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, 2002
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, 2002, there were 22,351,772 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, 2002
and December 31, 2001 .................................................. 2
Condensed Consolidated Statements of Income for the three
months ended March 31, 2002 and 2001 ................................... 3
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 ................................... 4
Notes to Condensed Consolidated Financial Statements ................... 5 - 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 15 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............. 23
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K ....................................... 24
Signatures ............................................................. 25
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,
2002 2001
------------ --------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 10.8 $ 4.0
Accounts receivable, net 110.3 162.6
Short-term investment 38.2 -
Inventories, net 141.4 131.1
Other current assets 26.8 25.6
Assets held for sale 26.9 53.5
------------ -------------
Total current assets 354.4 376.8
Investments and advances - affiliated companies at equity 27.7 27.2
Property, plant and equipment, net 330.5 332.4
Goodwill 135.4 131.6
Other intangibles 65.2 64.4
Other assets 17.8 19.6
------------ -------------
Total assets $ 931.0 $ 952.0
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 4.1 $ 38.5
Accounts payable 130.9 111.3
Accrued liabilities 83.5 85.3
------------ -------------
Total current liabilities 218.5 235.1
Long-term debt 270.5 265.1
Other liabilities 65.1 64.3
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share,
Authorized 100.0 shares:
22.3 shares issued and outstanding in 2002 (22.2 in 2001) 22.3 22.2
Additional paid-in capital 421.6 424.4
Accumulated deficit (19.9) (12.5)
Accumulated other comprehensive loss (47.1) (46.6)
------------ -------------
Total shareholders' equity 376.9 387.5
------------ -------------
Total liabilities and shareholders' equity $ 931.0 $ 952.0
============ =============
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,
2002 2001
-------------- -------------
Sales $ 211.1 $ 255.6
Cost of goods sold 152.9 182.4
Selling and administration 47.1 45.6
Amortization of intangibles 1.0 2.5
Research and development 5.8 6.4
Equity in (earnings) of affiliated companies (0.6) (1.2)
Restructuring 7.6 0.8
-------------- -------------
Income (loss) from continuing operations before interest,
taxes and cumulative effect of accounting change (2.7) 19.1
Interest expense 3.5 5.5
Interest income 0.3 0.1
-------------- -------------
Income (loss) from continuing operations before taxes and
cumulative effect of accounting change (5.9) 13.7
Income tax expense (benefit) (2.3) 4.6
-------------- -------------
Income (loss) from continuing operations before cumulative
effect of accounting change (3.6) 9.1
Loss from discontinued operations, net of tax (2.3) -
Loss on sale of DanChem, net of tax (1.5) -
Cumulative effect of accounting change, net of tax - (0.2)
-------------- -------------
Net income (loss) $ (7.4) $ 8.9
============== =============
Basic and diluted income (loss) per common share:
Continuing operations before cumulative effect
of accounting change $ (0.16) $ 0.41
Loss from discontinued operations (0.10) -
Loss on sale of DanChem (0.07) -
Cumulative effect of accounting change - (0.01)
-------------- -------------
Basic and diluted income (loss) per common share $ (0.33) $ 0.40
============== =============
Weighted average common shares outstanding:
Basic 22.4 22.3
============== =============
Diluted 22.4 22.3
============== =============
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,
2002 2001
----------- ----------
Operating activities
- --------------------
Net income (loss) $ (7.4) $ 8.9
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by operating activities,
net of businesses acquired:
Loss from discontinued operations 2.3 -
Loss on sale of DanChem 1.5 -
Equity in earnings of affiliates (0.6) (1.2)
Depreciation 12.5 12.9
Amortization of intangibles 1.0 2.5
Deferred taxes (0.3) 0.1
Restructuring 7.6 0.8
Restructuring payments (1.8) (7.0)
Changes in assets and liabilities, net of purchase
and sale of business:
Sale of accounts receivable 43.3 -
Receivables (29.6) (26.3)
Inventories (10.7) 6.5
Other current assets (1.2) (1.8)
Accounts payable and accrued liabilities 7.0 (27.6)
Noncurrent liabilities 2.6 1.8
Other operating activities (0.1) (0.1)
----------- ----------
Net operating activities from continuing operations 26.1 (30.5)
Change in net assets held for sale (4.0) 2.3
----------- ----------
Net operating activities 22.1 (28.2)
----------- ----------
Investing activities
- --------------------
Capital expenditures (8.9) (8.7)
Businesses acquired in purchase transaction, net of cash acquired - (2.0)
Proceeds from sale of business 25.0 -
Other investing activities - (0.2)
----------- ----------
Net investing activities 16.1 (10.9)
----------- ----------
Financing activities
- --------------------
Long-term debt repayments, net (14.4) (0.3)
Short-term debt borrowings (repayments), net (225.0) 35.1
Issuance of unsecured senior notes 211.0 -
Dividends paid (4.4) (4.4)
Other financing activities 1.7 0.9
----------- ----------
Net financing activities (31.1) 31.3
----------- ----------
Effect of exchange rate changes on cash and cash equivalents (0.3) (0.4)
----------- ----------
Net increase (decrease) in cash and cash equivalents 6.8 (8.2)
Cash and cash equivalents, beginning of year 4.0 19.1
----------- ----------
Cash and cash equivalents, end of period $ 10.8 $ 10.9
=========== ==========
Supplemental cash flow information
- ----------------------------------
Taxes paid (refunds), net $ (0.3) $ 1.4
=========== ==========
Interest paid $ 3.3 $ 6.6
=========== ==========
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)
1. 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, 2001. The
Company's HTH water products business 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 business for
the three months ended March 31, 2002, 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 2002 presentation.
2. 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. Diluted weighted average common
shares outstanding for the three months ended March 31, 2002 excludes the impact
of 1.0 million stock options with exercise prices greater than the average
market price of the Company's common stock. In addition, 1.4 million stock
options were excluded from the computation of diluted weighted average common
shares outstanding due to the loss from continuing operations for the three
months ended March 31, 2002.
