SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 October 31, 2001, there were 22,191,843 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 September 30, 2001
and December 31, 2000 2
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 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 11-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCH CHEMICALS, INC.
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
Unaudited
September 30, December 31,
2001 2000
------------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 7.5 $ 19.1
Accounts receivable, net 192.5 212.7
Inventories, net 125.3 164.7
Other current assets 31.3 39.2
Assets held for sale 58.2 80.1
------ --------
Total current assets 414.8 515.8
Investments and advances - affiliated companies at equity 24.8 32.6
Property, plant and equipment, net 331.8 330.8
Goodwill 133.3 172.8
Other intangibles 63.1 10.5
Other assets 12.4 11.1
------ --------
Total assets $980.2 $1,073.6
====== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $224.3 $ 95.8
Accounts payable 95.6 143.5
Accrued liabilities 84.5 104.2
------ --------
Total current liabilities 404.4 343.5
Long-term debt 93.8 247.6
Other liabilities 69.2 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 424.1 423.3
Retained earnings 9.1 6.5
Accumulated other comprehensive loss (42.6) (32.1)
------ --------
Total shareholders' equity 412.8 419.8
------ --------
Total liabilities and shareholders' equity $980.2 $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 Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
------- ------- ------- -------
Sales $ 208.5 $ 208.9 $ 749.0 $ 719.7
Cost of goods sold 156.6 156.3 534.0 523.1
Selling and administration 47.9 40.2 150.0 122.4
Amortization of intangibles 2.6 1.4 7.6 3.7
Research and development 6.4 4.4 18.8 12.1
Equity in (earnings) of affiliated companies (0.9) (2.3) (2.2) (5.9)
Special items:
Restructuring -- 7.5 0.6 7.5
Other (gains) and losses 1.0 (8.4) 1.0 (8.4)
------- ------- ------- -------
Income (loss) from continuing operations before interest,
taxes and cumulative effect of accounting change (5.1) 9.8 39.2 65.2
Interest expense 4.1 3.0 14.9 8.6
Interest income 0.2 0.2 0.6 0.4
------- ------- ------- -------
Income (loss) from continuing operations before taxes and
cumulative effect of accounting change (9.0) 7.0 24.9 57.0
Income tax expense (benefit) (2.3) 2.4 9.0 19.4
------- ------- ------- -------
Income (loss) from continuing operations before cumulative
effect of accounting change (6.7) 4.6 15.9 37.6
Income from discontinued operations, net of tax 0.2 -- 0.2 --
Cumulative effect of accounting change, net of tax -- -- (0.2) --
------- ------- ------- -------
Net income (loss) $ (6.5) $ 4.6 $ 15.9 $ 37.6
======= ======= ======= =======
Basic income (loss) per common share:
Continuing operations before cumulative effect
of accounting change $ (0.30) $ 0.21 $ 0.71 $ 1.69
Discontinued operations 0.01 -- 0.01 --
Cumulative effect of accounting change -- -- (0.01) --
------- ------- ------- -------
Basic income (loss) per common share $ (0.29) $ 0.21 $ 0.71 $ 1.69
======= ======= ======= =======
Diluted income (loss) per common share:
Continuing operations before cumulative
effect of accounting change $ (0.30) $ 0.21 $ 0.71 $ 1.68
Discontinued operations 0.01 -- 0.01 --
Cumulative effect of accounting change -- -- (0.01) --
------- ------- ------- -------
Diluted income (loss) per common share $ (0.29) $ 0.21 $ 0.71 $ 1.68
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 22.3 22.2 22.3 22.3
======= ======= ======= =======
Diluted 22.3 22.2 22.3 22.3
======= ======= ======= =======
Dividends declared per share $ 0.20 $ 0.20 $ 0.60 $ 0.60
======= ======= ======= =======
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)
Nine Months
Ended September 30,
2001 2000
---- ----
Operating activities
- --------------------
Net income $15.9 $ 37.6
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities,
net of businesses acquired:
Income from discontinued operations (0.2) --
Equity in earnings of affiliates (2.2) (5.9)
Depreciation 37.0 36.0
Amortization of intangibles 7.6 3.8
Deferred taxes 6.3 8.4
Deferred income -- (7.2)
Restructuring charge 0.6 7.5
Restructuring payments (13.5) --
Other (gains) and losses 1.0 (8.4)
Changes in assets and liabilities:
Receivables 18.0 2.2
Inventories 38.4 16.5
Other current assets 1.1 (1.6)
Accounts payable and accrued liabilities (47.4) (13.7)
Noncurrent liabilities (1.6) (0.3)
Other operating activities 1.4 (2.9)
----- ------
Net operating activities from continuing operations 62.4 72.0
Change in net assets held for sale (2.7) 4.5
----- ------
Net operating activities 59.7 76.5
----- ------
Investing activities
- --------------------
Capital expenditures (30.2) (43.2)
Businesses acquired in purchase transaction, net of cash acquired (2.9) (140.5)
Proceeds from sale of business -- 21.1
Disposition of property, plant and equipment -- 6.3
Investments and advances - affiliated companies at equity -- (3.4)
Other investing activities 1.1 3.2
----- ------
Net investing activities (32.0) (156.5)
