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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 JUNE 30, 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.
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(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 JUNE 30, 2001
----- --------------
COMMON STOCK, $0.01 PAR VALUE 103,813,231 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ---------------------
2001 2000 2001 2000
----- ----- ------ ------
NET SALES.......................................... $ 737 $ 834 $1,484 $1,680
Cost of goods sold................................. 609 676 1,228 1,324
----- ----- ------ ------
GROSS PROFIT....................................... 128 158 256 356
Marketing expenses................................. 45 41 91 88
Administrative expenses............................ 38 50 74 93
Technological expenses............................. 15 21 32 43
Amortization expense............................... 8 8 16 15
----- ----- ------ ------
OPERATING INCOME................................... 22 38 43 117
Equity earnings (loss) from affiliates............. 8 (2) 12 7
Interest expense................................... (22) (21) (44) (41)
Other income (expense)--net........................ 6 (9) 37 (4)
----- ----- ------ ------
INCOME BEFORE INCOME TAXES......................... 14 6 48 79
Income taxes....................................... 1 2 13 24
----- ----- ------ ------
NET INCOME......................................... $ 13 $ 4 $ 35 $ 55
===== ===== ====== ======
BASIC EARNINGS PER SHARE........................... $0.13 $0.04 $ 0.34 $ 0.51
===== ===== ====== ======
DILUTED EARNINGS PER SHARE......................... $0.12 $0.04 $ 0.33 $ 0.50
===== ===== ====== ======
Weighted average equivalent shares (in millions):
Basic.......................................... 103.7 107.4 103.6 108.3
Effect of dilutive securities:
Common share equivalents--common shares
issuable upon exercise of outstanding
stock options............................ 1.3 1.6 1.3 1.6
----- ----- ------ ------
Diluted........................................ 105.0 109.0 104.9 109.9
===== ===== ====== ======
STATEMENT OF CONSOLIDATED COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ---------------------
2001 2000 2001 2000
----- ----- ------ ------
NET INCOME......................................... $ 13 $ 4 $ 35 $ 55
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments................... (24) (45) (60) (65)
Net unrealized loss on derivative instruments...... (2) -- (2) --
Net gain on derivative instruments................. -- -- (2) --
----- ----- ------ ------
COMPREHENSIVE INCOME (LOSS)........................ $ (13) $ (41) $ (29) $ (10)
===== ===== ====== ======
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 17 $ 19
Trade receivables, net of allowance of $13 in 2001 and $12
in 2000................................................... 430 406
Miscellaneous receivables and prepaid expenses.............. 99 126
Deferred income tax benefit................................. 110 107
Inventories................................................. 355 357
------ ------
TOTAL CURRENT ASSETS........................................ 1,011 1,015
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 57 60
Buildings................................................... 412 421
Machinery and equipment..................................... 2,944 2,982
Construction in progress.................................... 78 62
------ ------
Total property, plant and equipment......................... 3,491 3,525
Less accumulated depreciation............................... 2,334 2,320
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 1,157 1,205
INVESTMENTS IN AFFILIATES................................... 376 351
GOODWILL, net of accumulated amortization of $33 in 2001 and
$24 in 2000............................................... 385 421
IDENTIFIED INTANGIBLE ASSETS, net of accumulated
amortization of $21 in 2001 and $16 in 2000............... 197 217
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 153 190
OTHER ASSETS................................................ 179 182
------ ------
TOTAL ASSETS................................................ $3,458 $3,581
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................ $ 313 $ 359
Wages and benefits.......................................... 48 45
Accrued liabilities......................................... 402 451
Short-term debt............................................. 597 494
------ ------
TOTAL CURRENT LIABILITIES................................... 1,360 1,349
LONG-TERM DEBT.............................................. 770 784
POSTRETIREMENT LIABILITIES.................................. 925 941
OTHER LIABILITIES........................................... 455 541
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............................ (151) (141)
Treasury stock, at cost (14,587,404 shares in 2001 and
15,484,194 shares in 2000).............................. (279) (296)
Unearned ESOP shares........................................ (5) (9)
Accumulated other comprehensive loss........................ (172) (108)
Reinvested earnings......................................... 554 519
------ ------
SHAREHOLDERS' DEFICIT....................................... (52) (34)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $3,458 $3,581