3. Accounts Receivable/Short-Term Investment
In March 2002, the Company completed arrangements to sell, without
recourse, certain accounts receivable through its wholly-owned subsidiary, Arch
Chemicals Receivables Corp., a special-purpose corporation. Arch Chemicals
Receivables Corp. entered into a trade accounts receivable securitization
agreement with an independent financial institution whereby it can sell, on an
ongoing basis, participation interests in accounts receivable for a maximum
purchase price of up to $80.0. The Company has agreed to provide servicing for
accounts receivable collections. The proceeds from the sale of participation
interests under this arrangement are subject to change based on the level of
eligible receivables. The accounts receivable sold have been reflected as a sale
of accounts receivable in accordance with SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
At March 31, 2002, the Company had received proceeds of $43.3 from the
sale of participation interests in $85.5 of accounts receivable. The fair value
of the retained undivided interest of $38.2 is classified as a held-to-maturity
debt security and is reflected as Short-term Investments on the accompanying
Condensed Consolidated Balance Sheet. The proceeds of the sale were used to
reduce borrowings. The costs of the program for the three months ended March 31,
2002 of $0.6 consist primarily of certain one-time fees, and are included in
Selling and Administration expenses in the accompanying Condensed Consolidated
Statement of Income. The Company expects the costs of the accounts receivable
securitization program to be approximately 3% of the fair market value of the
participation interests sold. Fair value of the retained undivided interest
includes a reserve for credit losses but has not been discounted due to the
short-term nature of the underlying financial assets. The Company has not
recorded an asset or liability related to the servicing responsibility retained
as the fees earned for servicing are at fair value.
5
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
4. Inventories
March 31, December 31,
2002 2001
--------- ----------
Raw materials and supplies $ 43.0 $ 43.3
Work in process 22.1 24.6
Finished goods 124.8 111.8
--------- ----------
Inventories, gross 189.9 179.7
LIFO reserve (48.5) (48.6)
--------- ----------
Inventories, net $ 141.4 $ 131.1
========= ==========
Approximately half of the Company's inventories are valued by the dollar
value last-in, first-out ("LIFO") method of inventory accounting. Costs of 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, 2002, reflect certain
estimates relating to inventory quantities and costs at December 31, 2002.
5. Assets Held For Sale/Discontinued Operations
The Company has accounted for the Hickson International Limited
("Hickson") organics division (Castleford, England and Danville, Virginia
operations) in accordance with EITF 87-11, "Allocation of Purchase Price to
Assets to be Sold" ("EITF 87-11") through August 31, 2001 and 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" ("APB 30") 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" ("EITF 90-6") since September 1, 2001. Net earnings
(losses) of the Hickson organics division from the acquisition date through
August 31, 2001 were 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. 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 Ended
March 31, 2001
----------------
Pretax income from operations $1.3
Interest expense allocated 1.6
Beginning September 1, 2001, results of operations of the Hickson
organics division are included in Loss From Discontinued Operations, net of tax
on the accompanying Condensed Consolidated Statements of Income and include an
allocation of interest expense. Sales for the three months ended March 31, 2002
were $18.1. Interest allocated to discontinued operations for the three months
ended March 31, 2002 was $0.5.
In March 2002, the Company completed the sale of its DanChem operations in
Danville, Virginia, which was part of the Hickson organics division, for
approximately $25 and recorded a loss on the disposal of $1.5, net of tax of
$0.9. Proceeds from the sale of these assets have been used to pay down debt.
DanChem sales for the three months ended March 31, 2002 were $2.9. Interest
allocated to, and after-tax loss of the DanChem operation for the three months
ended March 31, 2002 was $0.2 and $0.3, respectively.
Assets held for sale at March 31, 2002 include the Hickson organics
division Castleford, England operation and certain land that the Company is in
the process of divesting. The Hickson organics businesses have been valued on
the accompanying Condensed Consolidated Balance Sheets at estimated net selling
price. In addition, in accordance with APB 16, the Company has estimated the net
future results of operations through its expected
6
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
disposition date. Accordingly, a $1.4 reserve for estimated losses to be
incurred at the Castleford, England operation through the third quarter 2002 was
recorded in the first quarter of 2002 and is included in Loss From Discontinued
Operations in the accompanying Condensed Consolidated Statements of Income.
However, the amounts actually realized (including future operating results) by
the Company could differ materially from the amounts estimated in the financial
statements and could result in future gains or losses from discontinued
operations or from disposal of this business. Factors that could influence the
ultimate outcome include, but are not limited to, general economic conditions,
the Company's ability to dispose of the business within the time, price and
manner originally estimated, the retention of key customers during the divesture
period and environmental matters. The Company continues to actively work on
completing the sale of these assets during 2002. However, due to the current
poor market conditions, it is possible that they may not be sold by such date.
If the sale does not occur by the third quarter, the Company may be required to
discontinue its current accounting and include the results of this division in
continuing operations.
The Company adopted Statement of Financial Accounting Standard No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144")
effective January 1, 2002. 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. In accordance with the transition provisions in paragraphs 50 and 51
of SFAS 144, the Company will continue to account for these assets held for sale
in accordance with APB 30 and EITF 90-6.
6. Goodwill and Other Intangibles
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
which requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead be tested for impairment at least annually
in accordance with the provisions of SFAS 142. The application of the
non-amortization provisions of SFAS 142 resulted in a decrease in amortization
of goodwill and other intangibles in the first quarter of 2002 of approximately
$1.5. SFAS 142 also requires that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and be reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The
application of this provision of SFAS 142 did not have a material effect on the
Company's results of operations.
