UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 3, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-17827-01
ISP CHEMCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0382622
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5818
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
-----------------------------------
See Table of Additional Registrants
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 / /
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
As of May 17, 2005, 100 shares of the registrant's common stock (par value
$.01 per share) were outstanding. There is no trading market for the common
stock of the registrant. As of May 17, 2005, each of the additional registrants
had the number of shares outstanding which is shown on the table below. There is
no trading market for the common stock of the additional registrants. No shares
of the registrant or the additional registrants were held by non-affiliates.
THE REGISTRANT AND THE ADDITIONAL REGISTRANTS MEET THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND ARE THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
ADDITIONAL REGISTRANTS
Address, including zip
Commission File code and telephone
Exact name of registrant as State or other No. of No./ I.R.S. number, including area
specified in its charter jurisdiction of Shares Employer code, of registrant's
incorporation or Outstanding Identification No. principal executive
organization offices
- --------------------------- ---------------- ----------- ------------------ -------------------------
ISP Chemicals Inc. Delaware 10 333-70144-08/ Route 95 Industrial Area,
22-3807357 P.O. Box 37
Calvert City, KY 42029
(270) 395-4165
ISP Minerals Inc. Delaware 10 333-70144-07/ 34 Charles Street
22-3807370 Hagerstown, MD 21740
(301) 733-4000
ISP Technologies Inc. Delaware 10 333-70144-09/ 4501 Attwater Avenue
22-3807372 and State Highway 146
Texas City, TX 77590
(409) 945-3411
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(THOUSANDS)
FIRST QUARTER ENDED
---------------------
APRIL 3, APRIL 4,
2005 2004
--------- ---------
Net sales........................................ $ 284,718 $ 266,895
Cost of products sold............................ (176,616) (168,815)
Selling, general and administrative.............. (50,081) (49,151)
Other operating charges.......................... (10,532) -
Amortization of intangible assets................ (334) (72)
--------- ---------
Operating income................................. 47,155 48,857
Interest expense................................. (13,853) (14,084)
Interest income.................................. 531 497
Other expense, net............................... (4,901) (1,708)
--------- ---------
Income before income taxes....................... 28,932 33,562
Income taxes..................................... (9,756) (11,689)
--------- ---------
Net income....................................... $ 19,176 $ 21,873
========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
ISP CHEMCO INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 3, DECEMBER 31,
2005 2004
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 26,334 $ 32,939
Accounts receivable, trade, less allowance of
$6,791 and $6,794 at April 3, 2005 and
December 31, 2004, respectively.................. 135,141 105,737
Accounts receivable, other......................... 23,439 21,464
Receivables from related parties................... 17,172 15,186
Inventories........................................ 231,419 191,735
Deferred income tax assets......................... 17,075 14,833
Prepaid expenses................................... 7,248 6,973
--------- ----------
Total Current Assets............................. 457,828 388,867
Property, plant and equipment, net................... 617,075 599,085
Goodwill, net of accumulated amortization of $180,486 337,704 337,794
Intangible assets, net of accumulated amortization of
$2,593 and $2,259 at April 3, 2005 and
December 31, 2004, respectively.................... 18,343 18,677
Long-term receivable from related party.............. 34,554 34,043
Other assets......................................... 65,380 64,450
---------- ----------
Total Assets......................................... $1,530,884 $1,442,916
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt................................... $ 71 $ 71
Current maturities of long-term debt.............. 2,816 2,932
Accounts payable.................................. 74,934 65,799
Accrued liabilities............................... 68,369 84,549
Income taxes payable.............................. 49,161 56,484
---------- ----------
Total Current Liabilities....................... 195,351 209,835
---------- ----------
Long-term debt less current maturities.............. 648,752 649,368
---------- ----------
Deferred income tax liabilities..................... 123,437 122,822
---------- ----------
Other liabilities................................... 87,395 88,961
---------- ----------
Shareholder's Equity:
Common stock, $.01 par value per share;
1,000 shares authorized; 100 shares issued
and outstanding ................................ - -
Additional paid-in capital........................ 417,763 327,763
Retained earnings................................. 55,718 36,542
Accumulated other comprehensive income............ 2,468 7,625
---------- ----------
Total Shareholder's Equity...................... 475,949 371,930
---------- ----------
Total Liabilities and Shareholder's Equity.......... $1,530,884 $1,442,916
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
FIRST QUARTER ENDED
--------------------
APRIL 3, APRIL 4,
2005 2004
-------- ----------
Cash flows from operating activities:
Net income............................................. $ 19,176 $ 21,873
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Impairment of fixed assets......................... 10,532 -
Depreciation....................................... 16,308 15,765
Amortization of intangible assets.................. 334 72
Noncash interest charges........................... 503 597
Deferred income taxes.............................. (1,627) 7,070
Increase in working capital items...................... (68,342) (37,719)
Proceeds from sale of accounts receivable.............. 687 2,877
Increase in receivables from related parties........... (2,497) (3,667)
Other, net............................................. 2,217 (545)
--------- ---------
Net cash provided by (used in) operating activities...... (22,709) 6,323
--------- ---------
Cash flows from investing activities:
Capital expenditures and acquisitions.................. (72,401) (40,222)
--------- ---------
Net cash used in investing activities.................... (72,401) (40,222)
--------- ---------
Cash flows from financing activities:
Increase in short-term debt............................ - 3
Proceeds from issuance of debt......................... - 31,188
Repayments of long-term debt........................... (791) (692)
Increase in loan to related party...................... - (7,760)
Debt issuance costs.................................... - (850)
Capital contribution from parent company............... 90,000 -
--------- ---------
Net cash provided by financing activities................ 89,209 21,889
--------- ---------
Effect of exchange rate fluctuations on cash
and cash equivalents................................... (704) (315)
--------- ---------
Net change in cash and cash equivalents.................. (6,605) (12,325)
Cash and cash equivalents, beginning of period........... 32,939 56,426
--------- ---------
Cash and cash equivalents, end of period................. $ 26,334 $ 44,101
========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
ISP CHEMCO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
(THOUSANDS)
FIRST QUARTER ENDED
-------------------
APRIL 3, APRIL 4,
2005 2004
--------- ---------
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized).................. $ 23,845 $ 24,967
Income taxes (including taxes paid pursuant to
the Tax Sharing Agreement)......................... 18,182 5,188
Acquisitions:
Estimated fair market value of assets acquired........ $ 29,239 $ 29,407
Purchase price of acquisitions........................ 24,137 26,266
-------- --------
Liabilities assumed................................... $ 5,102 $ 3,141
======== ========
Supplemental disclosure of financing activities:
Effective April 1, 2004, the Company declared a dividend of $31.2 million to
its parent company, International Specialty Holdings Inc. In connection with
this dividend, the Company's total long-term loan receivable of $39.0 million
from a related party was reduced by $31.2 million.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for ISP Chemco Inc. (the "Company")
reflect, in the opinion of management, all adjustments necessary to present
fairly the financial position of the Company and its consolidated subsidiaries
at April 3, 2005, and the results of operations and cash flows for the quarterly
periods ended April 3, 2005 and April 4, 2004, each period beginning on January
1. All adjustments are of a normal recurring nature. Certain amounts in the 2004
consolidated financial statements have been reclassified to conform to the 2005
presentation. These consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 (the "2004 Form 10-K").
