --------
Total liabilities and shareholders' equity $1,072.5 $1,073.6
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of the condensed consolidated financial statements.
2
ARCH CHEMICALS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In millions, except per share amounts)
Three Months
Ended March 31,
2001 2000
------- -------
Sales $ 255.6 $ 228.7
Cost of goods sold 182.4 164.5
Selling and administration 45.6 39.0
Amortization of intangibles 2.5 1.1
Research and development 6.4 4.0
Restructuring charge 0.8 -
Equity in (earnings) of affiliated companies (1.2) (1.9)
------- -------
Income before interest and taxes and
cumulative effect of accounting change 19.1 22.0
Interest expense 5.5 2.6
Interest income 0.1 0.1
------- -------
Income before taxes and cumulative
effect of accounting change 13.7 19.5
Income tax expense 4.6 6.6
------- -------
Income before cumulative effect of accounting change 9.1 12.9
Cumulative effect of accounting change, net of tax (0.2) -
------- -------
Net income $ 8.9 $ 12.9
======= =======
Basic and diluted earnings per common share:
Before cumulative effect of accounting change $ 0.41 $ 0.57
Cumulative effect of accounting change (0.01) -
------- -------
Basic and diluted earnings per common share $ 0.40 $ 0.57
======= =======
Weighted average common shares outstanding:
Basic 22.3 22.4
======= =======
Diluted 22.3 22.5
======= =======
Dividends declared per share $ 0.20 $ 0.20
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of the condensed consolidated financial statements.
3
ARCH CHEMICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Three Months
Ended March 31,
2001 2000
---- ----
Operating activities
- --------------------
Net income $ 8.9 $12.9
Adjustments to reconcile net income to net cash and
cash equivalents provided (used) by operating activities
net of business acquired:
Equity in earnings of affiliates (1.2) (1.9)
Depreciation 12.9 11.5
Amortization of intangibles 2.5 1.1
Deferred taxes 0.1 0.1
Deferred income - (2.4)
Restructuring charge (7.0) -
Changes in assets and liabilities:
Receivables (26.3) (46.8)
Inventories 6.5 (2.3)
Other current assets (1.8) (0.5)
Accounts payable and accrued liabilities (27.6) (5.9)
Noncurrent liabilities 1.8 3.6
Other operating activities 0.7 (2.1)
----- -----
Net operating activities from continuing operations (30.5) (32.7)
Change in net assets held for sale 2.3 -
----- -----
Net operating activities (28.2) (32.7)
----- -----
Investing activities
- --------------------
Capital expenditures (8.7) (11.3)
Business acquired in purchase transaction (2.0) -
Disposition of property, plant and equipment - 6.3
Other investing activities (0.2) (0.5)
----- -----
Net investing activities (10.9) (5.5)
----- -----
Financing activities
- --------------------
Long-term debt repayments (0.3) (1.7)
Short-term debt borrowings 35.1 47.2
Dividends paid (4.4) (4.5)
Purchases of Arch common stock - (7.7)
Other financing activities 0.9 0.1
----- -----
Net financing activities 31.3 33.4
----- -----
Effect of exchange rate changes on cash and cash equivalents (0.4) (0.1)
----- -----
Net decrease in cash and cash equivalents (8.2) (4.9)
Cash and cash equivalents, beginning of year 19.1 12.1
----- -----
Cash and cash equivalents, end of period $10.9 $ 7.2
===== =====
Supplemental cash flow information:
Taxes paid, net $ 1.4 $ 1.1
===== =====
Interest paid $ 6.6 $ 1.9
===== =====
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of the condensed consolidated financial statements.