The Company is required to test goodwill for impairment annually and upon
adoption of SFAS 142. The first step of the transitional goodwill impairment
assessment, which is a comparison of the carrying amount of the reporting units
to the corresponding fair value of those units, must be completed within six
months of adoption. If the carrying amount of the reporting units exceeds the
related fair values, the Company has until December 31, 2002 to determine the
amount of any loss, which will be recognized as a cumulative effect of change in
accounting principle in 2002. The Company has not yet determined the extent of
the impact of the goodwill impairment provisions of SFAS 142, if any.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2002 are as follows:
Wood
Protection and Personal Care
Microelectronics HTH Water Industrial and Industrial Performance
Materials Products Coatings Biocides Products Total
--------- -------- -------- -------- -------- -----
Balance, January 1, 2002 $ 26.8 $ 2.2 $ 67.9 $ 30.3 $ 4.4 $ 131.6
Post acquisition adjustment - - 3.6 - - 3.6
Other - - 0.2 - - 0.2
------- ------ ------- ------- ------ -------
Balance, March 31, 2002 $ 26.8 $ 2.2 $ 71.7 $ 30.3 $ 4.4 $ 135.4
======= ====== ======= ======= ====== =======
In accordance with EITF 93-7, "Uncertainties Related to Income Taxes in a
Purchase Business Combination," the Company recorded a deferred tax liability
and corresponding adjustment to goodwill as a result of its analysis of the tax
basis of the DanChem assets acquired in the Company's acquisition of Hickson.
7
The gross carrying amount and accumulated amortization for other
intangible assets as of March 31, 2002 and December 31, 2001 are as follows:
March 31, 2002 December 31, 2001
--------------------------------------- ----------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
------ ------------ ------ ------ ------------ ------
Patents ........................ $ 6.7 $ 5.7 $ 1.0 $ 6.6 $ 5.5 $ 1.1
Technology ..................... 11.7 10.6 1.1 11.7 10.3 1.4
Customer lists ................. 23.8 1.0 22.8 23.8 0.6 23.2
Other .......................... 18.9 9.7 9.2 16.7 9.1 7.6
-------- --------- -------- -------- --------- -------
Total amortizable other
intangibles ..................... 61.1 27.0 34.1 58.8 25.5 33.3
Trademarks ..................... 31.5 0.4 31.1 31.5 0.4 31.1
-------- --------- -------- -------- --------- -------
Total non-amortizable other
intangibles ..................... 31.5 0.4 31.1 31.5 0.4 31.1
-------- --------- -------- -------- --------- -------
Total other intangibles ........... $92.6 $ 27.4 $ 65.2 $ 90.3 $ 25.9 $ 64.4
======== ========= ======== ======== ========= =======
Amortization expense for the three months ended March 31, 2002 was $1.0.
Estimated amortization expense for the years ended December 31, 2002, 2003,
2004, 2005 and 2006 is $4.2, $2.4, $2.2, $2.0 and $2.0, respectively.
In accordance with SFAS 142, prior period amounts have not been restated.
A reconciliation of reported net income and earnings per share for the three
months ended March 31, 2001 to net income and earnings per share as adjusted for
the elimination of the amortization of goodwill and certain other intangible
assets, net of the related income tax effect, is as follows:
Basic and
Diluted
Net Earnings
Income Per Share
--------- ----------
As reported $ 8.9 $ 0.40
Goodwill amortization 1.5 0.06
--------- ----------
Adjusted net income $10.4 $ 0.46
========= ==========
7. Debt
In March 2002, the Company issued $211.0 of unsecured senior notes to
certain institutional investors in two series. The Series A notes of $149.0 are
due in March 2007 and the Series B notes of $62.0 are due in March 2009 and bear
fixed interest rates of 7.94% and 8.24%, respectively, subject to certain
leverage ratio requirements through December 31, 2002. The notes contain
quarterly leverage ratio (debt/EBITDA) covenants of 4.5 through December 31,
2002 and 3.5 thereafter and fixed coverage ratio covenants of 2.0 through
December 31, 2002 and 2.25 thereafter, and restrict the payment of dividends and
repurchases of stock in excess of $65 plus 50% of cumulative net income under
certain circumstances. Proceeds from the issuance of these notes have been used
to pay down debt, including the credit facility used to acquire Hickson
("Acquisition Facility").
In January 2002, the Company renewed its existing 364-day credit facility
in the amount of $87.5, which now expires in January 2003 and amended certain
prospective financial covenants of this facility and its five-year credit
facility to reflect the seasonality of its portfolio. The quarterly leverage
ratio has been increased to 4.5 for the first quarter of 2002, with gradual
reductions to 3.5 as of December 31, 2002. The restriction on the payment of
dividends and repurchase of shares was also amended to limit payments to $40
plus 50% of cumulative net income under certain circumstances for the periods
beginning December 31, 2001.
8
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
In April 2002, the Company entered into interest rate swap agreements
under which the Company swaps its 7.94% fixed interest rate on $80.0 principal
amount of unsecured senior notes for floating rate interest based on LIBOR plus
3.045%. The counterparties to these agreements are major financial institutions.
The agreements expire in March 2007.
8. Derivative Instruments and Hedging
The Company accounts for derivatives in accordance with 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 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.
Foreign Currency
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 2002. During the three months ended March
31, 2002 and 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 Sheets. During the three months ended March 31,
2002 and 2001, the Company recorded income (loss) of $0.1 and $(0.2),
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 months ended March 31, 2002 and 2001, the Company recorded a net gain
of $0.1 and $0.1, respectively, in Selling and Administration 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.
Natural Gas
In order to manage the risks associated with the changes in natural gas
prices, the Company purchased futures contracts to hedge a portion of its
projected natural gas purchase requirements. These contracts expired in April
2002. These contracts have been recorded at fair value and are included in
Accrued Liabilities on the accompanying Condensed Consolidated Balance Sheet.
These derivative contracts did not meet the criteria of SFAS 133 to qualify for
effective hedge accounting. During the three months ended March 31, 2002, the
Company recorded an unrealized gain of $0.1 in Selling and Administration
expenses related to the change in fair value of derivatives which did not
qualify for hedge accounting.
Debt and Interest
In March 2002, the portion of the Company's outstanding borrowings that
was denominated in British pounds and that had been designated since its
inception as a hedge of the British pound net investment in the Hickson organics
division was paid-off with the expiration of the Acquisition Facility.