NOTE 1. OTHER OPERATING CHARGES
The Company has implemented a program for the restructuring and
consolidation of production capacity in the specialty chemicals business
segment. In March 2005, the Company entered into a long-term supply contract
with an international company for the purchase of a product in the specialty
chemicals business that the Company currently manufactures. As a result, the
utilization of one of the Company's domestic specialty chemicals manufacturing
facilities will be adversely impacted. Accordingly, the Company performed an
impairment review in the first quarter of 2005 and recorded a $10.5 million
non-cash fixed asset impairment charge related to this facility. The impairment
charge was determined based on a review of anticipated future cash flows related
to this facility compared with the carrying value of the facility's fixed
assets.
NOTE 2. COMPREHENSIVE INCOME
First Quarter Ended
---------------------
April 3, April 4,
2005 2004
--------- ----------
(Thousands)
Net income......................................... $ 19,176 $ 21,873
-------- --------
Other comprehensive loss, net of tax:
Foreign currency translation adjustment.......... (5,157) (985)
-------- --------
Total other comprehensive income (loss)............ (5,157) (985)
-------- --------
Comprehensive income............................... $ 14,019 $ 20,888
======== ========
Changes in the components of accumulated other comprehensive income for the
first quarter ended April 3, 2005 are as follows:
5
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. COMPREHENSIVE INCOME - (CONTINUED)
Cumulative Additional
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Income
---------- ---------- -------------
(Thousands)
Balance, December 31, 2004....... $ 16,229 $ (8,604) $ 7,625
Change for the period............ (5,157) - (5,157)
---------- --------- ---------
Balance, April 3, 2005........... $ 11,072 $ (8,604) $ 2,468
========== ========= =========
NOTE 3. INVENTORIES
Inventories comprise the following:
April 3, December 31,
2005 2004
--------- ------------
(Thousands)
Finished goods................ $124,415 $109,366
Work-in-process............... 43,474 34,665
Raw materials and supplies.... 63,530 47,704
-------- --------
Inventories................... $231,419 $191,735
======== ========
At April 3, 2005 and December 31, 2004, $67.8 and $60.4 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, the value of
inventories would have been $11.4 and $4.0 million higher at April 3, 2005 and
December 31, 2004, respectively.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
The following schedule reconciles the changes in the carrying amount of
goodwill, by business segment, for the first quarter ended April 3, 2005.
Specialty Industrial Mineral Total
Chemicals Chemicals Products Goodwill
---------- ----------- --------- ----------
(Thousands)
Balance, December 31, 2004........ $ 286,255 $ - $ 51,539 $ 337,794
Translation adjustment............ (90) - - (90)
--------- ---------- --------- ---------
Balance, April 3, 2005............ $ 286,165 $ - $ 51,539 $ 337,704
========= ========== ========= =========
The following is information as of April 3, 2005 and December 31, 2004
related to the Company's acquired intangible assets:
6
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. GOODWILL AND INTANGIBLE ASSETS - (CONTINUED)
April 3, 2005 December 31, 2004
Range of ---------------------------- ----------------------------
Amortizable Gross Carrying Accumulated Gross Carrying Accumulated
Lives Amount Amortization Amount Amortization
----------- -------------- ------------ -------------- ------------
(Dollars in Thousands)
Intangible assets subject to amortization:
Patents............................... 5-20 years $ 669 $ (184) $ 669 $ (170)
Formulations.......................... 5-10 years 2,740 (386) 2,740 (295)
Unpatented technology................. 10-15 years 1,350 (106) 1,350 (75)
Customer base......................... 10-15 years 2,348 (198) 2,348 (151)
Non-compete agreements................ 2- 5 years 3,419 (1,611) 3,419 (1,469)
EPA registrations..................... 5 years 166 (108) 166 (99)
-------- -------- -------- --------
Total amortizable intangible assets.. 10,692 (2,593) 10,692 (2,259)
-------- -------- -------- --------
Intangible assets not subject
to amortization:
Trademarks............................ 5,596 - 5,596 -
EPA registrations..................... 4,648 - 4,648 -
-------- -------- -------- --------
Total unamortizable intangible assets 10,244 - 10,244 -
-------- -------- -------- --------
Total intangible assets................... $ 20,936 $ (2,593) $ 20,936 $ (2,259)
======== ======== ======== ========
Estimated amortization expense:
Year ending December 31, (Thousands)
-----------
2005................................................ $ 1,336
2006................................................ 1,336
2007................................................ 1,072
2008................................................ 1,072
2009................................................ 774
NOTE 5. BENEFIT PLANS
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan
for certain hourly employees in the United States (the "Hourly Retirement
Plan"). At several locations, new employees may not participate and benefits
have been frozen for most participants. Benefits under this plan are based on
stated amounts for each year of service. The Company's policy is to fund this
plan consistent with the minimum funding requirements of ERISA.
ISP Marl GmbH, a wholly owned German subsidiary of the Company, provides
a noncontributory defined benefit retirement plan for its hourly and salaried
employees (the "ISP Marl Plan"). Benefits under the ISP Marl Plan are based on
average earnings over each employee's career with the Company.
The Company's net periodic pension cost for the first quarters of 2005
and 2004 for the Hourly Retirement Plan and the ISP Marl Plan included the
following components:
7
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. BENEFIT PLANS - (CONTINUED)
Hourly Retirement Plan ISP Marl Plan
---------------------- ----------------------
First Quarter Ended First Quarter Ended
---------------------- ----------------------
April 3, April 4, April 3, April 4,
2005 2004 2005 2004
------- -------- -------- --------
(Thousands)
Service cost............................. $ 64 $ 69 $ 32 $ 23
Interest cost............................ 527 523 55 48
Expected return on plan assets........... (764) (736) - -
Amortization of actuarial losses......... 145 126 4 -
Amortization of unrecognized prior
service cost........................... 60 60 1 1
------- -------- ------- ------
Net periodic pension cost................ $ 32 $ 42 $ 92 $ 72
======= ======== ======= ======
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees.
The net periodic postretirement benefit cost (income) for the first
quarter of 2005 and 2004 included the following components:
First Quarter Ended
---------------------
April 3, April 4,
2005 2004
------- -------
(Thousands)
Service cost.......................................... $ - $ 26
Interest cost......................................... 70 131
Amortization of actuarial gains....................... (38) -
Amortization of unrecognized prior service cost....... (87) (71)
------ ------
Net periodic postretirement benefit cost (income)..... $ (55) $ 86
====== ======
Long-Term Incentive Plans
The Company has two long-term incentive plans, the 2000 Long-Term
Incentive Plan and the 2003 Executive Long-Term Incentive Plan, which provide
long-term compensation to executives, key management personnel and certain other
employees based on ISP's "Book Value" (as defined in the plans). The value of
incentive units granted under the plans is determined at the end of each fiscal
quarter based on ISP's total Shareholder's Equity. The value on the date of
grant is compared to the value as remeasured at the end of each quarter in order
to determine compensation expense. Compensation expense related to these plans
was $2.9 and $3.3 million in the first quarter of 2005 and 2004, respectively.