====== ======
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
SIX MONTHS
ENDED JUNE 30,
------------------
2001 2000
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income.................................................. $ 35 $ 55
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes............................... 38 15
Depreciation and amortization....................... 90 96
Amortization of deferred credits.................... (7) (5)
Restructuring expenses and other charges--net....... -- 41
Other............................................... (3) (13)
Working capital changes that provided (used) cash:
Trade receivables................................... (25) (21)
Inventories......................................... 1 (13)
Accounts payable and accrued liabilities............ (96) 21
Other............................................... 31 (18)
Net pretax gains from asset disposals................... (31) --
Other items............................................. (115) (27)
----- ----
CASH FROM OPERATIONS........................................ (82) 131
----- ----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (43) (123)
Acquisition and investment payments, net of cash acquired... (18) (107)
Property disposals and investment proceeds, net............. 32 28
----- ----
CASH FROM INVESTING ACTIVITIES.............................. (29) (202)
----- ----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... 101 125
Long-term debt reductions................................... -- (9)
Treasury stock purchases.................................... -- (53)
Common stock issued under employee stock plans.............. 8 1
----- ----
CASH FROM FINANCING ACTIVITIES.............................. 109 64
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (2) (7)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 19 28
----- ----
END OF PERIOD............................................... $ 70 $ 21
===== ====
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; process research, process development
and scale-up services for the pharmaceutical industry; VYDYNE(R) and
ASCEND(TM) nylon polymers; 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 and six-month
periods ended June 30, 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 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 three-month
and six-month periods ended June 30, 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
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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.
For the six months ended June 30, 2001, Solutia has reduced its
workforce by approximately 400 positions incurring cash outlays
associated with this restructuring action of approximately
$26 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
Amounts utilized................................... (17) -- (17)
---- ---- ----
BALANCE AT JUNE 30, 2001............................... $ 24 $-- $ 24
==== ==== ====
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 included employment reductions of approximately 130 people,
primarily from Vianova Resins' service organizations located in
approximately 10 countries. In addition, the plans included amounts
to shutdown certain Vianova Resins sales offices.
During the second quarter of 2001, Solutia completed the
integration actions of shutting down certain Vianova Resins sales
offices at a cost of approximately $1 million and reduced its
workforce by approximately 130 positions at a cost of approximately
$10 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
Amounts utilized................................... (5) (1) (6)
---- ---- ----
BALANCE AT JUNE 30, 2001............................... $-- $-- $--
==== ==== ====
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 of plant assets 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. Solutia provided notice of intent
to exit on June 30, 2000, and will exit the site in June of 2002. The
5
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.
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
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
BALANCE AT JUNE 30, 2001...................... $ 2 $-- $ 4 $ 6
==== ==== ==== ====
4. INVENTORY VALUATION
The components of inventories as of June 30, 2001, and December 31,
2000, were as follows:
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Finished goods................................ $ 262 $ 305
Goods in process.............................. 121 105
Raw materials and supplies.................... 106 108
----- -----
Inventories, at FIFO cost..................... 489 518
Excess of FIFO over LIFO cost................. (134) (161)
----- -----
TOTAL......................................... $ 355 $ 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 (now Pharmacia Corporation) 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. The
settlement agreement was approved by the court and will not have a
material adverse effect on Solutia's consolidated financial
position, liquidity or profitability in any one year.
6
6. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, Solutia adopted Statement of
Financial Accounting Standard (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 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 June 30, 2001, hedge
ineffectiveness was assessed and deemed immaterial.