----- ------
Financing activities
- --------------------
Long-term debt borrowings/(repayments), net (35.4) 137.2
Short-term debt borrowings/(repayments), net 10.4 (20.8)
Dividends paid (13.3) (13.4)
Purchases of Arch common stock -- (9.5)
Other financing activities 1.4 0.4
----- ------
Net financing activities (36.9) 93.9
----- ------
Effect of exchange rate changes on cash and cash equivalents (2.4) (2.5)
----- ------
Net (decrease) increase in cash and cash equivalents (11.6) 11.4
Cash and cash equivalents, beginning of year 19.1 12.1
----- ------
Cash and cash equivalents, end of period $ 7.5 $ 23.5
===== ======
Supplemental cash flow information
- ----------------------------------
Taxes paid, net $ 2.6 $ 8.2
===== ======
Interest paid $20.9 $ 8.0
===== ======
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 consolidated 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 and nine months ended September 30, 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
September 30, December 31,
2001 2000
----------------- ------------------
Raw materials and supplies $ 43.8 $ 65.0
Work in process 25.1 23.0
Finished goods 102.5 128.8
----------------- ------------------
Inventories, gross 171.4 216.8
LIFO reserve (46.1) (52.1)
----------------- ------------------
Inventories, net $125.3 $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 September 30, 2001, reflect
certain estimates relating to inventory quantities and costs at December 31,
2001.
During the three and nine months ended September 30, 2001, inventory level
reductions resulted in a liquidation of LIFO inventory layers carried at lower
costs which prevailed in prior years, which are not expected to be replenished
in the fourth quarter. The effect of the liquidations was to decrease cost of
goods sold by approximately $3.0 and $4.0 for the three and nine months ended
September 30, 2001, respectively.
Assets Held For Sale/Discontinued Operations
Assets held for sale at September 30, 2001 include the Hickson
International PLC ("Hickson") organics division and certain land that the
Company is in the process of divesting. The valuation of the Hickson organics
division at the acquisition date includes an estimate of the cash flows,
including estimated net sales proceeds, and an allocation of interest expense
during the holding period. Net earnings (losses) of the Hickson organics
division from the acquisition date through August 31, 2001 are not included in
the Condensed Consolidated Statements of Income, but have been recorded as an
adjustment to the net asset value in accordance with EITF 87-11.
5
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
The Company continues to actively work on completing the sale of these
assets, but due to current market conditions the Company was not able to sell
these assets within a one-year period after acquisition. Therefore, effective
September 1, 2001, the Company was required to discontinue its initial
accounting and begin reporting the results of this division as a discontinued
operation in accordance with APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" and EITF No. 90-6,
"Accounting For Certain Events Not Addressed in Issue No. 87-11 Relating to an
Acquired Operating Unit To Be Sold." Beginning September 1, 2001, results of
operations of the organics division are included in income from discontinued
operations, net of tax on the accompanying condensed consolidated statements of
income and include an allocation of interest expense.
The results of operations associated with these assets held for sale and
interest allocated to these assets, which are not included on the accompanying
condensed consolidated statements of income are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Results of operations $ 0.1 $ - $6.6 $ -
Interest allocated 0.8 0.5 3.8 0.5
During the second quarter of 2001, the value assigned at the acquisition
date to certain land included in assets held for sale was reduced by $6.6 and
goodwill was adjusted accordingly. During the third quarter of 2001, the value
assigned at the acquisition date to the organics division was reduced by $18.8
and goodwill was adjusted accordingly. See also "Acquisition" for additional
information.
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. 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 is recognized as part of other
comprehensive income until the underlying transaction that is being hedged is
recognized in earnings. The ineffective portion of the change in fair value of
cash flow hedges is recognized in earnings currently. 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 three and nine months
ended September 30, 2001, the majority 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
Condensed 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 April 2002. These contracts have been recorded at fair value and
are included in Accrued Liabilities on the accompanying Condensed Consolidated
Balance Sheet. As of September 30, 2001, these derivative contracts did not meet
the criteria of SFAS 133 to qualify for effective hedge accounting.