8
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BUSINESS SEGMENT INFORMATION
First Quarter Ended
---------------------
April 3, April 4,
2005 2004
--------- ---------
(Millions)
Net sales:
Specialty Chemicals..................................... $ 186.4 $ 186.2
Industrial Chemicals.................................... 58.7 48.7
Mineral Products (1).................................... 39.6 32.0
--------- ---------
Net sales................................................. $ 284.7 $ 266.9
========= =========
Operating income:
Specialty Chemicals (2)................................. $ 34.9 $ 46.2
Industrial Chemicals.................................... 7.8 0.3
Mineral Products........................................ 4.6 2.4
--------- ---------
Total segment operating income.......................... 47.3 48.9
Unallocated corporate office............................ (0.1) -
--------- --------
Total operating income.................................... 47.2 48.9
Interest expense, interest income and other expense, net.. (18.3) (15.3)
--------- ---------
Income before income taxes................................ $ 28.9 $ 33.6
========= =========
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $27.5 and $24.2 million for the first quarters of
2005 and 2004, respectively.
(2) Operating income for the Specialty Chemicals business segment for the first
quarter of 2005 includes a $10.5 million charge for the impairment of fixed
assets. See Note 1.
NOTE 7. ACQUISITION
In March 2005, the Company acquired a 1,4-butanediol ("BDO") production
facility in Lima, Ohio, and related working capital. BDO is a key building block
for many of the core specialty chemicals that the Company markets for
pharmaceutical, personal care, food, beverage, coatings, oil field and other
market applications. The preliminary purchase price of the acquisition has been
allocated to the estimated fair value of the assets acquired pending the
determination of any additional contingent consideration. This acquisition is
not expected to be material to the Company's results of operations in 2005.
NOTE 8. NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs,"
an amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4, which
discussed the general principles applicable to the pricing of inventory. SFAS
No. 151 amends ARB No. 43, Chapter 4, to clarify
9
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. NEW ACCOUNTING STANDARDS - (CONTINUED)
that abnormal amounts of idle facility expense, freight, handling costs, and
spoilage should be recognized as current-period charges. In addition, SFAS No.
151 requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not expect the adoption of SFAS
No. 151 to have a material effect on the Company's consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment of Accounting Principles Board Opinion No. 29. SFAS No.
153 eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception for
exchanges that do not have commercial substance. A nonmonetary exchange has
commercial substance if the entity's future cash flows are expected to
significantly change as a result of the exchange. SFAS No. 153 will be effective
for nonmonetary asset exchanges occurring in fiscal reporting periods beginning
after June 15, 2005. The Company does not expect the adoption of SFAS No. 153 to
have an immediate effect on the Company's consolidated financial statements.
In December 2004, the FASB issued a revised SFAS No. 123 ("SFAS 123R"),
"Share-Based Payment." SFAS 123R requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. SFAS
123R establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a
fair-value-based measurement method in accounting for share-based payment
transactions with employees. In February 2003, the Company's indirect parent
company, International Specialty Products Inc. ("ISP") completed a going private
transaction. As a result, stock-based compensation plans were terminated and
payments were made in accordance with the terms of the merger agreement. In
addition, the Company currently accounts for incentive units granted to eligible
Company employees pursuant to ISP's 2000 Long-Term Incentive Plan and the 2003
Executive Long-Term Incentive Plan under the accounting prescribed by FASB
Interpretation No. ("FIN") 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option and Award Plans." FIN 28 requires an entity to
measure compensation as the amount by which the Book Value (as defined in the
plans) of the incentive units covered by the grant exceeds the option price or
value specified of such incentive units between the date of grant and the
measurement date, resulting in a change in the measure of compensation for the
right or award. Since compensation expense related to such incentive units is
currently included in the actual Consolidated Statement of Operations, the
Company does not expect SFAS 123R to have an impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued FASB Staff Position ("FSP") Nos. FAS
109-1 and FAS 109-2, each as a result of the passage in October 2004 of the
American Jobs Creation Act of 2004 (the "Jobs Act"). FSP No. FAS 109-1 relates
to a provision in the Jobs Act that provides a tax deduction of up to nine
percent (when fully phased-in) on qualified production activities. The FASB
indicated in FSP No. FAS 109-1 that this deduction should be accounted
10
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. NEW ACCOUNTING STANDARDS - (CONTINUED)
for as a special deduction in accordance with SFAS No. 109, "Accounting for
Income Taxes," rather than as a tax rate reduction. This FSP was effective upon
issuance. The Company does not expect the adoption of this FSP to have a
material effect on its 2005 consolidated financial statements.
FSP No. FAS 109-2 relates to a provision in the Jobs Act that introduces a
special one-time dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer, provided certain criteria are met. This FSP
was effective upon issuance. This FSP will not have an impact on the Company's
consolidated financial statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations," an interpretation of SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 states that an entity shall
recognize the fair value of a liability for an asset retirement obligation
("ARO") in the period in which it is incurred if a reasonable estimate of fair
value can be made. The term "conditional asset retirement obligation" refers to
a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. FIN 47 states that if an entity has
sufficient information to reasonably estimate the fair value of an ARO, it must
recognize a liability at the time the liability is incurred. An entity would
have sufficient information to apply an expected present value and therefore an
ARO would be reasonably estimable if either of the following conditions exist:
(a) the settlement date and method of settlement for the ARO have been specified
by others, such as by law, regulation or contract or (b) the information is
available to reasonably estimate the settlement date or the range of potential
settlement dates, the method of settlement, and the probabilities associated
with the potential settlement dates and methods of settlements. FIN 47 will be
effective for the Company as of December 31, 2005. The Company is currently
reviewing its AROs to determine the potential impact of FIN 47 on its
consolidated financial statements, and, at this time, the Company does not
believe that FIN 47 will have a material impact on the Company's consolidated
financial statements.
NOTE 9. GUARANTOR FINANCIAL INFORMATION
In 2001, the Company and three of its wholly owned subsidiaries jointly
issued, in three separate transactions, an aggregate principal amount of $405.0
million in 10 1/4% Senior Subordinated Notes due in 2011 (the "2011 Notes"). The
2011 Notes are guaranteed by all of the Company's domestic subsidiaries, other
than certain immaterial subsidiaries, and the Company's accounts receivable
financing subsidiary. These guarantees are full, unconditional and joint and
several.
ISP Global Technologies Inc., which is a guarantor of the 2011 Notes, is
party to a License and Royalty Agreement with non-guarantor foreign affiliates.
Under this agreement, ISP Global Technologies granted a license to certain
non-guarantor foreign affiliates for the use of its patent rights, know-how and
11
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
trademarks in connection with the manufacture, use and sale of the Company's
products.