No cash flow hedges were discontinued during the quarter ended
June 30, 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. No outstanding
contracts matured during the quarter ended June 30, 2001. Net
unrealized losses on current open contracts totaled $2 million
aftertax during the quarter ended June 30, 2001. Commodity hedging
activity is not material to Solutia's financial statements.
7
7. OTHER
On July 20, 2001, the Financial Accounting Standards Board
issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." The statements will change
the accounting for business combinations and goodwill in two
significant ways. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of that statement,
which for Solutia, will be January 1, 2002. Solutia expects that the
adoption of SFAS No. 142 will reduce annual amortization expense by
approximately $22 million aftertax. Additionally, Solutia does not
expect to have significant goodwill impairment charges associated
with the adoption of this statement.
8. 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 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 for
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
8
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.
Segment data for the three months and the six months ended June 30,
2001, and 2000, were as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 159 $-- $ 20 $ 197 $-- $ 33
Specialty Products (a)........... 234 -- 14 248 -- 2
Integrated Nylon (b)............. 344 -- 9 389 -- 1
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 737 -- 43 834 -- 36
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............... -- -- -- --
Corporate expenses (c)........... (16) (19)
Equity earnings (loss) from
affiliates (c), (d)............ 7 (1)
Interest expense................. (22) (21)
Other income--net (c), (e)....... 2 11
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $ 737 $-- $ 834 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 14 $ 6
==== ====
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 310 $-- $ 36 $ 382 $-- $ 65
Specialty Products (a), (f)...... 485 -- 63 553 -- 31
Integrated Nylon (b)............. 689 -- 4 746 1 32
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 1,484 -- 103 1,681 1 128
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............... -- -- (1) (1)
Corporate expenses (c)........... (26) (31)
Equity earnings (loss) from
affiliates (c), (d)............ 12 9
Interest expense................. (44) (41)
Other income--net (c), (e)....... 3 14
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $1,484 $-- $1,680 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 48 $ 79
==== ====
<FN>
(a) Specialty Products profit for the periods 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).
9
(b) Integrated Nylon profit for the periods 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).
(c) For the periods ended June 30, 2000, amounts include charges related to the formation and startup of the
Astaris joint venture ($16 million pretax, $11 million aftertax).
(d) For the periods ended June 30, 2000, amount includes a 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).
(e) For the periods 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).
(f) Specialty Products profit for the six months ended June 30, 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).
10
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, liquidity and the effect of changes in accounting due to
recently issued accounting standards. 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--THREE MONTHS ENDED JUNE 30, 2001, COMPARED
WITH THE THREE MONTHS ENDED JUNE 30, 2000
Net sales for the second quarter of 2001 decreased by 12 percent
as compared with the second quarter of 2000. Excluding the
contribution of the Phosphorus Derivatives business to the Astaris
LLC joint venture in April 2000 and the Polymer Modifiers business
that was sold in August 2000, net sales for the second quarter
decreased 6 percent from the comparable period in 2000. Lower sales
volumes, lower average selling prices and unfavorable currency
exchange rate fluctuations contributed to the decrease in net sales.
Performance Films
Net sales for the second quarter of 2001 in the Performance
Films segment decreased by 19 percent over the same period of the
prior year primarily because of the sale of the Polymer Modifiers
business. Excluding the Polymer Modifiers business, net sales
decreased 2 percent for the segment primarily because of unfavorable
currency exchange rate fluctuations due to the devaluation of the
euro and Japanese yen in relation to the U.S. dollar. Also, to a
lesser extent, businesses in this segment achieved lower average
selling prices than those of the year-ago period due to competitive
pricing pressures. Sales volumes in the segment were up because of
increased demand for the 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 and lower sales of
specialty films into the electronic display market.