Cumulative foreign currency translation adjustments as of March 31, 2002 of $1.0
related to this debt instrument will be recognized upon the sale of the Hickson
organics Castleford, England operation.
In April 2002, the Company entered into interest rate swap agreements
under which the Company swaps its 7.94% fixed interest rate on $80.0 principal
amount of unsecured senior notes for floating rate interest based on LIBOR plus
3.045%. The counterparties to these agreements are major financial institutions.
The agreements expire in March 2007.
9
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
9. 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 months ended March 31, 2002 and 2001 was as follows:
Three Months
Ended March 31,
2002 2001
---- ----
Net income (loss) $ (7.4) $ 8.9
Foreign currency translation adjustments (0.6) (8.0)
Unrealized income on derivative instruments 0.1 (0.2)
-----------------
Total other comprehensive loss (0.5) (8.2)
-----------------
Comprehensive income (loss) $ (7.9) $ 0.7
=================
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.
10. Accumulated Other Comprehensive Loss
Changes in the accumulated net unrealized gain (loss) on derivative
instruments for the three months ended March 31, 2002 and 2001 are as follows:
Three Months
Ended March 31,
2002 2001
---- ----
Beginning balance of accumulated net unrealized gain
(loss) on derivative instruments $ - $ -
Net gain (loss) on cash flow hedges 0.1 (0.2)
Less reclassification adjustments - -
-----------------
Ending balance of accumulated net unrealized gain
(loss) on derivative instruments $ 0.1 $ (0.2)
=================
The unrealized gains (losses) on derivative instruments included in
Accumulated Other Comprehensive Loss are expected to be reclassified into
earnings within the next 12 months.
11. Segment Reporting
The Company has organized its segments around differences in products and
services, which is how the Company manages its business. In 2002, the Company
reorganized its business portfolio into four operating segments to better
reflect the Company's business strategy. The four segments are Microelectronic
Materials, Treatment Products, Performance Products and Other Specialty
Products. Treatment Products includes three reportable business units: the HTH
water products business, the personal care and industrial biocides business and
the wood protection and industrial coatings business. Performance Products
includes the performance urethanes business. Other Specialty Products includes
the hydrazine and sulfuric acid businesses. Sales and operating income for 2001
and 2000 have been restated to conform to current year presentation. Segment
operating income includes the equity in earnings of affiliated companies and
excludes special items and certain unallocated expenses of the corporate
headquarters.
10
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
Three Months
Ended March 31,
2002 2001
-----------------------
Sales:
Microelectronic Materials $ 32.2 $ 54.8
Treatment Products:
HTH Water Products 48.5 59.0
Personal Care & Industrial Biocides 29.4 32.7
Wood Protection & Industrial Coatings 52.7 53.8
-----------------------
Total Treatment Products 130.6 145.5
Performance Products 31.5 38.4
Other Specialty Products 16.8 16.9
-----------------------
Total Sales $ 211.1 $ 255.6
=======================
Operating Income (Loss):
Microelectronic Materials $ (4.3) $ 4.7
Treatment Products:
HTH Water Products 4.7 8.7
Personal Care & Industrial Biocides 6.3 6.6
Wood Protection & Industrial Coatings 2.3 2.5
-----------------------
Total Treatment Products 13.3 17.8
Performance Products (1.6) (0.7)
Other Specialty Products 1.4 0.4
Corporate Unallocated (3.9) (2.3)
-----------------------
Total Operating Income $ 4.9 $ 19.9
=======================
Capital Spending:
Microelectronic Materials $ 0.7 $ 1.4
Treatment Products:
HTH Water Products 2.1 2.0
Personal Care & Industrial Biocides 0.9 0.8
Wood Protection & Industrial Coatings 0.8 1.0
-----------------------
Total Treatment Products 3.8 3.8
Performance Products 1.1 2.3
Other Specialty Products 3.3 1.2
-----------------------
Total Capital Spending $ 8.9 $ 8.7
=======================
11
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
Quarterly sales and operating income for the two years ended December 31,
2001 and 2000 are as follows:
2001
--------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------
Sales:
Microelectronic Materials $ 54.8 $ 41.9 $ 31.8 $ 30.4 $ 158.9
Treatment Products:
HTH Water Products 59.0 94.6 37.9 16.7 208.2
Personal Care & Industrial Biocides 32.7 33.3 28.3 23.6 117.9
Wood Protection & Industrial Coatings 53.8 57.7 54.1 50.2 215.8
--------------------------------------------------------------------
Total Treatment Products 145.5 185.6 120.3 90.5 541.9
Performance Products 38.4 36.0 35.6 31.1 141.1
Other Specialty Products 16.9 21.4 20.8 19.8 78.9
--------------------------------------------------------------------
Total Sales $ 255.6 $ 284.9 $ 208.5 $ 171.8 $ 920.8
====================================================================
Operating Income (Loss):
Microelectronic Materials $ 4.7 $ (1.4) $ (5.0) $ (5.7) $ (7.4)
Treatment Products:
HTH Water Products 8.7 10.7 (6.7) (14.9) (2.2)
Personal Care & Industrial Biocides 6.6 6.3 4.9 3.8 21.6
Wood Protection & Industrial Coatings 2.5 5.4 2.6 0.9 11.4
--------------------------------------------------------------------
Total Treatment Products 17.8 22.4 0.8 (10.2) 30.8
Performance Products (0.7) 1.5 (0.9) (1.8) (1.9)
Other Specialty Products 0.4 4.2 2.5 4.6 11.7
--------------------------------------------------------------------
22.2 26.7 (2.6) (13.1) 33.2
Corporate Unallocated (2.3) (1.7) (1.5) (3.5) (9.0)
--------------------------------------------------------------------
Total Operating Income (Loss) $ 19.9 $ 25.0 $ (4.1) $ (16.6) $ 24.2
====================================================================
12
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
2000
------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------------------------------------------------------
Sales:
Microelectronic Materials $ 57.1 $ 57.8 $ 59.9 $ 58.8 $233.6
Treatment Products:
HTH Water Products 73.7 108.3 40.3 22.0 244.3
Personal Care & Industrial Biocides 23.0 26.5 22.0 30.3 101.8
Wood Protection & Industrial Coatings - - 19.2 48.8 68.0
------------------------------------------------------------
Total Treatment Products 96.7 134.8 81.5 101.1 414.1
Performance Products 39.1 41.8 39.7 43.0 163.6