Presented below is condensed consolidating financial information for the
Company, the guarantor subsidiaries and the non-guarantor subsidiaries. This
financial information should be read in conjunction with the consolidated
financial statements and other notes related thereto.
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FIRST QUARTER ENDED APRIL 3, 2005
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 130,639 $ 154,079 $ - $ 284,718
Intercompany net sales ................... - 61,692 4,876 (66,568) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 192,331 158,955 (66,568) 284,718
Cost of products sold .................... - (143,250) (99,934) 66,568 (176,616)
Selling, general and administrative ...... - (29,703) (20,378) (50,081)
Other operating charges................... - (10,532) - (10,532)
Amortization of intangible assets......... - (334) - (334)
-------- ---------- ---------- ---------- ----------
Operating income ......................... - 8,512 38,643 - 47,155
Equity in income of subsidiaries.......... 20,454 - - (20,454) -
Intercompany royalty income (expense)..... - 11,803 (11,803) -
Intercompany dividend income ............. - 1,841 - (1,841) -
Interest expense ......................... 867 (14,996) 276 (13,853)
Interest income........................... - 16 515 531
Other expense, net ....................... (1) (2,416) (2,484) (4,901)
-------- ---------- ---------- ---------- ----------
Income before income taxes ............... 21,320 4,760 25,147 (22,295) 28,932
Income taxes ............................. (303) (4,988) (4,465) (9,756)
-------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ 21,017 $ (228) $ 20,682 $ (22,295) $ 19,176
======== ========== ========== ========== ==========
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FIRST QUARTER ENDED APRIL 4, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Net sales ................................ $ - $ 125,359 $ 141,536 $ - $ 266,895
Intercompany net sales ................... - 60,745 4,335 (65,080) -
-------- ---------- ---------- ---------- ----------
Total net sales ....................... - 186,104 145,871 (65,080) 266,895
Cost of products sold .................... - (138,778) (95,117) 65,080 (168,815)
Selling, general and administrative ...... - (31,908) (17,243) (49,151)
Amortization of intangible assets......... - (72) - (72)
-------- ---------- ---------- ---------- ----------
Operating income ......................... - 15,346 33,511 - 48,857
Equity in income of subsidiaries.......... 23,026 - - (23,026) -
Intercompany royalty income (expense)..... - 11,084 (11,084) -
Intercompany dividend income ............. - 1,682 - (1,682) -
Interest expense ......................... 815 (15,100) 201 (14,084)
Interest income........................... - 12 485 497
Other expense, net ....................... (1) (817) (890) (1,708)
-------- ---------- ---------- ---------- ----------
Income before income taxes ............... 23,840 12,207 22,223 (24,708) 33,562
Income taxes ............................. (285) (7,724) (3,680) (11,689)
-------- ---------- ---------- ---------- ----------
Net income ............................... $ 23,555 $ 4,483 $ 18,543 $ (24,708) $ 21,873
======== ========== ========== ========== ==========
12
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 3, 2005
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 2 $ 3,788 $ 22,544 $ - $ 26,334
Accounts receivable, trade, net ....... - 14,487 120,654 135,141
Accounts receivable, other ............ - 2,439 21,000 23,439
Receivables from related parties....... (38) 17,210 - 17,172
Inventories ........................... - 144,684 86,735 231,419
Deferred income tax assets............. - 17,075 - 17,075
Prepaid expenses ...................... - 4,662 2,586 7,248
-------- ---------- ---------- ---------- -----------
Total current assets ................ (36) 204,345 253,519 - 457,828
Investment in subsidiaries ............... 364,476 246,242 - (610,718) -
Intercompany loans ....................... 21,578 (12,944) (8,634) -
Due from (to) subsidiaries, net .......... - 47,814 (47,814) -
Property, plant and equipment, net ....... - 523,896 93,179 617,075
Goodwill ................................. 89,931 240,928 6,845 337,704
Intangible assets, net.................... - 18,343 - 18,343
Long-term receivable from related party .. - - 34,554 34,554
Other assets ............................. - 64,874 506 65,380
-------- ---------- ---------- ---------- -----------
Total Assets ............................. $475,949 $1,333,498 $ 332,155 $ (610,718) $ 1,530,884
======== ========== ========== ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 71 $ - $ 71
Current maturities of long-term debt .. - 2,660 156 2,816
Accounts payable ...................... - 42,857 32,077 74,934
Accrued liabilities ................... - 45,470 22,899 68,369
Income taxes payable................... - 40,509 8,652 49,161
-------- ---------- ---------- ---------- -----------
Total Current liabilities ........... - 131,496 63,855 - 195,351
Long-term debt less current maturities ... - 648,381 371 648,752
Deferred income tax liabilities........... - 108,271 15,166 123,437
Other liabilities ........................ - 80,874 6,521 87,395
Total Shareholder's Equity ............... 475,949 364,476 246,242 (610,718) 475,949
-------- ---------- ---------- ---------- -----------
Total Liabilities and Shareholder's
Equity ................................ $475,949 $1,333,498 $ 332,155 $ (610,718) $ 1,530,884
======== ========== ========== ========== ===========
13
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............. $ 1 $ 14,659 $ 18,279 $ - $ 32,939
Accounts receivable, trade, net ....... - 4,870 100,867 105,737
Accounts receivable, other ............ - 2,155 19,309 21,464
Receivables from related parties....... (38) 15,224 - 15,186
Inventories ........................... - 108,810 82,925 191,735
Deferred income tax assets............. - 14,833 - 14,833
Prepaid expenses ...................... - 4,782 2,191 6,973
-------- ---------- ---------- ---------- -----------
Total current assets ................ (37) 165,333 223,571 - 388,867
Investment in subsidiaries ............... 310,959 226,870 - (537,829) -
Intercompany loans ....................... 21,337 (12,848) (8,489) -
Due from (to) subsidiaries, net .......... - 46,539 (46,539) -
Property, plant and equipment, net ....... - 500,700 98,385 599,085
Goodwill ................................. 89,931 240,928 6,935 337,794
Intangible assets, net ................... - 18,677 - 18,677
Long-term receivable from related party .. - - 34,043 34,043
Other assets ............................. - 63,920 530 64,450
-------- ---------- ---------- ---------- -----------
Total Assets ............................. $422,190 $1,250,119 $ 308,436 $ (537,829) $ 1,442,916
======== ========== ========== ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt ....................... $ - $ - $ 71 $ - $ 71
Current maturities of long-term debt .. - 2,766 166 2,932
Accounts payable ...................... - 45,554 20,245 65,799
Accrued liabilities ................... - 52,737 31,812 84,549
Income taxes payable................... 50,260 - 6,224 56,484
-------- ---------- ---------- ---------- -----------
Total Current liabilities ........... 50,260 101,057 58,518 - 209,835