4
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
Basis of Presentation
These condensed financial statements have been prepared by Arch Chemicals,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and, in the opinion of the Company,
reflect all adjustments (consisting of normal accruals) which are necessary to
present fairly the results for interim periods. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements,
accounting policies and the notes thereto and management's discussion and
analysis of financial condition and results of operations included in the
Company's Form 10-K for the year ended December 31, 2000. The Company's HTH
water products segment is seasonal in nature as its products are primarily used
in the U.S. residential pool market. Therefore, the results of operations for
the Company and in particular the HTH water products segment for the three
months ended March 31, 2001, are not necessarily indicative of the results to be
expected for the entire fiscal year.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 2001 presentation, including Sales and Cost of Goods Sold, which
were restated to reflect the adoption of EITF 00-10, "Accounting for Shipping
and Handling Fees and Costs," during the fourth quarter of 2000.
Inventories
March 31, December 31,
2001 2000
----------------- ----------------
Raw materials and supplies $ 51.2 $ 65.0
Work in process 22.7 23.0
Finished goods 134.5 128.8
----------------- ----------------
Inventories, gross 208.4 216.8
LIFO reserve (51.5) (52.1)
----------------- ----------------
Inventories, net $156.9 $164.7
================= ================
Approximately half of the Company's inventories are valued by the dollar
value last-in, first-out ("LIFO") method of inventory accounting. Costs for
other inventories are determined principally by the first-in, first-out method.
Elements of costs in inventories include raw materials, direct labor and
manufacturing overhead. Inventories under the LIFO method are based on an annual
determination of quantities and costs as of the year-end; therefore, the
condensed consolidated financial statements at March 31, 2001, reflect certain
estimates relating to inventory quantities and costs at December 31, 2001.
Assets Held For Sale
Assets held for sale at March 31, 2001 include the Hickson organics
division and certain land that the Company is in the process of divesting. The
valuation of the Hickson organics division includes an estimate of the cash
flows, including estimated net sales proceeds, and an allocation of interest
expense during the holding period. The Company expects to complete the sale no
later than the third quarter of 2001. Net earnings (losses) of the Hickson
organics division for the three months ended March 31, 2001 are not included in
the Consolidated Statement of Income, but have been recorded as an adjustment to
the net asset value in accordance with EITF 87-11.
5
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
The income associated with these assets held for sale for the three months ended
March 31, 2001 was $1.3. Interest expense allocated to these assets was $1.6.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options.
A reconciliation of basic and diluted weighted average common shares
outstanding is as follows (in millions):
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
Basic 22.3 22.4
Common equivalent shares from stock options
using the treasury stock method - 0.1
------------------ ------------------
Diluted 22.3 22.5
================== ==================
Stock options with exercise prices greater than the average market price of
the Company's common stock were not included in the computation of diluted
earnings per share.
Derivative Instruments and Hedging
As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The statement requires the recognition of all
derivative instruments as assets or liabilities in the Company's balance sheet
and the measurement of those instruments at fair value. The change in the fair
value of a derivative designated as a fair value hedge and the change in the
fair value of the hedged item attributable to the hedged risk are recognized in
earnings. For derivatives which qualify for designation as cash flow hedges, the
effective portion of the changes in fair value are recognized as part of other
comprehensive income until the gain or loss is realized and is recognized in
earnings. The ineffective portion of the change in fair value of cash flow
hedges is recognized in earnings. Changes in fair value for other derivatives
which do not qualify as a hedge for accounting purposes are recognized in
current period earnings.
The Company uses foreign currency forward contracts as a means of hedging
exposure to foreign currency risk. It is the Company's policy to hedge up to 80%
of its anticipated purchase and sales commitments denominated or expected to be
denominated in a foreign currency. Accordingly, the Company has purchased
forward contracts to hedge its exposure to the variability of future foreign
currency cash flows through December 2001. During the first quarter of 2001, a
portion of the Company's foreign currency forward contracts qualified as
effective cash flow hedges. The remainder of the foreign currency contracts did
not meet the criteria of SFAS 133 to qualify for effective hedge accounting. The
fair value of the foreign currency contracts is included in Other Current Assets
and Accrued Liabilities on the accompanying Consolidated Balance Sheet.