As of September 30, 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 organics
division. Foreign currency translation adjustments during the three and nine
months ended September 30, 2001 include $(1.4) and $0.6 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 and nine months
ended September 30, 2001, the Company recorded net income of $0.6 and $0.1,
respectively in Other Comprehensive Loss related to the change in the fair
market value of the derivatives designated as effective cash flow hedges. During
the three and nine months ended September 30, 2001, the Company recorded a net
loss of $0.7 and $2.0, respectively, in Selling and Administration expenses
related to the change in fair value of derivatives which did not qualify for
hedge accounting (principally natural gas futures contracts) and the change in
the time value of the forward contracts, which has been excluded from the
assessment of hedge effectiveness.
Comprehensive Income (Loss)
Comprehensive income (loss) 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 (loss) for
the three and nine months ended September 30, 2001 and 2000 was as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $(6.5) $4.6 $15.9 $37.6
Foreign currency translation adjustments 3.4 (7.7) (10.6) (11.3)
Unrealized income on derivative instruments 0.6 - 0.1 -
------------------------------------------------
Total other comprehensive income (loss) 4.0 (7.7) (10.5) (11.3)
------------------------------------------------
Comprehensive income (loss) $(2.5) $(3.1) $5.4 $26.3
================================================
Accumulated Other Comprehensive Loss
Changes in the accumulated net unrealized gain (loss) on derivative
instruments for the three and nine months ended September 30, 2001 and 2000 are
as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
Beginning balance of accumulated net unrealized gain
(loss) on derivative instruments $ (0.5) $ - $ - $ -
Net gain (loss) on cash flow hedges 0.3 (0.3)
Less reclassification adjustments 0.3 - 0.4 -
------------------------------------------------
Ending balance of accumulated net unrealized gain
(loss) on derivative instruments $ 0.1 $ - $ 0.1 $ -
================================================
7
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
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.
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
special items and certain unallocated expenses of the corporate headquarters.
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
----------- ------------ ----------- ------------
Sales:
Microelectronic Materials $ 31.8 $ 59.9 $ 128.5 $ 174.8
HTH Water Products 37.9 40.3 191.5 222.3
Treatment Products 58.8 32.0 185.3 81.5
Performance Products 59.2 48.9 184.6 129.8
Other Specialty Products 20.8 19.2 59.1 57.2
SPPI - 8.6 - 54.1
----------- ------------ ----------- ------------
Total Sales $ 208.5 $ 208.9 $ 749.0 $ 719.7
=========== ============ =========== ============
Operating Income (Loss):
Microelectronic Materials $ (5.0) $ 3.3 $ (1.7) $ 6.9
HTH Water Products (6.7) (3.3) 12.7 33.1
Treatment Products 6.1 4.2 23.2 9.0
Performance Products 0.5 6.5 5.0 16.3
Other Specialty Products 2.5 0.4 7.1 5.2
SPPI - 0.1 - 2.5
Corporate Unallocated (1.5) (2.3) (5.5) (8.7)
----------- ------------ ----------- ------------
Total Operating Income (Loss) $ (4.1) $ 8.9 $ 40.8 $ 64.3
=========== ============ =========== ============
Capital Spending:
Microelectronic Materials $ 2.9 $ 3.8 $ 7.6 $ 12.1
HTH Water Products 2.8 5.5 7.2 9.6
Treatment Products 0.7 4.9 3.6 13.1
Performance Products 3.3 1.5 8.2 4.0
Other Specialty Products 1.7 1.4 3.6 4.4
------------ ----------- ----------- ------------
Total Capital Spending $ 11.4 $ 17.1 $ 30.2 $ 43.2
=========== ============ =========== ============
8
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
Acquisition
In August 2000, the Company acquired Hickson International PLC and
accounted for the acquisition as a purchase business combination. The
determination of the fair values based upon final appraisal was completed in the
third quarter of 2001 and resulted in adjustments to the initial purchase
accounting adjustments. The following adjustments have been made to the initial
purchase accounting:
Adjustment
--------------
Property, plant and equipment $ 9.5
Intangible assets 55.3
Organics division valuation (18.8)
Land included in assets held for sale (6.6)
Additional liabilities (3.2)
--------------
Goodwill reduction $ 36.2
==============
Pro Forma 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 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 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 Nine Months
Ended September 30, Ended September 30,
2000 2000
---- ----
Sales $246.4 $844.5
Net income $ 5.0 $ 40.0
Diluted income per share $ 0.22 $ 1.79
Restructuring
In 2000, the Company recorded a restructuring charge of $34.0 (of which
$7.5 was recorded in the third quarter of 2000), 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 nine months ended September 30, 2001, $14.2 was charged against
the restructuring reserve and approximately 270 employees had been terminated as
of September 30, 2001. In addition, during the nine months ended September 30,
2001, the Company recorded restructuring income of $0.2 for the reimbursement of
certain severance costs which were previously recorded in the fourth quarter of
2000, and a charge of $0.8 consisting of retention payments made to employees as
a result of the Company's restructuring of the process chemicals business.