Long-term debt less current maturities ... - 648,940 428 649,368
Deferred income tax liabilities........... - 106,852 15,970 122,822
Other liabilities ........................ - 82,311 6,650 88,961
Total Shareholder's Equity ............... 371,930 310,959 226,870 (537,829) 371,930
-------- ---------- ---------- ---------- -----------
Total Liabilities and Shareholder's
Equity ................................ $422,190 $1,250,119 $ 308,436 $ (537,829) $ 1,442,916
======== ========== ========== ========== ===========
14
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
FIRST QUARTER ENDED APRIL 3, 2005
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
--------- ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)...................................... $ (1,278) $ (228) $ 20,682 $ 19,176
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Impairment of fixed assets.......................... - 10,532 - 10,532
Depreciation........................................ - 12,791 3,517 16,308
Amortization of intangible assets................... - 334 - 334
Noncash interest charges............................ - 503 - 503
Deferred income taxes............................... - (823) (804) (1,627)
Increase in working capital items...................... - (46,692) (21,650) (68,342)
Proceeds from sale of accounts receivable.............. - - 687 687
(Increase) decrease in receivables from related parties - (1,986) (511) (2,497)
Change in amounts due to (from) subsidiaries........... - (1,275) 1,275 -
Change in investment in and advances to affiliates..... (88,480) 82,792 5,688 -
Other, net............................................. - 2,630 (413) 2,217
-------- ---------- ----------- ---------
Net cash provided by (used in) operating activities...... (89,758) 58,578 8,471 (22,709)
-------- ---------- ----------- ---------
Cash flows from investing activities:
Capital expenditures and acquisition................... - (70,656) (1,745) (72,401)
-------- ---------- ----------- ---------
Net cash used in investing activities.................... - (70,656) (1,745) (72,401)
-------- ---------- ----------- ---------
Cash flows from financing activities:
Repayments of long-term debt........................... - (61) (791) (730)
Change in net intercompany loans....................... (241) 96 145 -
Intercompany dividends................................. - 1,841 (1,841) -
Capital contribution from parent company............... 90,000 - - 90,000
-------- ---------- ----------- ---------
Net cash provided by (used in) financing activities...... 89,759 1,207 (1,757) 89,209
-------- ---------- ----------- ---------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................ - - (704) (704)
-------- ---------- ----------- ---------
Net change in cash and cash equivalents.................. 1 (10,871) 4,265 (6,605)
Cash and cash equivalents, beginning of period........... 1 14,659 18,279 32,939
-------- ---------- ----------- ---------
Cash and cash equivalents, end of period................. $ 2 $ 3,788 $ 22,544 $ 26,334
======== ========== =========== =========
15
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
ISP CHEMCO INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
FIRST QUARTER ENDED APRIL 4, 2004
(THOUSANDS)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)...................................... $ (1,153) $ 4,483 $ 18,543 $ 21,873
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................ - 12,375 3,390 15,765
Amortization of intangible assets................... - 72 - 72
Noncash interest charges............................ - 597 - 597
Deferred income taxes............................... - 7,076 (6) 7,070
(Increase) decrease in working capital items........... 170 (23,415) (14,474) (37,719)
Proceeds from sale of accounts receivable.............. - - 2,877 2,877
(Increase) decrease in receivables from related parties - (3,016) (651) (3,667)
Change in amounts due to (from) subsidiaries........... 5,990 (819) (5,171) -
Change in investment in and advances to affiliates..... (4,031) 356 3,675 -
Other, net............................................. (977) 708 (276) (545)
-------- ---------- ----------- ---------
Net cash provided by (used in) operating activities...... (1) (1,583) 7,907 6,323
-------- ---------- ----------- ---------
Cash flows from investing activities:
Capital expenditures and acquisitions.................. - (25,437) (14,785) (40,222)
-------- ---------- ----------- ---------
Net cash used in investing activities.................... - (25,437) (14,785) (40,222)
-------- ---------- ----------- ---------
Cash flows from financing activities:
Increase in short-term debt............................ - - 3 3
Proceeds from issuance of debt......................... - 31,188 - 31,188
Repayments of long-term debt........................... - (15) (692) (677)
Increase in loan to related party...................... - (7,760) - (7,760)
Change in net intercompany loans....................... - (191) 191 -
Debt issuance costs.................................... - (850) - (850)
Intercompany dividends................................. - 1,682 (1,682) -
-------- ---------- ----------- ---------
Net cash provided by (used in) financing activities...... - 23,392 (1,503) 21,889
-------- ---------- ----------- ---------
Effect of exchange rate fluctuations on cash and cash
equivalents............................................ - - (315) (315)
-------- ---------- ----------- ---------
Net change in cash and cash equivalents.................. (1) (3,628) (8,696) (12,325)
Cash and cash equivalents, beginning of period........... 5 29,009 27,412 56,426
-------- ---------- ----------- ---------
Cash and cash equivalents, end of period................. $ 4 $ 25,381 $ 18,716 $ 44,101
======== ========== =========== =========
16
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. CONTINGENCIES
For information regarding contingencies, reference is made to Note 21 to
consolidated financial statements contained in the 2004 Form 10-K.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims") under the Comprehensive Environmental Response Compensation and
Liability Act, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or in
which remedial obligations are imposed. A number of these Environmental Claims
are in the early stages or have been dormant for protracted periods.
While the Company cannot predict whether adverse decisions or events can
occur in the future, in the opinion of the Company's management, the resolution
of the Environmental Claims should not be material to the business, liquidity,
results of operations, cash flows or financial position of the Company. However,
adverse decisions or events, particularly as to increases in remedial costs,
discovery of new contamination, assertion of natural resource damages, plans for
development of the Company's Linden, New Jersey property, and the liability and
the financial responsibility of the Company's insurers and of the other parties
involved at each site and their insurers, could cause the Company to increase
the estimate of its liability or decrease the estimate of insurance recoveries
in respect of those matters. It is not currently possible to estimate the amount
or range of any additional liability.
Tax Claim Against G-I Holdings Inc.
