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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING TWELVE 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS MARCH 31, 2001
----- --------------
COMMON STOCK, $0.01 PAR VALUE 103,575,266 SHARES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
----- -----
NET SALES................................................... $ 747 $ 846
Cost of goods sold.......................................... 619 648
----- -----
GROSS PROFIT................................................ 128 198
Marketing expenses.......................................... 46 47
Administrative expenses..................................... 36 43
Technological expenses...................................... 17 22
Amortization expense........................................ 8 7
----- -----
OPERATING INCOME............................................ 21 79
Equity earnings from affiliates............................. 4 9
Interest expense............................................ (22) (20)
Other income--net........................................... 31 5
----- -----
INCOME BEFORE INCOME TAXES.................................. 34 73
Income taxes................................................ 12 22
----- -----
NET INCOME.................................................. $ 22 $ 51
===== =====
BASIC EARNINGS PER SHARE.................................... $0.21 $0.47
===== =====
DILUTED EARNINGS PER SHARE.................................. $0.21 $0.46
===== =====
Weighted average equivalent shares (in millions):
Basic................................................... 103.4 109.2
Effect of dilutive securities:
Common share equivalents--common shares issuable
upon exercise of outstanding stock options........ 1.4 1.7
----- -----
Diluted................................................. 104.8 110.9
===== =====
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
----- -----
NET INCOME.................................................. $ 22 $ 51
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments............................ (36) (20)
Net gain on derivative instruments.......................... (2) --
----- -----
COMPREHENSIVE INCOME (LOSS)................................. $ (16) $ 31
===== =====
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 10 $ 19
Trade receivables, net of allowance of $13 in 2001 and $12
in 2000................................................... 426 406
Miscellaneous receivables and prepaid expenses.............. 97 126
Deferred income tax benefit................................. 112 107
Inventories................................................. 371 357
------ ------
TOTAL CURRENT ASSETS........................................ 1,016 1,015
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 59 60
Buildings................................................... 416 421
Machinery and equipment..................................... 2,943 2,982
Construction in progress.................................... 74 62
------ ------
Total property, plant and equipment......................... 3,492 3,525
Less accumulated depreciation............................... 2,313 2,320
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 1,179 1,205
INVESTMENTS IN AFFILIATES................................... 356 351
GOODWILL, net of accumulated amortization of $29 in 2001 and
$24 in 2000............................................... 400 421
IDENTIFIED INTANGIBLE ASSETS, net of accumulated
amortization of $19 in 2001 and $16 in 2000............... 205 217
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 171 190
OTHER ASSETS................................................ 178 182
------ ------
TOTAL ASSETS................................................ $3,505 $3,581
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 320 $ 359
Wages and benefits.......................................... 32 45
Accrued liabilities......................................... 446 451
Short-term debt............................................. 546 494
------ ------
TOTAL CURRENT LIABILITIES................................... 1,344 1,349
LONG-TERM DEBT.............................................. 774 784
POSTRETIREMENT LIABILITIES.................................. 935 941
OTHER LIABILITIES........................................... 493 541
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value
$0.01)
Issued: 118,400,635 shares in 2001 and 2000............... 1 1
Additional contributed capital............................ (149) (141)
Treasury stock, at cost (14,825,369 shares in 2001 and
15,484,194 shares in 2000).............................. (283) (296)
Unearned ESOP shares........................................ (7) (9)
Accumulated other comprehensive loss........................ (144) (108)
Reinvested earnings......................................... 541 519
------ ------
SHAREHOLDERS' DEFICIT....................................... (41) (34)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $3,505 $3,581
====== ======
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income.................................................. $ 22 $ 51
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes............................... 20 11
Depreciation and amortization....................... 45 49
Amortization of deferred credits.................... (3) (3)
Other............................................... (1) (14)
Working capital changes that provided (used) cash:
Trade receivables................................... (20) (27)
Inventories......................................... (14) (12)
Accounts payable and accrued liabilities............ (65) 34
Other............................................... 31 (2)
Net pretax gains from asset disposals................... (28) --
Other items............................................. (58) (13)
----- ----
CASH FROM OPERATIONS........................................ (71) 74
----- ----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (24) (62)
Acquisition and investment payments, net of cash acquired... (1) (107)
Property disposals and investment proceeds, net............. 31 4
----- ----
CASH FROM INVESTING ACTIVITIES.............................. 6 (165)
----- ----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... 51 117
Long-term debt reductions................................... -- (8)
Treasury stock purchases.................................... -- (18)
Common stock issued under employee stock plans.............. 5 1
----- ----
CASH FROM FINANCING ACTIVITIES.............................. 56 92
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (9) 1
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 19 28
----- ----
END OF PERIOD............................................... $ 10 $ 29
===== ====
See accompanying Notes to Consolidated Financial Statements.