Cumulative net charges against the reserve and employee terminations total $26.6
and approximately 360, respectively. At September 30, 2001, $7.4 of
restructuring reserves was included in Accrued Liabilities in the Company's
Condensed Consolidated Balance Sheet.
9
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
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 10.5 - 1.2 11.7
Reclassification to Post-employment Liability 2.5 - - 2.5
------- ------ ----- ------
Balance at September 30, 2001 $ 3.6 $ - $3.8 $7.4
======= ====== ===== ======
Other Gains and Losses
Other gains and losses in 2001 includes a $1.0 write-off of an investment
in Global BA.com, Inc., an Internet-based business-to-distributor-to-business
on-line marketplace for specialty chemical companies, which became insolvent in
the third quarter of 2001. Other gains and losses in 2000 include a $10.6 gain
in connection with the sale of SPPI and $2.2 associated with the purchase of
derivative instruments to mitigate the risk of foreign currency fluctuations
related to the acquisition of Hickson International PLC.
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 assumed certain environmental exposures and potential
liabilities of current and past operating sites, including a trial court
judgment of approximately $8.5 plus interest, which was reversed on the
successful appeal by the Company and remanded for a new trial on damages.
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 nine months ended September 30, 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 special items and certain
unallocated expenses of the corporate headquarters.
Results of Operations
- ---------------------
Consolidated
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
------- ------ ------ ------
(In millions, except per share amounts)
Sales $ 208.5 $208.9 $749.0 $719.7
======= ====== ====== ======
Gross Margin $ 51.9 $ 52.6 $215.0 $196.6
Selling and Administration 47.9 40.2 150.0 122.4
Amortization of Intangibles 2.6 1.4 7.6 3.7
Research and Development 6.4 4.4 18.8 12.1
Restructuring -- 7.5 0.6 7.5
Other (Gains) and Losses 1.0 (8.4) 1.0 (8.4)
Equity in (Earnings) of Affiliated Companies (0.9) (2.3) (2.2) (5.9)
Interest Expense, net 3.9 2.8 14.3 8.2
Income Taxes (2.3) 2.4 9.0 19.4
Income from Discontinued Operations 0.2 -- 0.2 --
Cumulative Effect of Accounting Change -- -- (0.2) --
------- ------ ------ ------
Net Income (Loss) $ (6.5) $ 4.6 $ 15.9 $ 37.6
======= ====== ====== ======
Diluted Income (Loss) Per Common Share $ (0.29) $ 0.21 $ 0.71 $ 1.68
======= ====== ====== ======
EBITDA * $ 13.1 $ 18.5 $ 94.4 $ 95.8
======= ====== ====== ======
* Includes the operating results of the organics division since the date of
acquisition. EBITDA is not intended to represent cash flow from operations as
defined by generally accepted accounting principles. This measure should not be
used as an alternative to net income as an indicator of operating performance or
to cash flows as a measure of liquidity.
Three Months Ended September 30, 2001 Compared to 2000
Sales decreased $0.4 million. The decrease was due to the exit of certain
unprofitable process chemical product lines (approximately $13 million), the
divestiture of SPPI (approximately $9 million) and a decrease in volumes,
primarily related to the microelectronic materials segment, offset by the impact
of the acquisitions of Hickson International PLC ("Hickson") and Brooks
Industries personal care intermediates business ("Brooks") (approximately $41
million).
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Gross margin percentage was 24.9% and 25.2% for 2001 and 2000,
respectively. The slight decrease was due to unfavorable manufacturing costs and
the absence of income related to the BASF contract which more than offset the
contribution from the Hickson and Brooks acquisitions. Manufacturing costs were
unfavorable primarily due to unabsorbed costs in the HTH water products business
due to the timing of the annual plant maintenance shutdown which was performed
in the third quarter of 2001 compared to the fourth quarter of 2000 and the
extended maintenance shutdown period, and lower margins in the performance
urethanes business due to lower contract manufacturing, partially offset by the
favorable impact of the benefit of a $3.0 million LIFO inventory decrement.
Selling and administration expenses as a percentage of sales increased to
23.0% in 2001 from 19.2% in 2000. Excluding the impact of the acquisitions and
disposition that occurred in 2000, selling and administrative expenses decreased
in amount by $0.9 million. The decrease is primarily due to lower selling
expenses associated with the microelectronic materials segment, partially offset
by unrealized losses principally related to natural gas futures contracts.
Research and development expenses increased $2.0 million primarily due to
the inclusion of expenses related to Hickson and Brooks as well as higher
expenditures associated with HTH water products segment and the photopolymers
business.
Restructuring in 2000 relates to severance and benefit costs in connection
with the headcount reductions associated with the reorganization of certain
businesses, as well corporate and centralized service personnel.