Other Specialty Products 19.0 19.0 19.2 18.6 75.8
------------------------------------------------------------
211.9 253.4 200.3 221.5 887.1
Superior Pool Products 16.8 28.7 8.6 - 54.1
------------------------------------------------------------
Total Sales $ 228.7 $ 282.1 $ 208.9 $ 221.5 $941.2
============================================================
Operating Income (Loss):
Microelectronic Materials $ 1.6 $ 2.0 $ 3.3 $ 3.6 $ 10.5
Treatment Products:
HTH Water Products 14.4 22.0 (3.3) (10.5) 22.6
Personal Care & Industrial Biocides 2.5 2.3 4.0 2.7 11.5
Wood Protection & Industrial Coatings - - 0.8 2.1 2.9
------------------------------------------------------------
Total Treatment Products 16.9 24.3 1.5 (5.7) 37.0
Performance Products 5.2 4.6 5.9 4.0 19.7
Other Specialty Products 1.3 3.5 0.4 1.2 6.4
------------------------------------------------------------
25.0 34.4 11.1 3.1 73.6
Superior Pool Products 0.2 2.2 0.1 - 2.5
Corporate Unallocated (3.2) (3.2) (2.3) (2.0) (10.7)
------------------------------------------------------------
Total Operating Income $ 22.0 $ 33.4 $ 8.9 $ 1.1 $ 65.4
============================================================
12. Restructuring
In the first quarter of 2002, the Company recorded a restructuring charge
of $7.6 which included $6.6 related to headcount reductions of approximately 200
employees in the microelectronic materials, performance urethanes and HTH water
products businesses, as well as a charge related to the consolidation of several
treatment products segment operations. The non-cash portion of the restructuring
charge was approximately $1.0.
13
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
The following table summarizes activity related to the 2002, 2001 and 2000
restructuring costs:
Severance Asset
Costs 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:
Provision ......................................... 2.4 -- -- 2.4
Payments .......................................... 11.0 -- 1.6 12.6
Reclass postemployment liability .................. 2.5 -- -- 2.5
Reserve reduction ................................. 0.3 -- 1.2 1.5
------ ------ ----- -------
Balance at December 31, 2001 ........................ 5.2 -- 2.2 7.4
2002 Activity:
Provision ......................................... 6.6 -- 1.0 7.6
Payments .......................................... 1.8 -- -- 1.8
------ ------ ----- -------
Balance at March 31, 2002 ........................... $ 10.0 $ -- $ 3.2 $ 13.2
====== ====== ===== =======
As of March 31, 2002, $29.3 had been charged against restructuring
reserves. As of March 31, 2002, 150 employees from the 2002 restructuring
program and all employees from the 2001 and 2000 restructuring programs had been
terminated. At March 31, 2002, $13.2 of restructuring reserves was included in
Accrued Liabilities in the accompanying Condensed Consolidated Balance Sheet.
13. Significant Contract
In April 2002, pursuant to the Company's Chlor-Alkali Supply Agreement with
Olin Corporation ("Olin"), the Company notified Olin of its intention to
terminate its agreement effective December 31, 2003.
14. Commitments and Contingencies
In 1999, 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 legal obligations, including a trial court judgment of approximately
$8.5 plus interest in a lawsuit associated with a wood preservative spillage in
1994. In 2001, the judgment was reversed on the successful appeal by the Company
and remanded for a new trial on damages. The judgment and related interest is
included in Accrued Liabilities in the accompanying Condensed Consolidated
Balance Sheets.
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, 2002.
See the Company's Form 10-K for the year ended December 31, 2001 for
additional information on the above items.
14
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
business is seasonal in nature. Historically, approximately 40% - 50% 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. In addition, this seasonality is
expected to be affected by the change in distribution strategy to a
direct-to-retail method. 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
Ended March 31,
2002 2001
---------- ----------
(In millions, except per share amounts)
Sales $ 211.1 $ 255.6
========== ==========
Gross Margin $ 58.2 $ 73.2
Selling and Administration 47.1 45.6
Amortization of Intangibles 1.0 2.5
Research and Development 5.8 6.4
Equity in (Earnings) of Affiliated Companies (0.6) (1.2)
Restructuring 7.6 0.8
Interest Expense, net 3.2 5.4
Income Tax Expense (Benefit) (2.3) 4.6
Loss from Discontinued Operations, net of tax (2.3) --
Loss on Sale of DanChem, net of tax (1.5) --
Cumulative Effect of Accounting Change, net of tax -- (0.2)
----------- ----------
Net Income (Loss) $ (7.4) $ 8.9
=========== ==========
Diluted Income (Loss) Per Common Share $ (0.33) $ 0.40
=========== ==========
EBITDA * $ 18.4 $ 38.3
=========== ==========
* Represents earnings before interest, taxes, depreciation and amortization,
excludes special items and unremitted earnings of 50% or less owned affiliates
and includes the operating results of the Hickson 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.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
The following table reconciles diluted income (loss) per share to diluted
income per share excluding special items, discontinued operations, cumulative
effect of accounting change and the pro forma effect of not amortizing goodwill
and certain intangibles in 2001:
For the Three Months Ended
March 31,
2002 2001
------------- --------------
Diluted Income (Loss) Per Share $ (0.33) $ 0.40
Amortization of Intangibles - 0.06
------------- --------------
(0.33) 0.46
------------- --------------
Restructuring, net of tax 0.21 0.02
Loss from Discontinued Operations, net of tax 0.10 -
Loss on Sale of DanChem, net of tax 0.07 -
Cumulative Effect of Accounting Change, net of tax - 0.01
------------- --------------
0.38 0.03
------------- --------------
Diluted Income Per Share Excluding Special Items, Discontinued
Operations, Cumulative Effect of Accounting Change and Pro Forma
Effect of Change in Accounting for Amortization of Goodwill and
Certain Intangibles $ 0.05 $ 0.49
============= ==============
Three Months Ended March 31, 2002 Compared to 2001
Sales decreased $44.5 million. The decrease was due to the exit of certain
unprofitable process chemical product lines (approximately $12 million) and a
decrease in volumes, primarily related to the microelectronic materials, HTH
water products and performance urethanes businesses.