3
SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
Solutia Inc. and its subsidiaries produce and market a variety
of high-performance chemical-based materials. Solutia's strategic
focus is built on key strengths, including complex manufacturing
capabilities, process engineering expertise, technical service,
customer problem solving, polymer chemistry and fiber technology.
These world-class skills are applied to create solutions and
products for customers in the consumer, household, automotive,
industrial products and pharmaceutical industries. Solutia's
products and services include SAFLEX(R) plastic interlayer; window
and industrial films; GELVA(R) pressure-sensitive adhesives; liquid,
powder and waterborne resins; VYDYNE(R) and ASCEND(TM) nylon
polymers; process research, process development and scale-up
services for the pharmaceutical industry; and nylon fibers.
These financial statements should be read in conjunction with
the audited financial statements and notes to consolidated financial
statements included in Solutia's 2000 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission on March 8, 2001.
The accompanying unaudited consolidated financial statements
reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of
operations, comprehensive income, and cash flows for the interim
periods reported. Such adjustments are of a normal, recurring
nature. The results of operations for the three-month period ended
March 31, 2001, are not necessarily indicative of the results to be
expected for the full year.
Certain reclassifications to prior year's financial information
have been made to conform to the 2001 presentation.
2. ACQUISITIONS
During the first quarter of 2000, Solutia completed two
acquisitions in the Specialty Products segment, which provide custom
process research, process development and technology services to the
global pharmaceutical industry. In the first acquisition, which
closed on February 10, 2000, Solutia acquired CarboGen Holdings AG.
CarboGen is a leading independent process research and development
firm. In the second acquisition, which closed March 24, 2000,
Solutia purchased AMCIS AG. AMCIS serves the global pharmaceutical
industry by developing production processes and by manufacturing
active ingredients for clinical trials and small-volume commercial
drugs. The combined purchase price for these acquisitions was
approximately $118 million, which was financed with commercial paper
and the assumption of debt.
Both of the acquisitions have been accounted for using the
purchase method. The allocations of the purchase price to the assets
and liabilities acquired resulted in current assets of $17 million,
non-current assets of $27 million, goodwill of $57 million, other
intangible assets of $41 million, current liabilities of $21 million
and non-current liabilities of $3 million. Goodwill is being
amortized over its estimated useful life of 20 years, and other
intangible assets are being amortized over their estimated useful
lives, which average 18 years.
Results of operations for CarboGen and AMCIS were included in
Solutia's results of operations from the acquisition dates. The
results of operations for the acquired businesses were not material
to Solutia's consolidated results of operations for the first
quarter of 2000.
3. RESTRUCTURING AND BUSINESS COMBINATION RESERVES
During the fourth quarter of 2000, Solutia recorded
restructuring charges of $53 million ($33 million aftertax) to cost
of goods sold for costs associated with workforce reductions of
approximately 700 people and the closure of certain non-strategic
facilities. The restructuring actions are expected to be carried out
by the end of 2001. Approximately 80 percent of the workforce
reductions are planned for North American business and manufacturing
operations, and approximately 20 percent are planned for European,
Asian and Latin American
4
operations and sales offices. Management and senior management
positions represent approximately one-third of the workforce
reductions. The closure of non-strategic facilities is not
anticipated to have a significant impact on future operations.
During the first quarter of 2001, Solutia reduced its workforce
by approximately 200 positions incurring cash outlays associated
with this restructuring action of approximately $9 million.
The following table summarizes the fourth quarter 2000
restructuring charge and amounts utilized to carry out those plans:
EMPLOYMENT SHUTDOWN OF
REDUCTIONS FACILITIES TOTAL
---------- ----------- -----
Balance at January 1, 2000............................. $ -- $ -- $ --
Charges taken...................................... 50 3 53
Amounts utilized................................... -- (3) (3)
---- ---- ----
Balance at December 31, 2000........................... 50 -- 50
Amounts utilized................................... (9) -- (9)
---- ---- ----
BALANCE AT MARCH 31, 2001.............................. $ 41 $ -- $ 41
==== ==== ====
During the second quarter of 2000, Solutia completed its plans
to integrate Vianova Resins operations with Solutia's resins
business and service organizations and recorded a liability of
$11 million to accrue for costs of integration, in accordance with
Emerging Issues Task Force Issue 95-3, "Recognition of Liabilities
in Connection with a Purchase Business Combination." The integration
plans include employment reductions of approximately 130 people,
primarily from Vianova Resins' service organizations located in
approximately 10 countries. In addition, the plans include amounts
to shut down certain Vianova Resins sales offices. The integration
actions are expected to be carried out by the end of the second
quarter of 2001.