Performance Films segment profit for the three-month period
ended June 30, 2001, decreased 39 percent over the three-month
period ended June 30, 2000, because of the loss of income associated
with the sale of the Polymer Modifiers business, unfavorable
manufacturing variances associated with lower capacity utilization
rates and higher raw material costs, partially offset by lower
personnel expense associated with restructuring activities.
Specialty Products
Net sales in the Specialty Products segment for the second
quarter of 2001 decreased 6 percent over the comparable quarter of
2000. Excluding sales from the Phosphorus Derivatives business which
was contributed to the Astaris joint venture in April 2000, net
sales declined by 1 percent. The decrease primarily resulted from
unfavorable currency exchange movements due to the devaluation of
the euro in relation to the U.S. dollar and lower demand from
European customers in the Resins and Additives business. Partially
offsetting the impact of unfavorable currency exchange rate
fluctuations and lower European sales volumes was increased demand
for the process research, process development and small scale
manufacturing services provided by the Pharmaceutical Services
business and higher average selling prices in the Resins and
Additives business.
Segment profit for the Specialty Products segment increased
six-fold for the quarter ended June 30, 2001, over the year-ago
quarter primarily because of a restructuring charge of $8 million
($5 million aftertax) incurred in June of 2000 related to exiting
operations at the Port Plastics site in Addyston, Ohio. Excluding
the restructuring charge, segment profit increased due to higher net
sales in the Pharmaceutical Services business, lower personnel
expense associated with restructuring activities and a small gain
associated with certain asset sales in the Resins and Additives
business.
11
Integrated Nylon
The Integrated Nylon segment's net sales for the three-month
period ended June 30, 2001, decreased 12 percent from the second
quarter of 2000. Volume declines and lower average selling prices
contributed to the decrease in sales throughout most of the
product lines in this segment. The effects of a slowing U.S. economy
continue to unfavorably impact the Integrated Nylon segment. The
most significant volume declines were shown in nylon carpet and
industrial fibers and nylon plastics and polymers. Carpet fiber
sales volumes decreased as carpet mills continue to manage inventory
levels in response to lower retail demand. Decreased sales volumes
of nylon plastics and polymers 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. Nylon industrial product sales volumes
decreased because of the slowdown in the U.S. automotive industry.
Segment profit for the Integrated Nylon segment increased
eight-fold for the quarter ended June 30, 2001, compared to the
second quarter of 2000. Excluding charges of $19 million ($11 million
aftertax) incurred in June of 2000 to write down certain investments
in Asia and to accrue for the payment of debt obligations associated with
one of the investments, segment profit decreased 55 percent. The profit
decrease resulted primarily from lower net sales in the segment and
unfavorable manufacturing variances associated with lower capacity
utilization rates, partially offset by decreased raw material costs
and lower personnel expense associated with restructuring activities.
Lower Integrated Nylon volumes will continue to adversely affect
profitability over the near term.
Operating Income
Operating income for the second quarter of 2001 declined to
$22 million from $38 million in the second quarter of 2000. However,
operating income for the second quarter of 2000 reflected an
asset impairment charge of $6 million ($4 million aftertax) to
administrative expenses for the write down of capitalized software
costs related to the formation of the Astaris joint venture and the
Port Plastics restructuring charge that was taken in the Specialty
Products segment. Excluding these charges, the decline in operating
income was primarily driven by lower segment profit discussed above.
Equity Earnings (Loss) from Affiliates
Equity earnings from affiliates was $8 million in the second
quarter of 2001 compared to a loss of $2 million in the comparable
quarter in 2000. Profitability in the prior year was negatively
affected by special charges incurred by the Flexsys, L.P. and
Astaris joint ventures. During 2000, the Flexsys joint venture
recorded charges associated with the closure and impairment of
certain manufacturing operations in the United Kingdom. Solutia's
share of these charges was $13 million ($13 million aftertax). In
addition, the Astaris joint venture recorded charges related to the
closure of certain of its production facilities. Solutia's share of
these charges was approximately $2 million ($2 million aftertax).