Gross margin percentage was 27.6% and 28.6% for 2002 and 2001,
respectively. The decrease in margin percentage was due to lower margins in the
microelectronic materials business as a result of lower volumes, partially
offset by lower manufacturing costs in the biocides and coatings businesses.
Selling and administration expenses as a percentage of sales increased to
22.3% in 2002 from 17.8% in 2001 due to the lower sales in 2002. Excluding costs
related to the Company's accounts receivable securitization program ($0.6
million), selling and administrative expenses increased in amount by $0.9
million. The increase is primarily due to higher pension and benefit-related
expenses, partially offset by lower selling expenses associated with the
microelectronic materials segment.
Research and development expenses decreased $0.6 million primarily due to
cost reduction initiatives in the microelectronic materials and HTH water
products businesses.
Restructuring in 2002 includes a $6.6 million charge for headcount
reductions in the microelectronics materials, treatment products and performance
products segments, and a $1.0 million charge for expenses related to the
consolidation of several treatment products segment operations. The Company
anticipates future annual cost savings of $10 to $12 million related to the
workforce reductions. Restructuring in 2001 consists of retention payments made
to employees as a result of the company's restructuring of the process chemicals
business in 2000.
Equity in earnings of affiliated companies decreased $0.6 million due to
lower profits from the Nordeschlor S.A. and FUJIFILM Arch joint ventures.
Interest expense, net was $3.2 million in 2002 compared to $5.4 million in
2001. The decrease was primarily due to lower effective interest rates and lower
debt due to lower working capital borrowings.
The effective tax rate on income (loss) from continuing operations before
cumulative effect of accounting change and before special items for the first
quarter was 36% in 2002 compared to 34% in 2001.
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
Loss from discontinued operations, net of tax, reflects the results of
operations of the Hickson organics division including a $0.6 million
restructuring charge for severance costs and interest expense allocated to this
business. In addition, it includes a $1.4 million charge for estimated losses to
be incurred through the estimated sale date.
Loss on the sale of DanChem, net of tax, represents the after-tax loss on
the sale of the Company's operations in Danville, Virginia for proceeds of
approximately $25 million.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased $19.9 million due to lower operating results in the microelectronics
materials and HTH water products businesses and the Hickson organics division.
Second Quarter and Full Year Outlook
The Company anticipates earnings per share from continuing operations in
the second quarter to be in the $0.55 to $0.60 range, compared to $0.60 in the
prior-year quarter. The second quarter is traditionally the Company's strongest
quarter of the year, largely because it is the peak selling season for pool care
products. The Company expects the microelectronic materials and performance
urethanes businesses to continue to experience soft demand in their end-use
markets, but expects improvement in each of its operating segments during the
second quarter as compared to the first quarter.
The Company expects 2002 to be a transition year for major global economies
and in turn for the chemical industry. For the full-year 2002, earnings per
share from continuing operations excluding special items are expected to be in
the range of $0.50 to $0.75. In addition, EBITDA is expected to be in the $95 to
$105 million range, while capital spending should be around $45 million. See
"Cautionary Statement under Federal Securities Laws" below.
Segment Information
The Company has reorganized its business portfolio into four operating
segments to better reflect the Company's business strategy. The four segments
are microelectronic materials, treatment products, performance products and
other specialty products. The treatment products segment includes three
reportable business units: the HTH water products business, the personal care
and industrial biocides business and the wood protection and industrial
coatings business. Performance products includes the performance urethanes
business. Other specialty products include the hydrazine and sulfuric acid
businesses. Sales and operating income for 2001 have been restated to reflect
the new structure. The following compares segment sales and operating income for
the first quarter of 2002 and 2001 (including equity in earnings of affiliated
companies and excluding special items and certain unallocated expenses of the
corporate headquarters):
Microelectronic Materials
Three Months
Ended March 31,
2002 2001
------ ------
($ in millions)
Results of Operations
Sales $32.2 $54.8
Operating Income/(Loss) (4.3) 4.7
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
Three Months Ended March 31, 2002 Compared to 2001
Sales decreased approximately 41%. Of the sales decrease, approximately $12
million was related to the exit of certain unprofitable process chemical product
lines announced in the fourth quarter of 2000. Excluding this effect, sales were
approximately 25% lower, principally due to the downturn in the semiconductor
industry, which adversely affected demand for most product lines. The operating
loss as compared to operating income in the prior year, resulted primarily from
the lower sales and was partially offset by lower manufacturing and selling and
administrative costs resulting from cost-reduction initiatives.
Treatment Products
Three Months
Ended March 31,
2002 2001
---- ----
($ in millions)
Results of Operations:
Sales
HTH Water Products $ 48.5 $ 59.0
Personal Care & Industrial Biocides 29.4 32.7
Wood Protection & Industrial Coatings 52.7 53.8
------ ------
Total Treatment Products 130.6 145.5
====== ======
Operating Income
HTH Water Products 4.7 8.7
Personal Care & Industrial Biocides 6.3 6.6
Wood Protection & Industrial Coatings 2.3 2.5
------ ------
Total Treatment Products 13.3 17.8
====== ======
Three Months Ended March 31, 2002 Compared to 2001
Sales decreased 10% and operating income decreased 25%. The decrease in
sales is due to lower volumes in the HTH water products and personal care and
industrial biocides businesses. The decrease in operating income is primarily a
result of the lower sales.