During the first quarter of 2001, Solutia reduced its workforce
by approximately 30 positions incurring cash outlays associated with
this restructuring action of approximately $3 million. Total
workforce reductions under this restructuring action have totaled 90
positions at a cost of approximately $5 million.
The following table summarizes the Vianova Resins integration
costs and amounts utilized to carry out those plans:
EMPLOYMENT SHUTDOWN OF
REDUCTIONS FACILITIES TOTAL
---------- ----------- -----
Balance at January 1, 2000............................. $ -- $ -- $ --
Charges taken...................................... 10 1 11
Amounts utilized................................... (2) -- (2)
---- ---- ----
Balance at December 31, 2000........................... 8 1 9
Amounts utilized................................... (3) -- (3)
---- ---- ----
BALANCE AT MARCH 31, 2001.............................. $ 5 $ 1 $ 6
==== ==== ====
As part of the integration of Vianova Resins with Solutia's
resins businesses, Solutia identified excess production capacity for
certain Solutia resins products that will allow for the
consolidation of production facilities. As a result, Solutia decided
to exit its operations at the Port Plastics site in Addyston, Ohio.
An $8 million ($5 million aftertax) charge to cost of goods sold was
recorded in the second quarter of 2000 to carry out the exit plan.
The charge included $2 million to write down plant assets to their
fair value of approximately $1 million, $2 million of dismantling
costs and $4 million of estimated costs for which Solutia is
contractually obligated under an operating agreement. Fair value was
determined by discounting future cash flows using an appropriate
discount rate. Under the operating agreement, Solutia is required to
provide 24 months notice of intent to exit and to pay contractually
obligated costs for an additional 18 months thereafter to a
third-party operator. The contractually obligated costs represent
direct manufacturing, overhead, utilities and severance. The
financial impact will not be material to Solutia as production will
be shifted to other production facilities.
5
The following table summarizes the second quarter 2000
restructuring charge and amounts utilized to carry out those plans:
SHUTDOWN OF ASSET WRITE- OTHER
FACILITIES DOWNS COSTS TOTAL
----------- ------------ ----- -----
Balance at January 1, 2000.................... $ -- $ -- $ -- $ --
Charges taken............................. 2 2 4 8
Amounts utilized.......................... -- (2) -- (2)
---- ---- ---- ----
Balance at December 31, 2000.................. 2 -- 4 6
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
BALANCE AT MARCH 31, 2001..................... $ 2 $ -- $ 4 $ 6
==== ==== ==== ====
4. INVENTORY VALUATION
The components of inventories as of March 31, 2001, and
December 31, 2000, were as follows:
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Finished goods................................ $ 260 $ 305
Goods in process.............................. 134 105
Raw materials and supplies.................... 110 108
----- -----
Inventories, at FIFO cost..................... 504 518
Excess of FIFO over LIFO cost................. (133) (161)
----- -----
TOTAL......................................... $ 371 $ 357
===== =====
5. CONTINGENCIES
Solutia is a party to numerous legal proceedings that result
from the size and nature of its business. Most of these proceedings
have arisen in the ordinary course of business and involve claims
for money damages. In addition, in connection with the spinoff from
Monsanto Company on September 1, 1997, Solutia assumed from
Monsanto, under a distribution agreement, liabilities related to
specified legal proceedings. As a result, although Monsanto remains
the named defendant, Solutia is required to manage the litigation
and indemnify Monsanto for costs, expenses and judgments arising
from the litigation. Such matters arise out of the normal course of
business and relate to product liability; government regulation,
including environmental issues; employee relations and other issues.
Certain of the lawsuits and claims seek damages in very large
amounts. Although the results of litigation cannot be predicted with
certainty, management believes that the final outcome of such
litigation will not have a material adverse effect on Solutia's
consolidated financial position, liquidity or profitability in any
one year.
On October 12, 2000, the printing ink resins unit and a small
phenolics production unit at Wiesbaden, Germany were severely
damaged by an explosion and fire. No fatalities, serious injuries or
environmental damage resulted from the incident. During the first
quarter of 2001, Solutia finalized insurance recoveries and,
accordingly, recognized a $28 million gain ($17 million aftertax) in
other income--net from insurance settlements in excess of the net
book value of plant assets and associated losses.
On April 14, 2001, Solutia reached an agreement to settle the
claims brought by 1,596 plaintiffs in one of the actions pending in
the U.S. District Court for the Northern District of Alabama. Court
approval of the settlement is required for those plaintiffs who are
minors. The settlement will not have a material adverse effect on
Solutia's consolidated financial position, liquidity or
profitability in any one year.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, Solutia adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended, which requires that all derivative instruments be reported
on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The
cumulative
6
effect of adopting SFAS No. 133 as of January 1, 2001, did not have
a material effect on Solutia's consolidated financial statements.