The predecessor of ISP and certain of its domestic subsidiaries were
parties to tax sharing agreements with members of a consolidated group for
federal income tax purposes that included G-I Holdings Inc. (the "G-I Holdings
Group") in certain prior years. Until January 1, 1997, ISP and its domestic
subsidiaries were included in the consolidated federal income tax returns of the
G-I Holdings Group and, accordingly, would be severally liable for any tax
liability of the G-I Holdings Group in respect of those prior years. Those tax
sharing agreements are no longer applicable with respect to the tax liabilities
of ISP for periods subsequent to January 1, 1997, because neither the Company
nor any of its domestic subsidiaries are members of the G-I Holdings Group for
periods after January 1, 1997. In January 2001, G-I Holdings filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to
its asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service ("IRS") of a deficiency in the amount of $84.4 million (after
taking into account the use of net operating losses and foreign tax credits
otherwise available for use in later years) in connection with the formation in
1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "Surfactants
Partnership"), a partnership in which G-I Holdings held an interest. On
September 21, 2001, the IRS filed a proof of claim with respect to such
deficiency in the G-I Holdings bankruptcy against G-I Holdings and ACI Inc., a
subsidiary of G-I Holdings which also held an interest in the Surfactants
Partnership and also has
17
ISP CHEMCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. CONTINGENCIES - (CONTINUED)
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. If the proof of claim is sustained, ISP and/or certain of its
subsidiaries together with G-I Holdings and several current and former
subsidiaries of G-I Holdings would be severally liable for taxes and interest in
the amount of approximately $297 million, computed as of April 3, 2005. On May
7, 2002, G-I Holdings, together with ACI Inc., filed an objection to the proof
of claim, which objection will be heard by the United States District Court for
the District of New Jersey overseeing the G-I Holdings bankruptcy. G-I Holdings
has advised the Company that it believes that it will prevail in this tax matter
involving the Surfactants Partnership, although there can be no assurance in
this regard. The Company believes that the ultimate disposition of this matter
will not have a material adverse effect on its business, financial position or
results of operations. For additional information relating to G-I Holdings,
reference is made to Notes 7 and 21 to consolidated financial statements
contained in the 2004 Form 10-K.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise expressly indicated, "we," "us" and "our" refer to ISP
Chemco Inc. and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our critical accounting
policies during the first quarter of 2005. For a discussion of our critical
accounting policies, reference is made to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
RESULTS OF OPERATIONS - FIRST QUARTER 2005 COMPARED WITH
FIRST QUARTER 2004
Overview
We recorded net income of $19.2 million for the first quarter of 2005
compared with net income of $21.9 million in the first quarter of 2004. The
decline in net income for the first quarter of 2005 was primarily attributable
to a non-cash, pre-tax asset impairment charge of $10.5 million (see "Other
Operating Charges" below) and higher other expense, net.
Net Sales. Net sales by business segment for the first quarter of 2005
and 2004 were:
First Quarter Ended
----------------------------
April 3, April 4,
2005 2004
--------- ---------
(Millions)
Specialty chemicals.................... $ 186.4 $ 186.2
Industrial chemicals................... 58.7 48.7
Mineral products....................... 39.6 32.0
--------- ---------
Net sales............................ $ 284.7 $ 266.9
========= =========
Net sales for the first quarter of 2005 were $284.7 million compared
with $266.9 million in the first quarter of 2004. The $17.8 million (7%)
increase in sales resulted primarily from higher unit volumes and favorable
pricing in the mineral products segment and favorable pricing in the industrial
chemicals segment. The favorable impact of the weaker U.S. dollar, primarily in
Europe, also benefited sales.
Gross Margin. Our gross margin in the first quarter of 2005 was 38.0%
compared with 36.7% in the first quarter of 2004. The improved margin was mainly
attributable to favorable pricing in the industrial chemicals and mineral
products business segments, as well as the favorable impact of higher unit
volumes and the weaker U.S. dollar, partially offset by higher material and
manufacturing costs.
19
Selling, General and Administrative. Selling, general and administrative
expenses increased 2% in the first quarter of 2005 to $50.1 million from $49.2
million in the first quarter of 2004, however, as a percent of sales, decreased
to 17.6% from 18.4% in the first quarter of 2004. The increase in selling,
general and administrative expenses in the first quarter of 2005 was due
primarily to higher selling and distribution costs as a result of the higher
sales levels.
Other Operating Charges. Other operating charges of $10.5 million in the
first quarter of 2005 represented a non-cash fixed asset impairment charge
related to our program for the restructuring and consolidation of production
capacity in the specialty chemicals business segment. In March 2005, we entered
into a long-term supply contract with an international company for the purchase
of a product in the specialty chemicals business that we currently manufacture.
As a result, the utilization of one of our domestic specialty chemicals
manufacturing facilities will be adversely impacted. Accordingly, we performed
an impairment review in the first quarter of 2005 and recorded a $10.5 million
non-cash fixed asset impairment charge related to this facility. The impairment
charge was determined based on a review of anticipated future cash flows related
to this facility compared with the carrying value of the facility's fixed
assets.
Operating Income. Operating income by business segment for the first
quarter of 2005 and 2004 was:
First Quarter Ended
----------------------------
April 3, April 4,
2005 2004
--------- ---------
(Millions)
Specialty chemicals.................... $ 34.9 $ 46.2
Industrial chemicals................... 7.8 0.3
Mineral products....................... 4.6 2.4
--------- ---------
Total segment operating income....... 47.3 48.9
Unallocated corporate office items..... (0.1) -
--------- ---------
Operating income..................... $ 47.2 $ 48.9
========= =========
Operating income for the first quarter of 2005 was $47.2 million
compared with $48.9 million in the first quarter of 2004. Excluding the $10.5
million non-cash asset impairment charge discussed above, operating income
increased 18% to $57.7 million (see "Non-GAAP Financial Measures" below).
The specialty chemicals segment recorded operating income of $34.9 million
in the first quarter of 2005. Excluding the aforementioned non-cash asset
impairment charge of $10.5 million, operating income for the segment was $45.4
million compared with $46.2 million in the first quarter of 2004. The lower
operating income was primarily attributable to unfavorable results in the
performance chemicals and fine chemicals product lines, offset by favorable
performance for the personal care product line.
The industrial chemicals segment recorded operating income of $7.8 million
in the first quarter of 2005 compared with $0.3 million in the first quarter of
2004. The improved results were attributable to favorable pricing, partially
offset by higher material costs.
Operating income for the mineral products segment was $4.6 million in the
first quarter of 2005 compared with $2.4 million in the first quarter of 2004.
The improvement in operating income from the first quarter of 2004 resulted
20
from favorable pricing and the impact of higher unit volumes, partially offset
by increased material and manufacturing costs.
Interest Expense. Interest expense for the first quarter of 2005 was
$13.9 million compared with $14.1 million in the same period in 2004. The lower
interest expense was attributable to lower average interest rates ($0.3 million
impact).
Other Expense, Net. Other expense, net, comprises foreign exchange gains
and losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating items of expense. Other expense, net, was $4.9 million in the
first quarter of 2005 compared with $1.7 million in the first quarter of 2004.
The higher expense in the first quarter of 2005 was due primarily to unfavorable
foreign exchange.
Income Taxes. In the first quarter of 2005, we recorded a provision for
income taxes of $9.8 million. Our effective tax rate for the first quarter of
2005 was 33.7%, which was comparable with an effective tax rate of 34.8% in the
first quarter of 2004.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through three reportable business segments:
specialty chemicals, industrial chemicals and mineral products. The operating
income for the first quarter of 2005 for the specialty chemicals business
segment discussed below is adjusted for the non-GAAP financial measures in the
table below.