HTH Water Products
Sales decreased 18% and operating income decreased $4.0 million. The
decrease in sales was principally due to lower sales of branded products and
lower non-branded calcium hypochlorite volumes. The lower branded volumes were
primarily a result of a change in distribution strategy to a direct-to-retail
approach, which is expected to shift traditional first quarter sales into the
second quarter. The lower non-branded calcium hypochlorite sales were due to
decreased demand from repackaging customers. The decrease in operating income
was primarily due to the lower sales volumes, unfavorable product mix and lower
profits from the Company's Brazilian joint venture, Nordesclor S.A.
Personal Care and Industrial Biocides
Sales were 10% lower than 2001 as higher marine antifouling paint sales
were more than offset by lower personal care sales, the discontinuance of a
custom-chemical product line and reduced antidandruff volumes. Operating income
was comparable to 2001 as higher gross margins due to favorable product mix and
lower manufacturing and selling and administrative costs from cost-reduction
initiatives were offset by the lower sales. In addition, operating results
benefited from the non-amortization of goodwill.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
Wood Protection & Industrial Coatings
Sales were two percent lower than the prior year due to weak European
economic conditions. Operating income was comparable to the prior year as lower
raw materials costs offset slightly higher selling and administrative expenses
to support various industrial coatings growth initiatives. In addition,
operating results benefited from the non-amortization of goodwill and other
intangible assets.
Performance Products
Three Months
Ended March 31,
2002 2001
---- ----
($ in millions)
Results of Operations
Sales $31.5 $38.4
Operating Loss (1.6) (0.7)
Three Months Ended March 31, 2002 Compared to 2001
Sales decreased $6.9 million or approximately 18% principally due to lower
glycol and performance polyol volumes, a result of poor economic conditions and
lower Latin American sales. These sales continue to be adversely affected by the
softness in the North American coatings, adhesives, sealants and elastomer
markets combined with pricing pressures from imported products. Operating
results were lower as a result of the lower sales, partially offset by lower
manufacturing and selling and administrative costs due to cost-reduction
initiatives implemented in 2001 and 2002.
Other Specialty Products
Three Months
Ended March 31,
2002 2001
---- ----
($ in millions)
Results of Operations
Sales $16.8 $16.9
Operating Income 1.4 0.4
Three Months Ended March 31, 2002 Compared to 2001
Sales were comparable and operating income increased significantly.
Hydrazine sales increased by approximately three percent due to higher
propellant sales and higher hydrate volumes, partially offset by lower hydrate
prices. Operating income was higher primarily due to the higher propellant sales
and lower manufacturing costs.
Sulfuric acid sales decreased approximately five percent as a result of
lower pricing due to an unfavorable product mix compared to the prior year.
Operating income was comparable to prior year as the lower sales were offset by
lower manufacturing costs.
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
Liquidity, Investment Activity and Other Financial Data
- -------------------------------------------------------
Cash Flow Data
Three Months
Ended March 31,
2002 2001
---- ----
($ in millions)
Provided By (Used For)
Sale of Accounts Receivable $ 43.3 $ -
Net Operating Activities from Continuing Operations 26.1 (30.5)
Capital Expenditures (8.9) (8.7)
Proceeds from Sale of Business 25.0 -
Businesses Acquired, Net of Cash - (2.0)
Net Investing Activities 16.1 (10.9)
Debt Borrowing (Repayments) (28.4) 34.8
Net Financing Activities (31.1) 31.3
Three Months Ended March 31, 2002 Compared to 2001
For the three months ended March 31, 2002, the $56.6 million increase in
cash flow provided by net operating activities from continuing operations was
primarily attributable to the sale of accounts receivable, lower restructuring
payments and lower investment in working capital, partly offset by lower cash
earnings.
Cash used by assets held for sale was $4.0 million in 2002 compared to cash
provided of $2.3 million in 2000 primarily due to lower cash earnings of the
Hickson organics Castleford, England operation.
Capital expenditures for the first three months of 2002 were comparable to
2001 as higher discretionary expenditures in the other specialty products
segment was offset by lower discretionary expenditures in the microelectronic
materials and performance urethanes businesses. Capital expenditures for 2002
are expected to be approximately $45 million.
In March 2002, the Company completed the sale of its DanChem operations in
Danville, Virginia for approximately $25 million. Proceeds from the sale of
these assets have been used to pay down debt.
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.
Cash used by financing activities in the first three months of 2002 as
compared to cash provided by financing activities in 2001, was due to the pay
down of debt from the proceeds of the sale of accounts receivable, the sale of
the Company's operations in Danville, Virginia and the lower working capital
borrowing needs, partially offset by the lower cash earnings.
On March 8, 2002, 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 2002.
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, 2002, 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.
At March 31, 2002, the Company had two credit facility agreements. These
included an unsecured $125 million revolving five-year credit facility
("Five-year Facility"), which expires in January 2004 and an unsecured $87.5
million 364-day facility ("364-day Facility"), which had expired in January 2002
and was subsequently
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
renewed (see below). The Company's $225 million revolving credit facility
("Acquisition Facility"), which the Company used to finance the Hickson
acquisition and refinance a portion of the assumed Hickson debt (collectively
the "Credit Facilities"), expired in March 2002. As of March 31, 2002, facility
fees are payable on the Credit Facilities and range from 0.125% to 0.5%. The
Company may select various floating rate borrowing options, including, but not
limited to, LIBOR plus 0.425% to 1.55%. At March 31, 2002, the Company had
approximately $156 million of available borrowings under the Credit Facilities.
In January 2002, the Company renewed its existing 364-day Facility in the
amount of $87.5 million, which now expires in January 2003 and amended certain
prospective financial covenants of this facility and the Five-year Facility to
reflect the seasonality of its portfolio. The quarterly leverage ratio
(debt/EBITDA) has been increased to 4.5 for the first quarter of 2002, with
gradual reductions to 3.5 as of December 31, 2002. The restriction on the
payment of dividends and repurchase of shares was also amended to limit payments
to $40 million plus 50% of cumulative net income under certain circumstances
beginning December 31, 2001.