Solutia's business operations give rise to market risk exposures
that result from changes in currency exchange rates, interest rates
and certain commodity prices. To manage the volatility relating to
these exposures, Solutia enters into various hedging transactions
that enable it to alleviate the adverse effects of financial market
risk. Solutia's hedging transactions are carried out under policies
and procedures approved by the Audit and Finance Committee of the
Board of Directors, which do not permit the purchase or holding of
any derivative financial instruments for trading purposes.
FOREIGN CURRENCY EXCHANGE RATE RISK
Solutia manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to
movements in foreign currency exchange rates. The primary purpose of
Solutia's foreign currency hedging activities is to manage the
volatility associated with foreign currency purchases of materials
and other assets and liabilities created in the normal course of
business. Solutia primarily utilizes forward exchange contracts and
purchased options to hedge these risks.
Solutia also enters into certain foreign currency derivative
instruments primarily to protect against exposure related to
intercompany financing transactions. Solutia has chosen not to
designate these instruments as hedges and to allow the gains and
losses that arise from marking the contracts to market to be
recorded in other income--net in the period. The net impact of the
related gains and losses was not material.
In addition, Solutia utilizes purchased forward exchange
contracts which are designated and qualify as cash flow hedges.
These are intended to offset the effect of exchange rate
fluctuations on forecasted collection of certain accounts receivable
and certain equipment purchases. Gains and losses on these
instruments to the extent that the hedge is effective are deferred in
other comprehensive income (OCI) until the related collection of accounts
receivable or related depreciation of equipment purchased is recognized in
earnings. The earnings impact is reported in other income--net to match
the collection of accounts receivable and in cost of goods sold to match
the classification of depreciation. At March 31, 2001, hedge ineffectiveness
was assessed and deemed immaterial.
No cash flow hedges were discontinued during the quarter ended
March 31, 2001. Foreign currency hedging activity is not material to
Solutia's financial statements.
INTEREST RATE RISK
Interest rate risk is primarily related to the changes in fair
value of fixed-rate long-term debt and short-term, floating rate
debt. Solutia believes its current debt structure appropriately
protects the company from changes in interest rates and is not
actively using any contracts to manage interest rate risk.
COMMODITY PRICE RISK
Raw materials used by Solutia are subject to price volatility
caused by weather, crude oil prices, supply conditions, political
and economic variables and other unpredictable factors. Solutia
periodically uses forward and option contracts to manage the
volatility related to anticipated energy and raw material purchases.
These market instruments are designated as cash flow hedges. The
mark-to-market gain or loss on qualifying hedges is included in OCI
to the extent effective, and reclassified into cost of goods sold in
the period during which the hedged transaction affects earnings. The
mark-to-market gains or losses on ineffective portions of hedges are
recognized in cost of goods sold immediately. All outstanding
contracts have matured and have been recognized in earnings during the
quarter ended March 31, 2001. Commodity hedging activity is not material
to Solutia's financial statements.
7. SEGMENT DATA
Effective January 1, 2001, Solutia reorganized its management
structure from a centralized organization to a decentralized
organization. This change redefined segment profitability as the
costs for certain functional services, which were previously managed
centrally, are now reflected in the operating segments. In addition,
certain
7
product groups have been moved between operating segments in
recognition of the new management structure and related product
management responsibilities. Financial data for prior periods have
been restated to conform to the current presentation.
Solutia's management is organized around four strategic business
platforms: Performance Films, Resins and Additives, Specialties and
Integrated Nylon. Resins and Additives and Specialties have been
aggregated into the Specialty Products reportable segment because of
their similar economic characteristics, as well as their similar
products and services, production processes, types of customers and
methods of distribution. Solutia's reportable segments and their
major products are as follows:
PERFORMANCE FILMS SPECIALTY PRODUCTS INTEGRATED NYLON
----------------- ------------------ ----------------
SAFLEX(R) plastic interlayer Resins and additives, Intermediate "building block"
including ALFTALAT(R) chemicals
KEEPSAFE(R), SAFLEX polyester resins,
INSIDE(R) (in Europe only) RESIMENE(R) and MAPRENAL(R)
and KEEPSAFE MAXIMUM(R) crosslinkers and
glass for residential SYNTHACRYL(R) acrylic resins
security and hurricane
protection windows
LLUMAR(R), VISTA(R) and THERMINOL(R) heat transfer Merchant polymer and nylon
GILA(R) professional and fluids extrusion polymers,
after-market window films including VYDYNE(R) and
ASCEND(TM)
Conductive and anti-reflective DEQUEST(R) water treatment Carpet fibers, including the
coated films and deep-dyed chemicals WEAR-DATED(R) and ULTRON VIP
films brands
SKYDROL(R) hydraulic fluids Industrial nylon fibers
and SKYKLEEN(R) cleaning
fluids for aviation
GELVA(R) pressure-sensitive ACRILAN(R) acrylic fibers for
adhesives apparel, upholstery fabrics,
craft yarns and other
applications
Pharmaceutical services--
process research,
process development services
scale-up capabilities and
small scale manufacturing
for the pharmaceutical
industry
Accounting policies of the segments are the same as those used
in the preparation of Solutia's consolidated financial statements.