Excluding these charges, equity earnings from affiliates in the
quarter ended June 30, 2001, decreased approximately $5 million
because of lower earnings from the Astaris joint venture resulting
from lower sales volumes, higher raw material costs and severance
charges of approximately $2 million ($2 million aftertax) associated
with headcount reductions at certain production facilities. To a
lesser extent, lower sales volumes from the Advanced Elastomer
Systems, L.P. joint venture contributed to lower earnings.
Other Income (Expense)--Net
Other income for the quarter ended June 30, 2001, was $6 million
compared to other expense of $9 million for the same period in 2000.
The significant increase in income was principally attributable to
2000 charges of $8 million ($5 million aftertax) associated with the
startup and formation of the Astaris joint venture and charges of
$19 million ($11 million aftertax) to write down certain investments
in Asia and to accrue for payment of debt obligations associated
with one of the investments. Offsetting the 2000 charges was a
$15 million gain ($9 million aftertax) resulting from the sale of
substantially all of Solutia's 40 percent interest in an Idaho
phosphorus manufacturing venture. Excluding these charges and gain,
other income in the second quarter of 2001 increased $3 million over
the same period in 2000, which was due in part to a small gain from
certain asset sales.
12
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2001, COMPARED WITH
SIX MONTHS ENDED JUNE 30, 2000
Net sales for the six-month period ended June 30, 2001,
decreased by 12 percent as compared with the six-month period ended
June 30, 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 six months of 2001 were down 3 percent from the
comparable period in 2000. Sales decreases reflect lower volumes and
unfavorable currency exchange rate fluctuations, partially offset by
higher average selling prices.
Performance Films
Performance Films' net sales for the first six months of 2001
decreased 19 percent in comparison to the first six months of 2000
primarily because of the sale of the Polymer Modifiers business.
Excluding the Polymer Modifiers business, net sales decreased
slightly for the segment primarily because of unfavorable currency
exchange rate fluctuations due to the devaluation of the euro and
Japanese yen in relation to the U.S. dollar. Also, to a lesser
extent, businesses in this segment achieved lower average selling
prices than those of the year-ago period due to competitive pricing
pressures. Sales volumes for the first half of 2001 increased over
the prior year period because of increased demand for the SAFLEX(R)
plastic interlayer products by European and Asian automotive glass
manufacturers and European architectural glass laminators. Partially
offsetting the increases in sales volumes were decreased demand by
North American automotive glass manufacturers and lower specialty
films sales into the electronic display market.
Performance Films' segment profit for the first half of 2001
decreased 45 percent from the first half of 2000 because of the loss
of income associated with the sale of the Polymer Modifiers
business, higher raw material and energy costs and unfavorable
manufacturing costs associated with production cutbacks to control
inventory, partially offset by lower personnel expense associated with
restructuring activities.
Specialty Products
Net sales in the Specialty Products segment decreased 12 percent
for the six months ended June 30, 2001, over the comparable period
of the prior year primarily because of the contribution of the
Phosphorus Derivatives business to the Astaris joint venture.
Excluding the contribution of the Phosphorus Derivatives business,
net sales increased by 1 percent due to higher average selling
prices in the Resins and Additives business and two full quarters of
net sales from the Pharmaceutical Services businesses. Partially
offsetting the increases in average selling prices and sales volumes
were unfavorable currency exchange movements due to the devaluation
of the euro in relation to the U.S. dollar and lower sales volumes
in the Resins and Additives business because of decreased demand by
European customers.
Segment profit for the six-month period ended June 30, 2001,
increased 103 percent as compared to the six-month period ended
June 30, 2000. Excluding a first quarter of 2001 gain from an insurance
settlement of $28 million ($17 million aftertax) associated with the
explosion and fire that destroyed the Vianova printing inks and
phenolics production facility in Wiesbaden, Germany, and a restructuring
charge of $8 million ($5 million aftertax) incurred in June of 2000
related to exiting operations at the Port Plastics site in Addyston,
Ohio, segment profit decreased 10 percent due to the loss of income
associated with the Phosphorus Derivatives business and to a lesser
extent, higher raw material costs and unfavorable manufacturing
variances for the Resins and Additives business.