Other gains and losses in 2001 includes the write-off of an investment in
Global BA.com, Inc., an Internet-based business-to-distributor-to-business
on-line marketplace for specialty chemical companies, which became insolvent in
the third quarter of 2001. Other gains and losses in 2000 include a $10.6
million gain in connection with the sale of SPPI and $2.2 million associated
with the purchase of derivative instruments to mitigate the risk of foreign
currency fluctuations related to the acquisition of Hickson International PLC.
Equity in earnings of affiliated companies decreased $1.4 million primarily
due to lower profits from FUJIFILM Arch Co. Ltd.
Interest expense, net was $3.9 million in 2001 compared to $2.8 million in
2000. The increase was primarily due to higher debt levels directly related to
the Hickson and Brooks acquisitions, partially offset by overall lower effective
interest rates and lower working capital borrowings.
The effective tax rate on income (loss) from continuing operations, before
cumulative effect of accounting change for the third quarter was a benefit of
25% in 2001 compared to expense of 34% in 2000. During the third quarter of
2001, the full-year effective tax rate increased from 33% to 36% due to the
impact of non-tax deductible items on lower estimated earnings.
Income from discontinued operations, net of tax, includes the results of
operations of the organics division and interest expense allocated to this
business for the month of September 2001.
Nine Months Ended September 30, 2001 Compared to 2000
Sales increased 4%, or $29.3 million. The increase was due to the impact of
the acquisitions of Hickson and Brooks (approximately $168 million), partially
offset by the divestiture of SPPI (approximately $54 million), the exit of
certain unprofitable process chemical product lines (approximately $25 million)
and a decrease in volumes, primarily in the microelectronic materials and HTH
water products segments.
Gross margin percentage was 28.7% and 27.3% for 2001 and 2000,
respectively. The increase was due to the Hickson and Brooks acquisitions, the
disposition of a low margin business (SPPI), higher margins in the
microelectronic materials segment due to the restructuring of the process
chemical business and the contract
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
settlement gain related to the termination by Sunoco of its contract
manufacturing agreement, partially offset by unfavorable manufacturing costs and
the absence of income related to the BASF contract. Manufacturing costs were
unfavorable due to lower margins in the performance urethanes business as a
result of higher unabsorbed energy and manufacturing costs due to lower contract
manufacturing and unabsorbed fixed costs at the HTH water products business due
to timing of the annual plant maintenance shutdown and lower production,
partially offset by the favorable impact of a $4.0 million LIFO inventory
decrement.
Selling and administration expenses as a percentage of sales increased to
20.0% in 2001 from 17.0% in 2000. Excluding the impact of the acquisitions and
disposition that occurred in 2000, selling and administrative expenses decreased
approximately $4 million. The decrease is primarily due to lower selling
expenses associated with the microelectronic materials segment, partially offset
by unrealized losses principally related to natural gas futures contracts.
Research and development expenses increased $6.7 million primarily due to
the inclusion of expenses related to Hickson and Brooks as well as higher
expenditures associated with HTH water products segment and the photopolymers
business.
Restructuring in 2001 consists of retention payments to employees
associated with the restructuring of the process chemicals business, offset by
the reimbursement of certain severance costs, which were previously recorded as
part of the restructuring charge in the fourth quarter of 2000. Restructuring in
2000 relates to severance and benefit costs in connection with headcount
reductions associated with the reorganization of certain businesses, as well as
corporate and centralized service personnel.
Other gains and losses in 2001 includes the write-off of an investment in
Global BA.com, Inc., an Internet-based business-to-distributor-to-business
on-line marketplace for specialty chemical companies, which became insolvent in
the third quarter of 2001. Other gains and losses in 2000 include a $10.6
million gain in connection with the sale of SPPI and $2.2 million associated
with the purchase of derivative instruments to mitigate the risk of foreign
currency fluctuations related to the acquisition of Hickson International PLC.
Equity in earnings of affiliated companies decreased $3.7 million due to
significantly lower profits from FUJIFILM Arch Co. Ltd., and Planar Solutions,
LLC 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, net was $14.3 million in 2001 compared to $8.2 million in
2000. The increase was primarily due to higher debt levels directly related to
the Hickson and Brooks acquisition, partially offset by overall lower effective
interest rates and lower working capital borrowings.
The effective tax rate on income from continuing operations before
cumulative effect of accounting change, for the nine months ended September 30
was 36% in 2001 and 34% in 2000. During the third quarter of 2001, the full year
effective tax rate increased from 33% to 36% due to the impact of non-tax
deductible items on lower estimated earnings.
Income from discontinued operations, net of tax includes the results of
operations of the organics division and interest expense allocated to this
business for the month of September 2001.
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).