6
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
In order to manage the risks associated with the changes in natural gas
prices, the Company purchases futures contracts to hedge a portion of its
projected natural gas purchase requirements. These contracts expire on various
dates through October 2002. These contracts have been recorded at fair value and
are included in Other Current Assets on the accompanying Consolidated Balance
Sheet. As of March 31, 2001 these derivative contracts did not meet the criteria
of SFAS 133 to qualify for effective hedge accounting.
As of March 31, 2001, a portion of the Company's outstanding short-term
borrowings is denominated in British pounds and has been designated since its
inception as a hedge of the British pound net investment in the Hickson
International PLC ("Hickson") organics division. Foreign currency translation
adjustments during the three months ended March 31, 2001 include $1.3 related to
this debt instrument.
The cumulative effect of the accounting change due to the adoption of SFAS
133 as of January 1, 2001 was $0.4 before taxes or $0.2 net of tax, principally
due to interest rate swaps acquired in connection with the acquisition of
Hickson, which were cancelled in January 2001. During the three months ended
March 31, 2001, the Company recorded a loss of $0.2 in Other Comprehensive
Income related to the change in the fair market value of the derivatives
designated as effective cash flow hedges. During the three months ended March
31, 2001, the Company recorded a net gain of $0.1 in Selling, General and
Administrative expenses related to the change in fair value of derivatives which
did not qualify for hedge accounting and the change in the time value of the
forward contracts which has been excluded from the assessment of hedge
effectiveness.
Comprehensive Income
Comprehensive income includes the change in the cumulative translation
adjustment and the change in the fair value of derivative financial instruments
which qualify for hedge accounting. Comprehensive income for the three months
ended March 31, 2001 and 2000 was $0.7 and $11.3, respectively, as follows:
Three Months Ended
------------------
March 31,
---------
2001 2000
---- ----
Net income $8.9 $12.9
Foreign currency translation adjustments (8.0) (1.6)
Unrealized loss on derivative instruments (0.2) -
----------- ----------
Total other comprehensive (loss) (8.2) (1.6)
----------- ----------
Comprehensive income $0.7 $11.3
=========== ==========
The unrealized losses on derivative instruments included in Accumulated
Other Comprehensive Loss are expected to be reclassified into earnings within
the next 12 months. The Company does not provide for U.S. income taxes on
foreign currency translation adjustments since it does not provide for such
taxes on undistributed earnings of foreign subsidiaries.
7
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
Segment Information
The Company has organized its segments around differences in products and
services, which is how the Company manages its business. Segment operating
income includes the equity in earnings of affiliated companies and excludes
certain unallocated expenses of the corporate headquarters.
Three Months Ended
March 31,
2001 2000
--------------------
Sales:
Microelectronic Materials $ 54.8 $ 57.1
HTH Water Products 59.0 73.7
Treatment Products 61.2 23.0
Performance Products 63.7 39.1
Other Specialty Products 16.9 19.0
SPPI - 16.8
------ ------
Total Sales $255.6 $228.7
====== ======
Operating Income (Loss):
Microelectronic Materials $ 3.9 $ 1.6
HTH Water Products 8.7 14.4
Treatment Products 7.7 2.5
Performance Products 0.7 5.2
Other Specialty Products 0.4 1.3
SPPI - 0.2
Corporate Unallocated (2.3) (3.2)
------ ------
Total Operating Income $ 19.1 $ 22.0
====== ======
Capital Spending:
Microelectronic Materials $ 1.4 $ 4.0
HTH Water Products 2.0 1.5
Treatment Products 1.4 3.2
Performance Products 2.7 1.3
Other Specialty Products 1.2 1.3
------ ------
Total Capital Spending $ 8.7 $ 11.3
====== ======
Proforma Financial Information
During 2000, the Company acquired Hickson and Brooks Industries and sold
its subsidiary Superior Pool Products, Inc. The table below presents unaudited
pro forma financial information in connection with the 2000 acquisitions and
disposition as if they had occurred on January 1, 2000. This unaudited pro forma
financial information reflects the preliminary allocation of the excess of the
acquisition cost over the fair value of the assets and liabilities under the
purchase method of accounting for the acquisition of Hickson. The estimate of
fair values is preliminary, and is subject to change upon receipt of the final
results of an appraisal of the fair value of the assets and liabilities of
Hickson, as well as the identification of certain intangible assets. The final
determination of these
8
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
fair values, anticipated no later than the third quarter of 2001, could result
in purchase accounting adjustments, which may impact the Company's results of
operations and financial position.
The unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the acquisitions and disposition had been
completed at the dates indicated. The information does not necessarily indicate
the future operating results or financial position of the Company.
Three Months Ended
March 31, 2000
------------------------
Sales $275.1
Net income $ 14.0
Diluted income per share $ 0.62
Restructuring Charge
In 2000, the Company recorded a restructuring charge of $34.0 which
included $8.9 of costs associated with headcount reductions and contractual
vendor obligations of the process chemicals business, $14.1 related to the
biocides business for the write-off of certain costs associated with the
abandonment of construction of a facility in China, the completion of a
consolidation study, and additional headcount reductions, and $11.0 related to
headcount reductions at other businesses and corporate. Total headcount
reductions affect approximately 450 individuals. The non-cash portion of the
restructuring charges was approximately $13.
During the quarter ended March 31, 2001, $8.0 was charged against the
restructuring reserve and approximately 220 employees had been terminated. In
addition, during the three months ended March 31, 2001, the Company incurred a
charge and paid $0.8 consisting of retention payments made to employees as a
result of the Company's restructuring of the process chemicals business.
Cumulative charges against the reserve and employee terminations total $20.4 and
approximately 300, respectively. At March 31, 2001, $13.6 of restructuring
reserves were included in Accrued Liabilities in the Company's Consolidated
Balance Sheet.
The following table summarizes activity related to the restructuring
costs:
Severance Costs Asset Write-downs Other Items Total
----------------------------------------------------------------
Provision $18.0 $11.0 $5.0 $34.0
2000 Activity:
Payments 1.4 - - 1.4
Utilized - 11.0 - 11.0
----- ----- ---- -----
Balance at December 31, 2000 16.6 - 5.0 21.6
2001 Activity:
Payments 5.4 - 0.1 5.5
Reclassification to Post-employment Liability 2.5 - - 2.5
----- ----- ----- -----
Balance at March 31, 2001 $ 8.7 $ - $ 4.9 $13.6
===== ===== ===== =====
9
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
U.S. Government Contract
On April 3, 2001 the Company announced it had agreed to a new contract
with the United States Department of the Air Force to supply hydrazine-based
propellant. It is a three-year contract with two one-year renewal options
effective March 1, 2001. The contract principally consists of a fixed price
facility management fee and a product purchase arrangement whereby the Company
supplies product at a fixed price per pound of product adjusted annually for
agreed-upon cost escalations.
Commitments and Contingencies
In 1999, Olin Corporation ("Olin") and the Company entered into an
agreement, which specifies that the Company is only responsible for
environmental liabilities at the Company's current operating plant sites and
certain offsite locations. Olin retained the liability for all former plant
sites and former waste disposal sites. In connection with the acquisition of
Hickson, the Company acquired certain environmental exposures and potential
liabilities of current and past operating sites.
Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting from
investigatory studies, advances in technology, changes in environmental laws and
regulations and their application, the scarcity of reliable data pertaining to
identified sites, the difficulty in assessing the involvement and financial
capability of other potentially responsible parties and the Company's ability to
obtain contributions from other parties and the length of time over which site
remediation occurs.