Solutia evaluates the performance of its operating segments based on
segment earnings before interest expense and income taxes (EBIT),
which includes marketing, administrative, technological and
amortization expenses and other non-recurring charges such as
restructuring and asset impairment charges that can be directly
attributable to the operating segment. Certain expenses and other
items that are managed outside of the segments are excluded. These
unallocated items consist primarily of corporate expenses, equity
earnings from affiliates, interest expense, other income--net and
expense items and certain non-recurring items such as gains and
losses on asset dispositions and restructuring charges that are not
directly attributable to the operating segment. Solutia accounts for
intersegment sales at agreed upon transfer prices. Intersegment
sales are eliminated in consolidation. Segment assets consist
primarily of customer receivables, raw materials and finished goods
inventories, fixed assets, goodwill and identified intangible assets
directly associated with the production processes of the segment
(direct fixed assets). Segment depreciation and amortization are
based upon direct tangible and intangible assets. Unallocated assets
consist primarily of deferred taxes, certain investments in equity
affiliates and indirect fixed assets. As a result of the allocation
of previously unallocated assets, total assets at March 31, 2001,
increased by $162 million in Performance Films, $609 million in
Specialty Products and $26 million in Integrated Nylon from
December 31, 2000.
8
Segment data for the three months ended March 31, 2001, and
2000, were as follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................... $151 $ -- $ 16 $185 $ -- $ 32
Specialty Products (a).............. 251 -- 49 305 -- 29
Integrated Nylon.................... 345 -- (5) 357 1 31
---- ---- ---- ---- ---- ----
SEGMENT TOTALS........................ 747 -- 60 847 1 92
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations.................. (1) (1)
Corporate expenses.................. (10) (12)
Equity earnings from affiliates..... 5 10
Interest expense.................... (22) (20)
Other income--net................... 1 3
CONSOLIDATED TOTALS:
---- ---- ---- ----
NET SALES........................... $747 $ -- $846 $ --
==== ==== ---- ==== ==== ----
INCOME BEFORE INCOME TAXES.......... $ 34 $ 73
==== ====
<FN>
(a) Specialty Products profit for the three months ended March 31, 2001, includes a gain from an insurance
settlement associated with the explosion and fire that destroyed the Vianova printing inks and phenolics
production facility in Wiesbaden, Germany ($28 million pretax, $17 million aftertax).
Restated segment results for 2000 were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ------------------------------------
2000 2000
----------------------------------- ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films.................. $197 $ -- $ 33 $ 382 $ -- $ 65
Specialty Products (b)............. 248 -- 2 553 -- 31
Integrated Nylon (c)............... 389 -- 1 746 1 32
---- ---- ---- ------ ---- ----
SEGMENT TOTALS....................... 834 -- 36 1,681 1 128
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations................. -- -- (1) (1)
Corporate expenses (d)............. (19) (31)
Equity earnings from affiliates
(d), (e)......................... (1) 9
Interest expense................... (21) (41)
Other income--net (d), (f)......... 11 14
CONSOLIDATED TOTALS:
---- ---- ------ ----
NET SALES.......................... $834 $ -- $1,680 $ --
==== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES......... $ 6 $ 79
==== ====
9
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- ------------------------------------
2000 2000
----------------------------------- ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films.................. $165 $ -- $ 24 $ 547 $ -- $ 89
Specialty Products (b)............. 237 -- 14 790 -- 45
Integrated Nylon (c)............... 372 -- 11 1,118 1 43
---- ---- ---- ------ ---- ----
SEGMENT TOTALS....................... 774 -- 49 2,455 1 177
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations................. (1) (1)
Corporate expenses (d)............. (12) (43)
Equity earnings from affiliates
(d), (e)......................... 14 23
Interest expense................... (22) (63)
Gain on sale of Polymer Modifiers
Business (g)..................... 73 73
Other income--net (d), (f)......... 1 15
CONSOLIDATED TOTALS:
---- ---- ------ ----
NET SALES.......................... $774 $ -- $2,454 $ --
==== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES......... $103 $182
==== ====
THREE MONTHS ENDED DECEMBER 31, TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------- ------------------------------------
2000 2000
----------------------------------- ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films.................. $145 $ -- $ 17 $ 692 $ -- $106
Specialty Products (b), (h)........ 214 -- (13) 1,004 -- 32
Integrated Nylon (c), (i), (j)..... 372 -- (72) 1,490 1 (29)
---- ---- ----- ------ ---- ----
SEGMENT TOTALS....................... 731 -- (68) 3,186 1 109
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations................. (1) (1)
Corporate expenses (d), (k)........ (64) (107)
Equity earnings from
affiliates (d), (e).............. 14 37
Interest expense................... (20) (83)
Gain on sale of Polymer Modifiers
Business (g)..................... -- 73
Other income (expense)--
net (d), (f)..................... (3) 12
CONSOLIDATED TOTALS:
---- ---- ------ ----
NET SALES.......................... $731 $ -- $3,185 $ --
==== ==== ----- ====== ==== ----
INCOME BEFORE INCOME TAXES......... $(141) $ 41
===== ====
<FN>
(b) Specialty Products profit for the three months ended June 30, 2000, includes a restructuring charge related
to exiting operations at the Port Plastics site in Addyston, Ohio ($8 million pretax, $5 million aftertax).