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Fourth Quarter and Full Year Outlook
The Company anticipates that results for the fourth quarter of 2001 will be
in the range of a $0.45 to $0.55 loss per share compared to income of $0.01 per
share, excluding special items, reported in the fourth quarter of 2000. The
decrease in expected results, as compared to 2000, is due primarily to the
slowing global economy and its adverse impact on the Company's customers' end
markets, particularly in the microelectronics materials segment. Sales from the
microelectronic materials segment, excluding the discontinued product lines, are
expected to be 10 to 15 percent lower than the third quarter and approximately
40 percent lower than prior year. For the full-year 2001, earnings per share
from continuing operations before cumulative effect of accounting change, are
expected to be in the $0.15 to $0.25 range, and EBITDA is expected to be in the
$95 million range. See "Cautionary Statement under Federal Securities Laws"
below.
Microelectronic Materials
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $31.8 $59.9 $128.5 $174.8
Operating Income/(Loss) (5.0) 3.3 (1.7) 6.9
Three Months Ended September 30, 2001 Compared to 2000
Sales decreased 47% principally due to lower demand for customer products
and lower process chemicals sales as a result of the exiting of certain
unprofitable product lines related to the restructuring announced during the
fourth quarter of 2000. Excluding the effect of restructuring, sales were
approximately 33% lower principally due to lower photoresist and ancillary
volumes as a result of the downturn in the electronics industry.
The operating loss as compared to operating income in the prior year was
due to the lower sales and significantly lower profit from the Company's joint
venture FUJIFILM Arch Co. Ltd. These were partially offset by lower selling and
administrative expenses due to cost reduction initiatives and lower operating
and depreciation expenses as a result of the restructuring of the process
chemicals business.
Nine Months Ended September 30, 2001 Compared to 2000
Sales decreased 26% principally due to lower process chemicals sales as a
result of the exiting of certain unprofitable product lines related to the
restructuring announced during the fourth quarter of 2000 and lower demand for
customer products. Excluding the effect of the restructuring, sales decreased
approximately 16% due to lower photoresist and ancillary volumes as a result of
the downturn in the electronics industry partially offset by higher polyimide
sales from new advanced products.
The operating loss compared to the prior year operating income was due to
the lower sales, significantly lower profits from its joint venture FUJIFILM
Arch Co. Ltd. and Planar Solutions, LLC expenses incurred in connection with the
commercialization of new products. These were partially offset by lower selling
and administrative expenses and lower operating and depreciation expenses as a
result of the restructuring of the process chemicals business.
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
HTH Water Products
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
------ ------ ------ ------
($ in millions)
Results of Operations
HTH Water Products $ 37.9 $ 40.3 $191.5 $222.3
SPPI -- 8.6 -- 54.1
------ ------ ------ ------
Total Sales 37.9 48.9 191.5 276.4
HTH Water Products (6.7) (3.3) 12.7 33.1
SPPI -- 0.1 -- 2.5
------ ------ ------ ------
Total Operating
Income (Loss) (6.7) (3.2) 12.7 35.6
Three Months Ended September 30, 2001 Compared to 2000
Sales decreased 22% and operating loss increased $3.5 million. Excluding
the results of SPPI, which was sold in 2000, sales decreased 6% and operating
loss increased $3.4 million. Sales decreased primarily due to lower non-branded
calcium hypochlorite volumes, partially offset by higher accessory sales.
Operating income decreased primarily due to the lower sales, higher research and
development costs for new product development and higher costs due to the timing
of the annual plant maintenance shutdown which was performed in the third
quarter of 2001 compared to the fourth quarter of 2000. In addition, results
were negatively impacted by unfavorable fixed cost absorption due to the
extended shutdown period as a result of an inventory reduction program, which
was partly offset by the benefit of a LIFO inventory decrement.
Nine Months Ended September 30, 2001 Compared to 2000
Sales decreased 31% and operating income decreased 64%. Excluding the
results of SPPI, which was sold in 2000, sales and operating income decreased
14% and 62%, respectively. Sales decreased primarily due to lower branded
(HTH(R) and J3TM) and non-branded calcium hypochlorite volumes and lower branded
trichlor (Pace(R)) volumes. The lower volumes were due to excess inventory from
the 2000 pool season, unfavorable weather conditions, a consolidation of the
Company's third-party distributor locations and customer destocking. Operating
income decreased primarily due to the lower sales, higher research and
development costs for new product development, higher costs due to the timing of
the annual plant maintenance shutdown and unfavorable fixed cost absorption due
to lower production, partly offset by the benefit of a LIFO inventory decrement.