There are a variety of non-environmental legal proceedings pending or
threatened against the Company. There has been no significant change in status
of such items during the three months ended March 31, 2001.
See the Company's Form 10-K for the year ended December 31, 2000 for
additional information on the above items.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
- --------
In analyzing the results of operations for the Company and its segments,
the following matters should be considered. The Company's HTH water products
segment is seasonal in nature. Historically, approximately forty-five percent of
the sales in the HTH water products business occur in the second quarter of the
fiscal year, as sales in the U.S. residential pool market are concentrated
between Memorial Day and the Fourth of July. Accordingly, results of operations
for the periods presented are not necessarily indicative of the results to be
expected for an entire fiscal year. Segment operating income includes the equity
in earnings of affiliated companies and excludes certain unallocated expenses of
the corporate headquarters.
Results of Operations
- ---------------------
Consolidated
Three Months
Ended March 31,
2001 2000
---- ----
(In millions, except per
share amounts)
Sales $255.6 $228.7
Gross Margin 73.2 64.2
Selling and Administration 45.6 39.0
Research and Development 6.4 4.0
Restructuring Charge 0.8 -
Equity in (Earnings) of Affiliated Companies (1.2) (1.9)
Interest Expense 5.5 2.6
Cumulative Effect of Accounting Change (0.2) -
Net Income 8.9 12.9
EBITDA 34.1 32.2
Basic and Diluted Income Per Share $ 0.40 $ 0.57
Weighted Average Common Stock Outstanding:
Basic 22.3 22.4
Diluted 22.3 22.5
Three Months Ended March 31, 2001 Compared to 2000
Sales increased 12%, or $27 million. The increase was due to the impact of
the acquisitions of Hickson International PLC ("Hickson") and Brooks Industries
personal care intermediates business ("Brooks") (approximately $61 million),
partially offset by the divestiture of Superior Pool Products, Inc. ("SPPI")
(approximately $17 million), and a 1% decrease in pricing and a 7% decrease in
volumes. The decrease in pricing and volumes was primarily related to the HTH
water products segment.
Gross margin percentage was 28.6% and 28.1% for 2001 and 2000,
respectively. The increase was due to the acquisitions and the disposition of a
low margin business, and higher margins in the microelectronic materials segment
due to the restructuring of the process chemicals business, partially offset by
lower margins in the performance urethanes and organics business as a result of
higher energy costs and the absence of income related to the BASF contract.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Selling and administration expenses as a percentage of sales increased to
17.8% in 2001 from 17.1% in 2000. Excluding the impact of the acquisitions and
disposition in 2000, selling and administrative expenses decreased approximately
$5 million. The decrease is primarily due to lower sales promotion and
advertising expenses at HTH water products due to timing, and lower selling
expenses associated with microelectronic materials.
Research and development expenses increased primarily due to the inclusion
of expenses related to Hickson and Brooks as well as higher expenditures
associated with HTH water products and the photopolymers business.
Restructuring charge consists of retention payments to employees associated
with the restructuring of the process chemicals business announced in the fourth
quarter of 2000.
Equity in earnings of affiliated companies decreased $0.7 million due to
lower profits from FUJIFILM Arch Co. Ltd., and Planar Solutions LLC due to
expenses incurred in connection with the commercialization of new products,
partially offset by profits from Koppers Arch Investments Pty Limited, which was
acquired as part of Hickson.
Interest expense was $5.5 million in 2001 compared to $2.6 million in 2000.
The increase was primarily due to higher debt levels directly related to the
Hickson and Brooks acquisition, as well as overall higher effective interest
rates.
The effective tax rate for the first quarter was 33% in 2001 and 34% in
2000.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased $1.9 million due to the results of the Hickson and Brooks acquisitions
and improved results from the microelectronics materials segment and biocides
business, partially offset by the exclusion of SPPI results and lower results
from the HTH water products segment and the performance urethanes and organics
business.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
and Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138.