(c) Integrated Nylon profit for the three months ended June 30, 2000, includes charges to write-down certain
investments in Asia based upon indicators that the loss in their values was other than temporary ($14 million
pretax, $8 million aftertax), and to accrue for payment of debt obligations associated with one of the
investments ($5 million pretax, $3 million aftertax).
(d) For the three months ended June 30, 2000, amounts include special operations charge related to the formation
and startup of the Astaris joint venture ($16 million pretax, $11 million aftertax).
(e) For the three months ended June 30, 2000, amount includes special operations charge associated with the
impairment and closure of certain manufacturing operations in the United Kingdom for the Flexsys joint
venture ($13 million pretax, $13 million aftertax).
10
(f) For the three months ended June 30, 2000, amount includes a gain on the sale of P4 Production L.L.C., a
phosphorus manufacturing venture ($15 million pretax, $9 million aftertax).
(g) For the three months ended September 30, 2000, amount includes a gain on the sale of the Polymer Modifiers
business and related manufacturing facilities ($73 million pretax, $46 million aftertax).
(h) Specialty Products profit for the three months ended December 31, 2000, includes an impairment charge
($15 million pretax, $9 million aftertax) to cost of goods sold primarily for the write down of certain non-
strategic production assets.
(i) Integrated Nylon profit for the three months ended December 31, 2000, includes impairment charges
($76 million pretax, $48 million aftertax) to cost of goods sold primarily for the write down of certain non-
performing and non-strategic production assets.
(j) Integrated Nylon profit for the three months ended December 31, 2000, includes a charge ($10 million pretax,
$6 million aftertax) primarily to reserve for advances and working capital loans to an Asian equity
affiliate.
(k) For the three months ended December 31, 2000, amount includes a restructuring charge ($53 million pretax,
$33 million aftertax) to cost of goods sold for workforce reductions of approximately 700 people across all
world areas and functions of the company and the closure of certain non-strategic facilities.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section includes forward-looking statements 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 include all statements regarding the expected future
financial position, results of operations, profitability, cash flows
and liquidity. Important factors that could cause actual results to
differ materially from the expectations reflected in the
forward-looking statements herein include, among others, general
economic, business and market conditions, customer acceptance of new
products, raw material and energy pricing, currency fluctuations,
increased competitive and/or customer pressure and ability to
implement cost reduction initiatives in a timely manner.
RESULTS OF OPERATIONS--FIRST QUARTER 2001 COMPARED WITH FIRST
QUARTER 2000
Net sales for the first quarter of 2001 decreased by 12 percent
as compared with the first quarter of 2000. Excluding the
contribution of the Phosphorus Derivatives business to the Astaris
joint venture in April 2000 and the Polymer Modifiers business that
was sold in August 2000, net sales for the first quarter 2001 were
unchanged from the comparable period in 2000. Unfavorable currency
exchange rate fluctuations offset higher volumes and higher average
selling prices.
Performance Films
Net sales in the Performance Films segment for the first quarter
of 2001 decreased by 18 percent over the same period of the prior
year because of the sale of the Polymer Modifiers business.
Excluding the Polymer Modifiers business, net sales increased
slightly for the segment. Net sales increased because of increased
demand for SAFLEX(R) plastic interlayer products by European and
Asian automotive glass manufacturers and European architectural
glass laminators, partially offset by decreased demand by North
American automotive glass manufacturers. Also, to a lesser extent,
businesses in this segment achieved higher average selling prices
than those of the year-ago quarter. Partially offsetting the
increases in sales volumes and average selling prices were
unfavorable currency exchange rate fluctuations in SAFLEX(R) due to
the devaluation of the euro and Japanese yen in relation to the U.S.
dollar.