Treatment Products
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $58.8 $32.0 $185.3 $81.5
Operating Income 6.1 4.2 23.2 9.0
Three Months Ended September 30, 2001 Compared to 2000
Sales increased $26.8 million due to the inclusion of sales associated with
Hickson's wood protection business and Brooks' personal care intermediates
business (approximately $27 million). Personal care and industrial biocides'
sales were comparable to prior year in all product lines. Operating income
increased as a result of the acquisitions, partly offset by unfavorable fixed
cost absorption due to planned inventory level reductions.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Nine Months Ended September 30, 2001 Compared to 2000
Sales increased $103.8 million primarily due to the inclusion of sales
associated with Hickson's wood protection business and Brooks' personal care
intermediates business (approximately $103 million). Higher antidandruff sales
and growth in marine antifoulant paint sales were partially offset by lower
custom chemicals sales as a result of the discontinuance of certain product
lines. Operating income increased significantly as a result of the acquisitions,
higher antidandruff and marine antifoulant paint sales and lower manufacturing
and selling costs.
Performance Products
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $59.2 $48.9 $184.6 $129.8
Operating Income 0.5 6.5 5.0 16.3
Three Months Ended September 30, 2001 Compared to 2000
Sales increased $10.3 million due to the inclusion of sales associated with
Hickson's coatings business (approximately $14 million), partially offset by
lower performance urethanes sales. Performance urethanes sales decreased 10%
principally due to lower contract manufacturing and lower Latin American
volumes, both the result of poor economic conditions, partially offset by higher
propylene glycol volumes.
Operating income decreased by 92%. The operating income contribution from
the coatings business was more than offset by lower results from performance
urethanes due to the lower sales, the absence of income related to the BASF
contract, which was completed on December 31, 2000 and higher unabsorbed energy
and manufacturing costs due to lower contract manufacturing, partly offset by
the benefit of a LIFO inventory decrement as a result of reduced inventory
levels.
Nine Months Ended September 30, 2001 Compared to 2000
Sales increased $54.8 million due to the inclusion of sales associated with
Hickson's coatings business (approximately $65 million), partially offset by
lower performance urethanes sales. Performance urethanes sales decreased 9%
principally due to lower contract manufacturing and lower Latin American volumes
as a result of poor economic conditions.
Operating income decreased 69%. The operating income contribution from the
coatings business was more than offset by lower results from performance
urethanes due to the lower sales, the absence of income related to the BASF
contract which was completed on December 31, 2000 and higher unabsorbed energy
and manufacturing costs due to lower contract manufacturing. Lower operating
results were partially offset by the contract settlement gain related to the
termination of the contract manufacturing agreement with Sunoco and the benefit
of a LIFO inventory decrement as a result of reduced inventory levels.
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Other Specialty Products
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $20.8 $19.2 $59.1 $57.2
Operating Income 2.5 0.4 7.1 5.2
Three Months Ended September 30, 2001 Compared to 2000
Sales increased 8% and operating income increased significantly.
Hydrazine sales were 53% higher as a result of higher propellant revenues
associated with the new contract with the U.S. government. Operating income
increased significantly due to the higher sales and lower selling and
administrative expenses, partially offset by unrealized losses related to
natural gas futures contracts.
Sulfuric acid sales decreased 23% as a result of lower volumes due to
customer operating difficulties and lower pricing due to unfavorable product mix
compared to the prior year. Operating income was lower primarily due to the
lower sales.
Nine Months Ended September 30, 2001 Compared to 2000
Sales increased 3% and operating income increased 37%.
Hydrazine sales were 13% higher primarily due to higher propellant revenues
associated with the new contract with the U.S. government. Operating income
increased due to the higher sales and lower selling and administration expenses,
partly offset by unabsorbed costs due to a plant shutdown in the first quarter
of 2001, higher energy costs and unrealized losses related to natural gas
futures contracts.
Sulfuric acid sales decreased 6% due to lower volumes due to customer
operating difficulties and lower pricing due to unfavorable product mix compared
to the prior year. Operating income was lower primarily due to lower sales.
Liquidity, Investment Activity and Other Financial Data
- -------------------------------------------------------
Cash Flow Data
Nine Months
Ended September 30,
2001 2000
---- ----
($ in millions)
Provided By (Used For)
Net Operating Activities from Continuing Operations $ 62.4 $72.0
Capital Expenditures (30.2) (43.2)
Businesses Acquired, Net of Cash (2.9) (140.5)
Net Investing Activities (32.0) (156.5)
Net Financing Activities (36.9) 93.9
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Nine Months Ended September 30, 2001 Compared to 2000
For the nine months ended September 30, 2001, the decrease in cash flow
provided by net operating activities from continuing operations was attributable
to lower cash earnings and $13.5 million of payments related to the 2000
restructuring, partially offset by increased cash flows due to the Company's
focus on reducing investment in working capital.
Capital expenditures for the first nine months of 2001 decreased
significantly as compared to 2000 due to lower expenditures associated with the
microelectronic materials and treatment products segments. Capital expenditures
for 2001 are expected to be in the $45 to $50 million range.
In September 2001, the Company acquired Butler Mabbutt & Wrighton and the
International Division of Humbrol Limited for an aggregate of approximately $1
million in cash.