The adoption of SFAS 133 resulted in a cumulative pre-tax reduction to income
of $0.4 million ($0.2 million after-tax).
Second Quarter and Full Year Outlook
The Company anticipates that earnings for the second quarter of 2001 will
be in the $0.75 per share range compared to $0.91 per share reported in the
second quarter of 2000, principally due to the slowing global economy and its
adverse impact on the Company's customers' end markets, as well as significantly
higher year-over-year energy costs. The improved performance expected in the
Treatment and Other Specialty Products segments will be negated by lower
year-over-year operating results principally from the HTH Water Products and
Performance Products segments, as well as higher interest expense. For the
full-year 2001, earnings per share are expected to be in the $1.75 range, which
is approximately 6% higher than the $1.66 reported in 2000 and EBITDA is
expected to be approximately $140 million. This forecast is dependent upon,
among other things, improved economic conditions in the second half, with
improvement to start in the third quarter and to strengthen in the fourth
quarter. See also "Cautionary Statement under Federal Securities Laws."
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Microelectronic Materials
Three Months
Ended March 31,
2001 2000
-------- --------
($ in millions)
Results of Operations
Sales $54.8 $57.1
Operating Income 3.9 1.6
Three Months Ended March 31, 2001 Compared to 2000
Sales decreased 4% principally due to lower process chemicals sales due to
the exiting of certain unprofitable product lines as a result of the
restructuring announced during the fourth quarter of 2000. Excluding process
chemicals, sales were comparable. The segment reported significantly improved
operating performance in 2001 compared to 2000 due to favorable raw material
pricing and lower plant spending and selling and administrative expenses as the
Company has begun to realize cost savings due to the restructuring of the
process chemicals business. Cost savings related to the restructuring were
partially offset by retention payments to employees. The restructuring is
essentially complete except for the winding-down of orders for a few customers,
which is expected to be completed no later than June 30, 2001.
HTH Water Products
Three Months
Ended March 31,
2001 2000
------------- -------------
($ in millions)
Results of Operations
HTH Water Products $59.0 $73.7
SPPI - 16.8
------------- -------------
Total Sales 59.0 90.5
HTH Water Products 8.7 14.4
SPPI - 0.2
------------- -------------
Total Operating Income 8.7 14.6
Three Months Ended March 31, 2001 Compared to 2000
Sales decreased 35% and operating income decreased 40%. Excluding the
results of SPPI, which was sold in 2000, sales and operating income decreased
20% and 40%, respectively. Sales decreased primarily due to lower branded
(HTH(R)) and non-branded calcium hypochlorite volumes, lower branded trichlor
(Pace(R)) volumes as well as lower pricing. The lower volumes were due to excess
inventory from the 2000 pool season, unfavorable weather conditions and a
consolidation of the Company's third-party distributor locations. Operating
income decreased primarily due to the lower sales and, to a lesser extent,
higher research and development costs, partially offset by lower sales promotion
and advertising expenses.
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Treatment Products
Three Months
Ended March 31,
2001 2000
-------- --------
($ in millions)
Results of Operations
Sales $61.2 $23.0
Operating Income 7.7 2.5
Three Months Ended March 31, 2001 Compared to 2000
Sales increased $38.2 million primarily due to the inclusion of sales
associated with Hickson's wood protection business and Brooks' personal care
intermediates business (approximately $36 million), and higher biocides sales.
Biocides' sales were 9% higher due to increased volumes in most markets,
principally driven by higher anti-dandruff sales and continued growth in marine
antifoulant sales. Operating income increased significantly as a result of the
acquisitions and higher biocides sales.