Segment profit for the three-month period ended March 31, 2001,
decreased 50 percent over the three-month period ended March 31,
2000, due to higher raw material and energy costs, unfavorable
manufacturing costs associated with production cutbacks to control
inventory and the loss of income associated with the sale of the
Polymer Modifiers business.
Specialty Products
Net sales for the three months ended March 31, 2001, reflect a
full quarter of net sales from the Pharmaceutical Services
businesses that were acquired during the first quarter of 2000 and a
decrease of net sales resulting from the contribution of the
Phosphorus Derivatives business to the Astaris joint venture. Net
sales in the Specialty Products segment decreased 18 percent for the
first quarter 2001 over the comparable quarter of the prior year.
Excluding sales from the Phosphorus Derivatives business, net sales
increased 4 percent over the first quarter of 2000 due to higher
sales volumes in the Resins and Additives business and a full
quarter of net sales from the Pharmaceutical Services businesses. Also,
to a lesser extent, businesses in this segment achieved higher average
selling prices than those of the year-ago quarter. Partially
offsetting the increases in sales volumes and average selling prices
were unfavorable currency exchange rate fluctuations due to the
devaluation of the euro in relation to the U.S. dollar.
Segment profit for the Specialty Products segment increased
69 percent for the quarter ended March 31, 2001, over the year-ago
quarter. Excluding the gain from an insurance settlement associated
with the explosion and fire that destroyed the Vianova printing inks
and phenolics production facility in Wiesbaden, Germany (as more
fully described in Footnote 5), segment profit decreased 28 percent due
to the loss of income associated with the Phosphorus Derivatives business.
12
Integrated Nylon
Net sales for the first quarter of 2001 in the Integrated Nylon
segment decreased 3 percent from the first quarter of 2000. The
decrease in sales occurred in almost all businesses in this segment
as volume declines more than offset improvements in average selling
prices. The effects of a slowing U.S. economy continue to
unfavorably impact the Integrated Nylon segment. The most
significant volume declines were shown for carpet fiber, nylon
plastic and polymer and ACRILAN(R) acrylic fiber. Carpet fibers
sales volumes decreased as carpet mills continue to manage inventory
levels in response to lower retail demand. Decreased sales volumes
in the nylon plastics and polymer business resulted from lower
shipments of VYDYNE(R) nylon molding resins to the Dow Plastics
alliance because of the slowdown in the U.S. automotive industry,
and lower global demand for textile polymers. ACRILAN(R) sales
volumes decreased in the U.S. because of the slowing U.S. economy
and increasing price pressure from foreign competitors. The majority
of the increase in average selling prices occurred in the
intermediates business. Intermediates' price increases primarily
resulted from contracts with formula pricing tied to raw material
costs.
The Integrated Nylon segment incurred a loss in the first
quarter of 2001 of $5 million compared to a profit of $31 million in
first quarter of 2000. The decline resulted primarily from higher
raw material and energy prices and to a lesser extent, decreased
sales volumes. The cost of natural gas, which is used as an energy
source and affects the cost of various raw materials within the
segment, increased more than 100 percent over the year-ago period.
The costs of propylene and cyclohexane, major feedstocks for the
segment, both increased approximately 10 percent over 2000 levels.
The petrochemical and natural gas markets remain extremely volatile
and upward pricing pressures continue because of low worldwide
inventory levels. Elevated natural gas costs as well as lower
Integrated Nylon volumes will continue to adversely affect
profitability over the near term. In addition to high raw material
and energy costs, segment profitability was also negatively affected
by the shutdown of the Chocolate Bayou Intermediates facility in
February 2001 as a result of a power outage.
Operating Income
Operating income for the first quarter of 2001 was $21 million
compared with $79 million in the first quarter of 2000 because of
lower segment profit discussed above.
During the fourth quarter of 2000, Solutia recorded
restructuring charges of $53 million ($33 million aftertax, or $0.31
per share) to cost of goods sold for costs associated with work
force reductions of approximately 700 people across all world areas
of the company and the closure of certain non-strategic facilities,
as more fully described in footnote 3.
During the first quarter of 2001 under its two restructuring
actions, Solutia reduced its workforce by approximately 230 positions
incurring cash outlays associated with its restructuring actions of
approximately $12 million. As a result of these actions, Solutia expects
to realize approximately $14 million in savings, beginning in the second
quarter of 2001, primarily reflected in cost of goods sold from reduced
employee expense.