Integrated Nylon
The Integrated Nylon segment's net sales for the six months
ended June 30, 2001, decreased 8 percent as compared with the six
months ended June 30, 2000. The decrease in sales occurred in almost
all product lines 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 in nylon
carpet and industrial fibers, as well as acrylic fibers and nylon
plastics and polymers. Carpet fiber sales volumes decreased as
carpet mills continue to manage inventory levels in response to
lower retail demand. Decreased sales volumes of nylon plastics and
polymers resulted from lower shipments of
13
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. Nylon industrial product sales volumes
decreased because of the slowdown in the U.S. automotive industry.
Sales volumes for acrylic fibers decreased in the U.S. because of
the slowing U.S. economy and increasing price pressure from foreign
competitors.
Integrated Nylon's segment profit for the first half of 2001
decreased 88 percent from the first half of 2000. Excluding charges
of $19 million ($11 million aftertax) incurred in June of 2000 to
write down certain investments in Asia and to accrue for the payment of
debt obligations associated with one of the investments, segment
profit decreased 92 percent. The decline resulted primarily from
higher raw material and energy prices, lower net sales and
unfavorable manufacturing variances associated with lower capacity
utilization rates. 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 80 percent over the year-ago
period. Elevated natural gas costs as well as lower Integrated Nylon
volumes will continue to adversely affect profitability over the
near term. In addition to higher raw material and energy costs and
decreased volumes, segment profitability was also negatively
affected by the shutdown of the Chocolate Bayou Intermediates
facility in February of 2001 as a result of a power outage.
Operating Income
Operating income for the first six months of 2001 declined to
$43 million from $117 million in the first six months of 2000.
However, operating income for the first six months of 2000 reflected
an asset impairment charge of $6 million ($4 million aftertax) to
administrative expenses for the write down of capitalized software
costs related to the formation of the Astaris joint venture and the
Port Plastics restructuring charge that was taken in the Specialty
Products segment. Excluding these charges, the decline in operating
income was primarily driven by lower segment profit discussed above.
As more fully described in footnote 3, during the first six
months of 2001 under its two restructuring actions, Solutia reduced
its workforce by approximately 470 positions (400 positions under
the fourth quarter 2000 restructuring plan and 70 positions under
the Vianova integration plan) incurring cash outlays associated
with its restructuring actions of approximately $34 million. As
a result of these actions, Solutia expects to realize approximately
$23 million in savings during 2001, primarily reflected in cost of
goods sold, from reduced employee expense.
Equity Earnings from Affiliates
Equity earnings from affiliates increased to $12 million in the
first half of 2001 from $7 million in the comparable period of 2000.
Prior year comparisons were affected by charges recorded in June of
2000 by the Flexsys and Astaris joint ventures. During 2000, the
Flexsys joint venture recorded charges associated with the closure
and impairment of certain manufacturing operations in the United
Kingdom. Solutia's share of these charges was $13 million
($13 million aftertax). In addition, the Astaris joint venture
recorded charges related to the closure of certain of its production
facilities. Solutia's share of these charges was approximately
$2 million ($2 million aftertax). Excluding these charges, equity
earnings from affiliates in the first half of 2001 decreased approximately
$10 million from the comparable period in 2000 because of lower earnings from
the Astaris joint venture resulting from lower sales volumes, higher
raw material costs and severance charges of approximately $2 million
($2 million aftertax) associated with headcount reductions at
certain production facilities. To a lesser extent, lower sales
volumes from the Advanced Elastomer Systems joint venture
contributed to lower earnings.