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.
On August 22, 2000, the Company completed the acquisition of UK-based
Hickson. The total purchase price, inclusive of expenses and net of cash
acquired, was $140.5 million and was financed from a new $225 million revolving
credit facility. See below for additional information concerning this revolving
credit facility. For additional information concerning the Hickson acquisition,
including pro forma financial information, see the Form 8-K/A filed by the
Company on November 2, 2000.
On July 31, 2000, the Company completed the sale to SCP Pool Corporation of
Covington, LA of the assets of its subsidiary, SPPI, a distributor of swimming
pool equipment, parts and supplies. Net proceeds from the sale were
approximately $21 million. A gain on the transaction of approximately $11
million was recorded. Net proceeds from the sale were used to reduce existing
debt levels.
In April 2000, the Company formed Planar Solutions, LLC to produce and
market chemical mechanical planarization slurry products. The Company
contributed cash of approximately $3.4 million and intellectual property to the
venture. In March 2000, the Company sold its building in Cheshire, Connecticut
for cash proceeds of $6.3 million.
On March 9, 2001, June 8, 2001 and September 7, 2001, the Company paid
quarterly dividends of $0.20 on each share of common stock. Total dividends paid
to shareholders were $13.3 million during the first nine months of 2001.
Cash used by financing activities in the first nine months of 2001 was due
to lower borrowing for working capital and capital spending needs, which
resulted in the paydown of debt, as compared to cash provided by financing
activities in the first nine months of 2000 due to the 2000 borrowings
associated with the Hickson acquisition, partially offset by the purchases of
common stock in 2000.
The Company has an unsecured $125 million revolving five-year credit
facility ("Five-year Facility") that expires in January 2004, an unsecured $125
million 364-day facility ("364-day Facility")that expires in January 2002, and a
$225 million revolving credit facility ("Acquisition Facility")that 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, as a result of 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 September 30,
2001, the Company had approximately $169 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%
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
of outstanding shares. Through September 30, 2001, the Company had repurchased
approximately 893,000 shares under this program at a cost of approximately $16
million. The program was suspended in 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. Proceeds from
the sale are expected to be used to reduce debt levels.
On October 25, 2001, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on December 7,
2001, to shareholders of record at the close of business on November 8, 2001.
New Accounting Standard
- -----------------------
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations completed after June
30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company is required to adopt the provisions of SFAS 141
immediately and SFAS 142 effective January 1, 2002. The adoption of SFAS 141 had
no effect, and the Company is currently evaluating the effect that the adoption
of SFAS 142 will have, on its financial position and results of operations.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires recording the fair
market value of an asset retirement obligation as a liability in the period in
which a legal obligation associated with the retirement of tangible long-lived
assets is incurred. SFAS 143 also requires recording the contra asset to the
initial obligation as an increase to the carrying amount of the related
long-lived asset and to depreciate that cost over the life of the asset. The
liability is then increased at the end of each period to reflect the passage of
time and changes in the initial fair value measurement. The Company is required
to adopt the provisions of SFAS 143 effective fiscal 2003 and has not yet
determined the extent of its impact, if any.
In October 2001, the FASB issued Statement No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. It also extends the reporting requirements to report separately as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. The Company is required to adopt the
provisions of SFAS 144 effective January 1, 2002 and has not yet determined the
extent of its impact, if any.
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 various 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
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
from those discussed include but are not limited to: general economic and
business and market conditions; lack of moderate growth or recession in the U.S.
or European economies; increases in interest rates; economic conditions in Asia;
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; further deterioration 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 customer or company plants;
unfavorable weather conditions for swimming pool use; gains or losses on
derivative instruments; the inability of the Company to sell the Hickson
organics division at its desired price; and the unsuccessful integration of
acquired businesses.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2001, the Company had forward contracts to sell foreign
currencies with notional amounts of $1.1 million and forward contracts to buy
foreign currencies with notional amounts of $4.7 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 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 application 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 if some of the derivative
instruments may not meet the requirements for hedge accounting.
The Company is exposed to commodity price risk related to the price
volatility of natural gas utilized at certain manufacturing sites. Depending on
market conditions, the Company may purchase derivative commodity instruments to
minimize the risk of price fluctuations. At September 30, 2001, the Company had
forward contracts to purchase natural gas with notional amounts of $3.5 million.
The fair value of these contracts is included in Accrued Liabilities. A 10
percent change in the forward price of natural gas would increase or decrease
the fair value of these forward contracts by approximately $0.2 million.
See the Company's Form 10-K for the year ended December 31, 2000 for
additional information on the above items.
21
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
September 30, 2001.
22
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)
November 14, 2001 By: Louis S. Massimo
---------------------------------
Louis S. Massimo
Vice President and Chief
Financial Officer
23