In March 2002, the Company issued $211.0 million of unsecured senior notes
to certain institutional investors in two series. The Series A notes of $149.0
million are due in March 2007 and the Series B notes of $62.0 million are due in
March 2009 and bear fixed interest rates of 7.94% and 8.24%, respectively,
subject to certain leverage ratio requirements through December 31, 2002. The
notes contain quarterly leverage ratio covenants of 4.5 through December 31,
2002 and 3.5 thereafter and fixed coverage ratio covenants of 2.0 through
December 31, 2002 and 2.25 thereafter, and restrict the payment of dividends and
repurchases of stock in excess of $65 million plus 50% of cumulative net income
under certain circumstances. Proceeds from the issuance of these notes have been
used to pay down debt, including the Acquisition Facility.
In April 2002, the Company entered into interest rate swap agreements under
which the Company swaps its 7.94% fixed interest rate on $80.0 million principal
amount of unsecured senior notes for floating rate interest based on LIBOR plus
3.045%. The counterparties to these agreements are major financial institutions.
These agreements expire in March 2007.
In March 2002, the Company completed arrangements to sell certain accounts
receivable through its wholly-owned subsidiary, Arch Chemicals Receivables
Corp., a special-purpose corporation. Arch Chemicals Receivables Corp. entered
into a trade accounts receivable securitization agreement with an independent
financial institution whereby it can sell, on an ongoing basis, participation
interests in accounts receivable for a maximum purchase price of up to $80.0
million. As of March 31, 2002, the Company had received proceeds of $43.3
million from the sale of participation interests in accounts receivable under
this program. The amount of participation interests sold under this arrangement
is subject to change based on the level of eligible receivables. The accounts
receivable sold are reflected as a sale of accounts receivable in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." The accounts receivable securitization
program provides another source of funding for the Company and is expected to
lower overall funding costs.
At March 31, 2002, the Company had $7.3 million of outstanding letters of
credit and $4.4 million of letters of guarantee, including $3.4 million of its
joint venture, Planar Solutions' borrowings. The Company has agreed to guarantee
up to $8.5 million of Planar borrowings as of March 31, 2002.
The Company believes that the Credit Facilities and cash provided by
operations are adequate to satisfy its liquidity needs for the near future.
However, if Company earnings were to fall significantly below current
expectations, a risk exists that the Company would not meet its quarterly
leverage, interest coverage or fixed charge coverage ratio covenants which could
trigger a default condition under its debt agreements.
The Company is pursuing the sale of the Hickson organics Castleford,
England operation. Proceeds from the sale are expected to be used to reduce debt
levels.
On April 25, 2002, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on June 5,
2002, to shareholders of record at the close of business on May 6, 2002.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
New Accounting Standards
- ------------------------
In August 2001, the Financial Accounting Standards Board ("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 January 1, 2003 and has not yet determined the extent of its impact,
if any.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and be reviewed for impairment in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
See Note 6 of Notes to Condensed Consolidated Financial Statements for
discussion of the impact of the provisions that have been adopted. The first
step of the transitional goodwill impairment assessment, which is a comparison
of the carrying amount of the reporting units to the corresponding fair value of
those units, must be completed within six months of adoption. If the carrying
amount of the reporting units exceeds the related fair values, the Company has
until December 31, 2002 to determine the amount of any loss, which will be
recognized as a cumulative effect of change in accounting principle in 2002. The
Company has not yet determined the extent of the impact of the goodwill
impairment provisions of SFAS 142.
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 from those discussed include but are not limited to: general
economic and business and market conditions; lack of economic recovery in the
second half of 2002 in the U.S.; lack of moderate growth or recession in
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 and
lack of recovery in the second half of 2002; 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; and
the inability of the Company to sell the Hickson organics Castleford, England
operation at its desired price.
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
At March 31, 2002, the Company was exposed to interest rate risk on
approximately 25% of its outstanding borrowings which are at floating rates. In
April 2002, the Company entered into interest rate swap agreements which
increased the percentage of borrowings with floating rates to approximately 50%.
Based on the Company's expected 2002 borrowing levels after taking into effect
the swap agreements, an increase in interest rates of 100 basis points would
decrease the Company's results of operations and cash flows by approximately $1
million.
Foreign Currency Risk
At March 31, 2002, the Company had forward contracts to sell foreign
currencies with notional amounts of $10.8 million and forward contracts to buy
foreign currencies with notional amounts of $13.4 million. The fair values of
these forward contracts is included in Other Current Assets and Accrued
Liabilities, respectively.
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 an increase (decrease) of between $2 million to $3 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 do not meet the requirements for hedge accounting.
Commodity Price Risk
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 March 31, 2002, the Company had
forward contracts to purchase natural gas with notional amounts of $0.6 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 $0.1 million.
See the Company's Form 10-K for the year ended December 31, 2001 for
additional information on the above items.
23
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.
4. Amendment No. 2, dated as of April 26, 2002, to Rights Amendment,
dated as of January 29, 1999.
10. First Amendment, dated as of April 10, 2002, to Receivables
Purchase Agreement, dated as of March 19, 2002, among Arch
Chemicals Receivables Corp., Arch Chemicals, Inc., Blue Ridge
Asset Funding Corporation, and Wachovia Bank, National
Association.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 2002.
24
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 10, 2002 By: Louis S. Massimo
------------------------------------
Louis S. Massimo
Vice President and Chief Financial
Officer
25
EXHIBIT INDEX
4. Amendment No. 2, dated as of April 26, 2002, to Rights Agreement, dated as
of January 29, 1999.
10. First Amendment, dated as of April 10, 2002, to Receivables Purchase
Agreement, dated as of March 19, 2002, among Arch Chemicals Receivables
Corp., Arch Chemicals, Inc., Blue Ridge Asset Funding Corporation, and
Wachovia Bank, National Association.