Other Income (Expense)--Net
Other income for the six months ended June 30, 2001, was $37 million
compared to other expense of $4 million for the same period in 2000.
However, both periods were affected by various gains and charges. The
six months ended June 30, 2001, included a $28 million gain ($17 million
aftertax) from an insurance settlement. The six months ended June 30,
2000, included net special charges of $12 million ($7 million aftertax)
principally associated with the formation of the Astaris joint venture,
certain asset impairments and a gain on the sale of a phosphorus manufacturing
venture. Excluding these gains and charges from both periods, other income
for the six months ended June 30, 2001, was $9 million compared to $8 million
for the same period in 2000.
14
Summary of Events Affecting Comparability
Charges recorded in the three- and six-month periods ended June 30,
2001, and 2000 and other events affecting comparability have been
summarized in the table below (dollars in millions).
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -----------------------
2001 2000 2001 2000
----- ----- ---- ----
Cost of goods sold........................ $ -- $ 8 (a) $-- $ 8 (a)
Marketing, administrative and
technological expenses............... -- 6 (b) -- 6 (b)
----- ----- ---- ----
OPERATING INCOME.......................... -- (14) -- (14)
----- ----- ---- ----
Equity earnings from affiliates........... -- (2) (b) -- (2) (b)
-- (13) (c) -- (13) (c)
----- ----- ---- ----
Other income (expense)--net............... -- (8) (b) -- (8) (b)
-- 15 (d) -- 15 (d)
-- (12) (e) -- (12) (e)
-- (7) (e) 28 (f) (7) (e)
----- ----- ---- ----
INCOME BEFORE INCOME TAXES................ -- (41) 28 (41)
Income taxes (benefit).................... -- (10) 11 (10)
----- ----- ---- ----
NET INCOME (LOSS)......................... $ -- $ (31) $ 17 $(31)
===== ===== ==== ====
<FN>
(a) Solutia incurred restructuring charges related to exiting operations at the Port Plastics site in Addyston,
Ohio. ($8 million pretax, $5 million aftertax).
(b) Solutia incurred charges related to the formation and startup of the Astaris joint venture ($16 million
pretax, $11 million aftertax).
(c) Solutia incurred charges associated with the impairment and closure of certain manufacturing operations in
the United Kingdom for the Flexsys joint venture. ($13 million aftertax).
(d) Solutia recognized a gain on the sale of a minority interest in a phosphorus manufacturing venture
($15 million pretax, $9 million aftertax).
(e) Solutia recorded charges to write down certain investments in Asia which exhibited indicators that the loss
in their values was other than temporary and to accrue for payment of debt obligations associated with one of
the investments ($19 million pretax, $11 million aftertax).
(f) Solutia recorded 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).
15
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 2001, Solutia had outstanding commercial paper balances of
$591 million, a $106 million increase from the December 31, 2000, balance
of $485 million. Increased commercial paper balances reflect lower
profitability, severance and other restructuring payments and an 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.
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 contributed $16 million during the second quarter of 2001 to
Astaris and anticipates an additional $10 million contribution
during the second half of 2001. This obligation is not expected to
have a significant impact on Solutia's consolidated financial
position, liquidity or profitability.
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. The
settlement will not have a material adverse effect on Solutia's
consolidated financial position, liquidity or profitability in any
one year.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard (SFAS) No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements will change the accounting for
business combinations and goodwill in two significant ways. SFAS No.
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited. SFAS No. 142 changes
the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon
adoption of that statement, which for Solutia, will be January 1,
2002. Solutia expects that the adoption of SFAS No. 142 will reduce
annual amortization expense by approximately $22 million aftertax.
Additionally, Solutia does not expect to have significant goodwill
impairment charges associated with the adoption of this statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FACTORS
There have been no material changes in market risk exposures
during the first six 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.