Non-GAAP Financial Measures
The business segment review below and the discussion of operating income
above contain information regarding non-GAAP financial measures contained
within the meaning of Item 10 of Regulation S-K promulgated by the Securities
and Exchange Commission. As used herein, "GAAP" refers to U.S. generally
accepted accounting principles. We use non-GAAP financial measures to eliminate
the effect of certain other operating gains and charges on reported operating
income. Management believes that these financial measures are useful to
bondholders and financial institutions because such measures exclude
transactions that are unusual due to their nature or infrequency and therefore
allow bondholders and financial institutions to more readily compare our
company's performance from period to period. Management uses this information in
monitoring and evaluating our company's performance and the performance of
individual business segments. The non-GAAP financial measures included herein
have been reconciled to the most directly comparable GAAP financial measure as
is required under Item 10 of Regulation S-K regarding the use of such financial
measures. These non-GAAP financial measures should be considered in addition to,
and not as a substitute, or superior to, operating income or other measures of
financial performance in accordance with GAAP.
21
First Quarter Ended
---------------------
April 3, April 4,
2005 2004
--------- ---------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................... $ 47.2 $ 48.9
Non-GAAP adjustments:
Less: Other operating charges (1).................. 10.5 -
--------- ---------
Operating income as adjusted............................ $ 57.7 $ 48.9
========= =========
Supplemental Business Segment Information:
Operating income:
Operating Income per GAAP - Specialty Chemicals.... $ 34.9 $ 46.2
Non-GAAP adjustments (1)........................... 10.5 -
--------- ---------
Operating Income - Specialty Chemicals as adjusted. $ 45.4 $ 46.2
========= =========
Operating Income per GAAP - Industrial Chemicals... $ 7.8 $ 0.3
Non-GAAP adjustments............................... - -
--------- ---------
Operating Income - Industrial Chemicals as adjusted $ 7.8 $ 0.3
========= =========
Operating Income per GAAP - Mineral Products....... $ 4.6 $ 2.4
Non-GAAP adjustments............................... - -
--------- ---------
Operating Income - Mineral Products as adjusted.... $ 4.6 $ 2.4
========= =========
Total segment operating income as adjusted......... $ 57.8 $ 48.9
Unallocated corporate office per GAAP.............. (0.1) -
--------- ---------
Operating income as adjusted....................... $ 57.7 $ 48.9
========= =========
(1) Non-GAAP adjustments in the first quarter of 2005 represent a $10.5
million non-cash other operating charge for the impairment of fixed
assets at one of our domestic manufacturing facilities related to a
program for the restructuring and consolidation of production capacity
in the specialty chemicals segment. See "Other Operating Charges" above.
Specialty Chemicals
Sales in the first quarter of 2005 were $186.4 million compared with $186.2
million for the same period in 2004. The slight increase in sales was primarily
attributable to the favorable impact of the weaker U.S. dollar ($3.3 million)
and, to a lesser extent, favorable pricing, offset by unfavorable unit volumes
($3.7 million). Higher sales in the personal care, food and pharmaceutical
product lines were offset by lower unit volumes in the performance chemicals and
fine chemicals product lines.
Operating income for the specialty chemicals segment was $34.9 million for
the first quarter of 2005. Excluding the aforementioned $10.5 million non-cash
asset impairment charge, operating income for the segment was $45.4 million
compared with $46.2 million in the first quarter of 2004. The lower operating
income was primarily attributable to higher material costs ($3.1 million impact)
and the impact of lower unit volumes ($0.9 million), partially offset by the
favorable impact of the weaker U.S. dollar ($2.1 million).
Industrial Chemicals
Sales in the first quarter of 2005 were $58.7 million compared with
$48.7 million in the first quarter of 2004. The 21% increase in sales was
primarily attributable to favorable pricing and, to a lesser extent, the
22
favorable effect of the weaker U.S. dollar, partially offset by lower unit
volumes.
The industrial chemicals segment recorded operating income of $7.8 million
in the first quarter of 2005 compared with $0.3 million in the first quarter of
2004. The higher operating income was primarily attributable to favorable
pricing ($9.8 million) and manufacturing efficiencies ($2.2 million), partially
offset by higher material costs ($4.4 million).
Mineral Products
Sales for the Mineral Products segment for the first quarter of 2005
were $39.6 million compared with $32.0 million for the first quarter of 2004.
The 24% increase was due to higher unit volumes ($5.2 million), as a result of
an increased customer base along with industry-wide growth, and also favorable
pricing ($2.4 million).
Operating income for the mineral products segment was $4.6 million in the
first quarter of 2005 compared with $2.4 million in the same period in 2004. The
improved operating income was attributable to favorable pricing ($2.4 million)
and the favorable impact of higher unit volumes ($2.0 million), partially offset
by higher material and manufacturing costs and increased selling and
distribution expenses (totaling $2.2 million).
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
During the first quarter of 2005, our net cash outflow before financing
activities was $95.1 million, including $22.7 million used in operations and the
reinvestment of $72.4 million for capital programs and an acquisition.
Operating Activities. Net cash used in operating activities totaled $22.7
million for the first quarter of 2005, principally related to a cash investment
of $68.3 million in additional working capital, including a $23.7 million
increase in receivables as a result of higher sales, a $19.8 million increase in
inventories to support our sales growth and a $24.6 million net decrease in
payables and accrued liabilities, mainly due to payments of accrued interest.
Investing Activities. Net cash used in investing activities in the first
quarter of 2005 totaled $72.4 million for capital expenditures and an
acquisition. Capital expenditures in the first quarter of 2005 included $33.6
million for the purchase of equipment at our Freetown, Massachusetts facility.
We entered into an operating lease in 1998 for an equipment sale-leaseback
transaction related to this equipment. The lease had an initial term of four
years and, at our option, up to three one-year renewal periods. The lease
provided for a substantial guaranteed payment by us, adjusted at the end of each
renewal period, and included purchase and return options at fair market values
determined at the inception of the lease. We had the right to exercise a
purchase option with respect to the leased equipment, or the equipment could be
returned to the lessor and sold to a third party. We exercised the purchase
option in the first quarter of 2005 for a purchase price of $33.6 million.
Our total capital expenditures for the year 2005 are expected to be
approximately $110 million.
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In March 2005, we acquired a 1,4-butanediol ("BDO") production facility in
Lima, Ohio, and related working capital. BDO is a key building block for many of
the core specialty chemicals that we market for pharmaceutical, personal care,
food, beverage, coatings, oil field and other market applications. The
preliminary purchase price of the acquisition has been allocated to the
estimated fair value of the assets acquired pending the determination of any
additional contingent consideration. This acquisition is not expected to be
material to our results of operations in 2005.
Financing Activities. Net cash provided by financing activities in the
first quarter of 2005 totaled $89.2 million, principally attributable to a $90.0
million capital contribution from our parent company.
As a result of the foregoing factors, cash and cash equivalents decreased
by $6.6 million during the first quarter of 2005 to $26.3 million.
Current Maturities of Long-Term Debt
As of April 3, 2005, our current maturities of long-term debt, scheduled to
be repaid during the twelve month period ended March 2006, totaled $2.8 million,
including $2.5 million related to the term loan under our senior credit
facilities.
Contingencies
See Note 10 to consolidated financial statements for information regarding
contingencies.
Contractual Obligations
We have an acetylene supply contract for our requirements of acetylene
delivery via pipeline to our Calvert City facility. The current term of this
contract expires December 31, 2009 and allows us, at our sole option, to extend
the agreement for two additional terms of five years each. We are required by
the contract to pay a monthly non-cancelable facility fee. Pricing under the
contract is on a fixed basis with escalators related to changes in the Producer
Price Index.