Performance Products
Three Months
Ended March 31,
2001 2000
-------- --------
($ in millions)
Results of Operations
Sales $63.7 $39.1
Operating Income 0.7 5.2
Three Months Ended March 31, 2001 Compared to 2000
Sales increased $24.6 million due to the inclusion of sales associated with
Hickson's coatings business (approximately $25 million), partially offset by
slightly lower performance urethanes and organics sales. Performance urethanes
and organics sales decreased 2% principally due to lower volumes of performance
polyols and softness in the Latin America market, partially offset by higher
pricing for performance polyols due to mix and higher volumes of glycol
products. Operating income decreased significantly. The operating income
contribution from the coatings business was more than offset by lower results
from performance urethanes and organics due to the lower sales, the absence of
income ($2.4 million) related to the BASF contract, which was completed on
December 31, 2000, and higher energy and manufacturing costs.
Other Specialty Products
Three Months
Ended March 31,
2001 2000
-------- --------
($ in millions)
Results of Operations
Sales $16.9 $19.0
Operating Income 0.4 1.3
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Three Months Ended March 31, 2001 Compared to 2000
Sales and operating income decreased 11% and 69%, respectively.
Hydrazine sales were 17% lower due to lower hydrazine hydrate volumes as a
result of reduced shipments in Asian markets where pricing was not advantageous,
partially offset by higher hydrazine hydrate pricing in other markets and higher
propellant revenues due to the new contract with the U.S. government. Operating
income decreased due to unabsorbed costs due to a plant shutdown, partially
offset by the effect of lower costs under the new U.S. government contract and
lower selling and administrative expenses.
Sulfuric acid sales decreased 5% due to lower volumes as a result of
refineries operating at lower than capacity. Operating income was lower
primarily due to the lower sales and higher energy costs.
Liquidity, Investment Activity and Other Financial Data
- -------------------------------------------------------
Cash Flow Data
Three Months
Ended March 31,
2001 2000
--------- ---------
($ in millions)
Provided By (Used For)
Net Operating Activities from Continuing Operations $(30.5) $(32.7)
Capital Expenditures (8.7) (11.3)
Net Investing Activities (10.9) (5.5)
Net Financing Activities 31.3 33.4
Three Months Ended March 31, 2001 Compared to 2000
For the three months ended March 31, 2001, the decrease in cash flow used
by net operating activities from continuing operations was attributable to the
Company's focus on reducing investment in working capital partially offset by
$7.0 million of payments related to the 2000 restructuring.
Capital expenditures for the first three months of 2001 decreased
significantly as compared to 2000 due to lower expenditures associated with the
microelectronic materials segment and the timing of certain capital projects in
the treatment products segment. Capital expenditures for 2001 are expected to be
in the $65 million range.
In March 2001, the Company completed the acquisition of the assets of
Walker Brothers, a division of Consolidated Coatings, for approximately $2
million in cash. In March 2000, the Company sold its building in Cheshire,
Connecticut for cash proceeds of $6.3 million.
On March 9, 2001, the Company paid a quarterly dividend of $0.20 on each
share of common stock. Total dividends paid to shareholders were $4.4 million
during the first three months of 2001.
Cash provided by financing activities in the first quarter of 2001 was
slightly lower than the first quarter 2000 due to lower borrowing for working
capital needs, partially offset by the absence of purchases of common stock in
2001.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
The Company has an unsecured $125 million revolving five-year credit
facility ("Five-year Facility"), which expires in January 2004, an unsecured
$125 million 364-day facility ("364-day Facility"), which expires in January
2002, and a $225 million revolving credit facility ("Acquisition Facility")
which expires in March 2002 which the Company used to finance the Hickson
acquisition and refinance a portion of the assumed Hickson debt (collectively
the "Credit Facilities"). It is the Company's intention to refinance the debt of
the Acquisition Facility on a long-term basis. However, due to the maturity of
the Acquisition Facility, all such borrowings thereunder have been classified as
short-term. The Credit Facilities contain leverage and interest coverage ratio
covenants, and restrict the payment of dividends and repurchases of stock in
excess of $65 million plus 50% of cumulative net income under certain
circumstances. Facility fees are payable on the Credit Facilities and range from
0.125% to 0.35%. The Company may select various floating rate borrowing options,
including, but not limited to, LIBOR plus 0.325% to 1.15%. At March 31, 2001,
the Company had approximately $106 million of available borrowings under the
Credit Facilities. The Company believes that the Credit Facilities and cash
provided by operations are adequate to satisfy its liquidity needs for the near
future.