16
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 case brought in Circuit Court for Shelby County, Alabama
on behalf of a purported class of property owners around a waterway downstream
from the Anniston plant. On May 4, 2001, the Alabama Supreme Court issued an
opinion affirming in part and reversing in part the order of the trial court
granting Solutia's motion for summary judgment. The Alabama Supreme Court
held that the trial court properly granted summary judgment for claims
relating to the period up to the date of settlement of a previous action for
damage to plaintiffs' property, which did not involve Monsanto Company (now
Pharmacia Corporation) or Solutia. However, the Alabama Supreme Court held
that plaintiffs were permitted to maintain claims relating to the period
from the settlement of the prior action until the filing of the instant
action.
Solutia's Form 10-K also described an action pending in Circuit
Court for Calhoun County, Alabama brought on behalf of a purported
class of owners of property upon which was deposited soil allegedly
contaminated with polychlorinated biphenyls ("PCBs") and taken from
the site of a nearby commercial development. Plaintiffs have advised
the court and Solutia that they have withdrawn their class action
allegations, and are maintaining this suit solely on behalf of the
two named plaintiffs.
Monsanto and Solutia have been named as defendants in a case
filed in United States District Court for the Northern District of
Alabama on May 31, 2001, on behalf of one plaintiff who allegedly
lived in residential areas near the Anniston plant. On June 22,
2001, plaintiff filed an amended complaint adding as plaintiffs
915 "minor children or persons under the age of twenty-one years" who
allegedly resided in "poor areas" near the plant. Plaintiffs allege
that they were exposed to PCBs and suffer from unspecified physical
injuries and emotional distress as a result. They seek compensatory
and punitive damages in unspecified amounts and request medical
testing, monitoring and treatment and unspecified injunctive relief.
Monsanto has been named as a defendant in a case filed in
Circuit Court for Calhoun County, Alabama on behalf of a purported
class of "all persons who own property contaminated by defendant's
chemicals and who are not presently represented by a legal
professional." Plaintiffs allege that PCBs and other substances were
released from the Anniston plant into local waterways and/or onto
plaintiffs' properties, causing injury and damage to those
properties. Plaintiffs seek compensatory and punitive damages in
unspecified amounts.
Solutia is vigorously defending these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Solutia's annual meeting of stockholders on April 25, 2001,
two matters were submitted to a vote of stockholders.
1. The stockholders elected the following directors for a
three-year term that will expire at the annual meeting of
stockholders in 2004 (or until their respective successors
are elected and qualified, or until their earlier death,
resignation, or removal). Votes were cast as follows:
VOTES
VOTES "WITHHOLD
NAME "FOR" AUTHORITY"
---- ---------- -----------
John C. Hunter III........................... 90,253,996 3,775,157
Michael E. Miller............................ 90,317,866 3,771,287
William D. Ruckelshaus....................... 90,729,051 3,300,102
John B. Slaughter............................ 90,710,934 3,318,219
The following directors are continuing terms expiring at the
annual meeting of stockholders in 2002: Paul H. Hatfield,
J. Patrick Mulcahy, and Sally G. Narodick. The following
directors are continuing terms expiring at the annual meeting
of stockholders in 2003: Robert H. Jenkins and Frank A. Metz, Jr.
17
Effective June 15, 2001, Robert T. Blakely resigned from the class
of directors who are continuing terms until the Annual Meeting
of Stockholders in 2003.
2. The stockholders ratified the appointment by the Board of
Directors of Deloitte & Touche L.L.P. as principal
independent auditors for the year 2001. A total of 93,700,599
votes were cast in favor of ratification, 220,335 votes were
cast against it, and 108,219 votes were counted as
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit index at page 20 of this report.
(b) Solutia did not file any reports on form 8-K during the quarter
ended June 30, 2001.
18
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: July 26, 2001
19
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 Omitted--Inapplicable
4 Omitted--Inapplicable
10 Solutia Inc. Non-Employee Director Compensation Plan, as
last amended June 27, 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
20