In 2004, we entered into a long-term requirements contract for acetylene at
our Texas City facility. Under this contract, we are obligated to purchase
specified quantities of acetylene through the end of 2013. Pricing under this
contract is on a fixed basis with escalators related to changes in actual costs
and changes in the Producer Price Index.
The annual unconditional purchase obligation related to the long-term
acetylene supply contract at the Texas City plant, together with the
non-cancelable facility fee associated with the acetylene contract for the
Calvert City plant is $5.1 million.
In March 2005, we entered into a long-term contract with an international
company for us to purchase 100% of our global requirements of a product in the
specialty chemicals business that we currently manufacture. Subject to limited
conditions and commencing no later than April 2006, for a period of five years
our annual purchase obligation related to this long-term supply contract will be
approximately $6.5 million. In the event that we do not meet the annual purchase
obligation, we must pay a penalty equal to 30% of the price of the volume
shortfall.
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As previously discussed, in March 2005, we acquired a BDO production
facility in Lima, Ohio. As part of this acquisition, we assumed responsibility
for a long-term supply agreement for the purchase of 100% of our hydrogen gas
requirements from a supplier located within the same complex as our BDO
production facility. The supply agreement was originally entered into in 1999
and has a term of 15 years from March 2000. We are required to pay a minimum
monthly charge (currently $3.1 million on an annualized basis), which increases
at the rate of 3.5% per year for the remainder of the agreement.
New Accounting Standards
In November 2004, the Financial Accounting Standards Board, which we refer
to as "FASB," issued Statement of Financial Accounting Standards, which we refer
to as SFAS, No. 151, "Inventory Costs," an amendment of Accounting Research
Bulletin, which we refer to as "ARB," No. 43, Chapter 4, which discussed the
general principles applicable to the pricing of inventory. SFAS No. 151 amends
ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs, and spoilage should be recognized as
current-period charges. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. We
do not expect the adoption of SFAS No. 151 to have a material effect on our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment of Accounting Principles Board Opinion No. 29. SFAS No.
153 eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets and replaces it with an exception for
exchanges that do not have commercial substance. A nonmonetary exchange has
commercial substance if the entity's future cash flows are expected to
significantly change as a result of the exchange. SFAS No. 153 will be effective
for nonmonetary asset exchanges occurring in fiscal reporting periods beginning
after June 15, 2005. We do not expect the adoption of SFAS No. 153 to have an
immediate effect on our consolidated financial statements.
In December 2004, the FASB issued a revised SFAS No. 123, which we refer to
as "SFAS 123R," "Share-Based Payment." SFAS 123R requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS 123R establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees. In February 2003, our indirect
parent company, International Specialty Products Inc., which we refer to as
"ISP," completed a going private transaction. As a result, stock-based
compensation plans were terminated and payments were made in accordance with the
terms of the merger agreement. In addition, we currently account for incentive
units granted to our eligible employees pursuant to ISP's 2000 Long-Term
Incentive Plan and 2003 Executive Long-Term Incentive Plan under the accounting
prescribed by FASB Interpretation No., which we refer to as "FIN" 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option and
Award Plans." FIN 28 requires an entity to measure compensation as the amount by
which the Book Value (as defined in the plans) of the incentive units covered by
the grant exceeds the option price or value specified of
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such incentive units between the date of grant and the measurement date,
resulting in a change in the measure of compensation for the right or award.
Since compensation expense related to such incentive units is currently included
in our actual Consolidated Statements of Operations, we do not expect SFAS 123R
to have an impact on our consolidated financial statements.
In December 2004, the FASB issued FSP Nos. FAS 109-1 and FAS 109-2, each as
a result of the passage in October 2004 of the American Jobs Creation Act of
2004, which we refer to as the "Jobs Act." FSP No. FAS 109-1 relates to a
provision in the Jobs Act that provides a tax deduction of up to 9 percent (when
fully phased-in) on qualified production activities. The FASB indicated in FSP
No. FAS 109-1 that this deduction should be accounted for as a special deduction
in accordance with SFAS No. 109, "Accounting for Income Taxes," rather than as a
tax rate reduction. This FSP is effective upon issuance. We do not expect the
adoption of this FSP to have a material effect on our 2005 consolidated
financial statements.
FSP No. FAS 109-2 relates to a provision in the Jobs Act that introduces a
special one-time dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer, provided certain criteria are met. FSP No.
FAS 109-2 was effective upon issuance. This FSP will not have an impact on our
consolidated financial statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations," an interpretation of SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 states that an entity shall
recognize the fair value of a liability for an asset retirement obligation
("ARO") in the period in which it is incurred if a reasonable estimate of fair
value can be made. The term "conditional asset retirement obligation" refers to
a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. FIN 47 states that if an entity has
sufficient information to reasonably estimate the fair value of an ARO, it must
recognize a liability at the time the liability is incurred. An entity would
have sufficient information to apply an expected present value and therefore an
ARO would be reasonably estimable if either of the following conditions exist:
(a) the settlement date and method of settlement for the ARO have been specified
by others, such as by law, regulation or contract or (b) the information is
available to reasonably estimate the settlement date or the range of potential
settlement dates, the method of settlement, and the probabilities associated
with the potential settlement dates and methods of settlements. FIN 47 will be
effective for the Company as of December 31, 2005. We are currently reviewing
our AROs to determine the potential impact of FIN 47 on our consolidated
financial statements, and, at this time, we do not believe that FIN 47 will have
a material impact on our consolidated financial statements.
* * *
Forward-looking Statements
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements
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within the meaning of section 27A of the Securities Act of 1933 and section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
only predictions and generally can be identified by use of statements that
include phrases such as "believe", "expect", "anticipate", "intend", "plan",
"foresee" or other words or phrases of similar import. Similarly, statements
that describe our objectives, plans or goals also are forward-looking
statements. Our operations are subject to certain risks and uncertainties that
could cause actual results to differ materially from those contemplated by the
relevant forward-looking statement. The forward-looking statements included
herein are made only as of the date of this quarterly report on Form 10-Q and we
undertake no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, for a discussion of "Market-Sensitive
Instruments and Risk Management." At December 31, 2004 and April 3, 2005, there
were no equity-related financial instruments employed by us to reduce market
risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have each concluded that, as of
the end of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act.
Internal Control Over Financial Reporting: There were no significant
changes in our internal control over financial reporting identified in
management's evaluation during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits:
Exhibit Number
--------------
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Executive
Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Financial
Officer.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISP CHEMCO INC.
ISP CHEMICALS INC.
ISP MINERALS INC.
ISP TECHNOLOGIES INC.
DATE: May 17, 2005 BY: /s/ Salvatore J. Guccione
------------ -------------------------
Salvatore J. Guccione
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
DATE: May 17, 2005 BY: /s/Kenneth M. McHugh
------------ --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Accounting Officer)
29