On October 28, 1999, the Company's Board of Directors approved a stock
repurchase program whereby the Company is authorized to buy back up to 1.2
million shares of its common stock, representing approximately 5% of outstanding
shares. Through March 31, 2001, the Company had repurchased approximately
893,000 shares under this program at a cost of approximately $16 million. The
program was suspended during 2000 pending the completion of the Hickson
acquisition, including the subsequent sale of the organics business.
The Company is pursuing the sale of the organics business and expects a
transaction to be completed by September 2001. Proceeds from the sale are
expected to be used to reduce debt levels.
On April 26, 2001, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on June 8,
2001, to shareholders of record at the close of business on May 10, 2001.
Cautionary Statement under Federal Securities Laws
- --------------------------------------------------
The information in this Form 10-Q contains forward-looking statements that are
based on management's beliefs, certain assumptions made by management and
management's current expectations, estimates and projections about the markets
and economy in which the Company and its businesses operate. Words such as
"anticipates," "believes," "estimates," "expects," "forecasts," "opines,"
"plans," "predicts," "projects," "should," "targets," "will," and variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("Future Factors"), which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expected or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of future events, new
information or otherwise. Future Factors which could cause actual results to
differ materially from those discussed include but are not limited to: general
economic and business and market conditions; lack of moderate growth or even a
slight recession in the U.S. or European economies in 2001; increases in
interest rates; economic conditions in Asia; further strengthening of the U.S.
dollar against the euro; customer acceptance of new products, efficacy of new
technology, changes in U.S. laws and regulations, increased competitive and/or
customer pressure; the Company's ability to maintain chemical price increases;
higher-than-expected raw material costs for certain chemical product lines;
increased foreign competition in the calcium hypochlorite markets; lack of
stability, recovery or growth in the semiconductor industry; unfavorable court,
arbitration or jury decisions, the supply/demand balance for the Company's
products, including the impact of excess industry capacity; failure to achieve
targeted cost reduction programs; unsuccessful entry into new markets for
electronic chemicals; capital expenditures in excess of those scheduled;
environmental costs in excess of those projected; the occurrence of unexpected
manufacturing interruptions/outages at the customer's or company plants;
unfavorable weather conditions for swimming pool use; the unsuccessful
restructuring of the process chemicals
16
business; the inability of the Company to sell the Hickson organics division
at its desired price; and the unsuccessful integration of acquired businesses.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2001, the Company had forward contracts to sell foreign
currencies with notional amounts of $11.6 million and forward contracts to buy
foreign currencies with notional amounts of $16.2 million. The fair values of
these forward contracts is included in Other Current Assets and Accrued
Liabilities.
Holding other variables constant, if there were a 10 percent adverse change
in foreign currency exchange rates, the net effect on the Company's annual cash
flows would be a decrease of between $1 million to $2 million, as any increase
(decrease) in cash flows resulting from the Company's hedge forward contracts
would be offset by an equal (decrease) increase in cash flows on the underlying
transaction being hedged. The adoption of SFAS 133 may cause increased
volatility in the Company's results of operations for interim periods in the
future, if the Company changes its policies, or because some of the derivative
instruments may not meet the requirements for hedge accounting.
See the Company's Form 10-K for the year ended December 31, 2000 for
additional information on the above items.
17
ARCH CHEMICALS, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-K.
None.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 2001.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARCH CHEMICALS, INC.
--------------------
(Registrant)
May 15, 2001 By: Louis S. Massimo
----------------------
Louis S. Massimo
Vice President and Chief
Financial Officer
19