Other Income--Net
For the three months ended March 31, 2001, other income--net
includes a gain from an insurance settlement associated with the
explosion and fire that destroyed the Vianova printing inks and
phenolics production facility in Wiesbaden, Germany ($28 million
pretax, $17 million aftertax).
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2001, Solutia had outstanding commercial paper
balances of $539 million, a $54 million increase from the December 31,
1999, balance of $485 million. Increased commercial paper balances
reflect lower profitability, severance and other restructuring payments
and a seasonal increase in overall working capital levels.
Solutia's commercial paper program is supported by an $800 million,
five-year revolving credit facility ($800 million facility) with a
syndicate of commercial banks and, a $250 million, 364-day multi-currency
revolving credit agreement ($250 million facility) with a syndicate of
commercial banks. The $800 million facility and the $250 million facility
are also available for working capital and other general corporate purposes.
13
Both the $800 million facility and the $250 million facility
contain various covenants that, among other things, restrict
Solutia's ability to merge with another entity and require Solutia
to meet certain leverage and interest coverage ratios. During the
first quarter of 2001, Solutia completed an amendment of its credit
agreements to modify the financial covenants. Solutia does not
anticipate that future borrowings will be limited by the terms of
these agreements.
In connection with the finalization of the external financing
agreement for Astaris during the third quarter of 2000, Solutia
contractually agreed to provide Astaris with funding in the event
the joint venture fails to meet certain financial benchmarks.
Solutia received notification that an estimated $20 million
contribution could be required during 2001. This obligation will not
have a significant impact on Solutia's consolidated financial
position, liquidity or profitability.
Solutia believes that its cash flow from operations and
available borrowing capacity under the $800 million facility and the
$250 million facility provide sufficient resources to finance its
operations and planned capital needs for the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FACTORS
There have been no material changes in market risk exposures
during the first three months of 2001 that affect the disclosures
presented in the information appearing under "Derivative Financial
Instruments" on pages 23 and 24 of Solutia's Annual Report on Form
10-K for the year ended December 31, 2000.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's Annual Report on Form 10-K for the year ended December 31,
2000, described a number of cases pending in Circuit Court for Calhoun
County, Alabama and the United States District Court for the Northern
District of Alabama which were brought on behalf of a number of individuals
who own or rent homes, own or operate businesses, attend churches, or who
have otherwise resided or visited in neighborhoods near the Anniston plant.
On April 14, 2001, Solutia reached an agreement to settle the claims brought
by 1,596 plaintiffs in one of the actions pending in the U.S. District Court
for the Northern District of Alabama. Court approval of the settlement is
required for those plaintiffs who are minors.
Solutia's Form 10-K also described several consolidated cases
pending in Circuit Court for Calhoun County, Alabama brought on
behalf of 2,714 plaintiffs in which the Alabama Supreme Court had
entered a stay of proceedings pending that court's decision on
Solutia's petition for a writ of mandamus. On March 23, 2001, the
Alabama Supreme Court denied Solutia's petition, dissolved the stay
of proceedings and remanded the cases to the Circuit Court for
Calhoun County with instructions to consider and rule upon Solutia's
motion for transfer of venue.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 17 of this report.
(b) Solutia did not file any reports on form 8-K during the quarter
ended March 31, 2001.
15
SIGNATURE
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.
SOLUTIA INC.
-----------------------------------
(Registrant)
/s/ JAMES M. SULLIVAN
-----------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: April 27, 2001
16
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Omitted--Inapplicable
3 (i) Omitted--Inapplicable
(ii) By-Laws of Solutia Inc., as last amended April 25, 2001
4 Omitted--Inapplicable
10 1. Amendment No. 2, dated as of February 1, 2001, to U.S.
$800,000,000 Amended and Restated Five-Year Credit
Agreement, dated as of November 23, 1999, among Solutia,
the initial lenders named therein, Bank of America, N.A.
as Syndication Agent and Citibank, N.A. as Administrative
Agent
10 2. Amendment No. 1, dated as of February 1, 2001, to U.S.
$250,000,000 364-Day Multicurrency Credit Agreement, dated
as of November 21, 2000, among Solutia, the lenders named
therein, Bank of America, N.A., as Syndication Agent and
Citibank, N.A., as Administrative Agent
10 3. Letter Agreement between Solutia Inc. and Michael E.
Miller dated January 23, 2001
11 Omitted--Inapplicable; see "Statement of Consolidated
Income" on page 1.
15 Omitted--Inapplicable
18 Omitted--Inapplicable
19 Omitted--Inapplicable
22 Omitted--Inapplicable
23 Omitted--Inapplicable
24 Omitted--Inapplicable
27 Omitted--Inapplicable
99 Computation of Ratio of Earnings to Fixed Charges
17