======================================================================
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 SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
---------
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
--------------
(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 SEPTEMBER 30, 2001
----- ------------------
COMMON STOCK, $0.01 PAR VALUE 104,228,734 SHARES
----------------------------- ------------------
======================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
2001 2000 2001 2000
----- ----- ------ ------
NET SALES.......................................... $ 690 $ 774 $2,174 $2,454
Cost of goods sold................................. 561 632 1,789 1,956
----- ----- ------ ------
GROSS PROFIT....................................... 129 142 385 498
Marketing expenses................................. 40 41 131 129
Administrative expenses............................ 40 39 114 132
Technological expenses............................. 16 19 48 62
Amortization expense............................... 9 9 25 24
----- ----- ------ ------
OPERATING INCOME................................... 24 34 67 151
Equity earnings from affiliates.................... 9 14 21 21
Interest expense................................... (22) (22) (66) (63)
Gain on sale of Polymer Modifiers business......... -- 73 -- 73
Other income (expense)--net........................ (3) 4 34 --
----- ----- ------ ------
INCOME BEFORE INCOME TAXES......................... 8 103 56 182
Income taxes....................................... 1 25 14 49
----- ----- ------ ------
NET INCOME......................................... $ 7 $ 78 $ 42 $ 133
===== ===== ====== ======
BASIC EARNINGS PER SHARE........................... $0.07 $0.75 $ 0.41 $ 1.24
===== ===== ====== ======
DILUTED EARNINGS PER SHARE......................... $0.07 $0.74 $ 0.40 $ 1.22
===== ===== ====== ======
Weighted average equivalent shares (in millions):
Basic.......................................... 104.0 104.3 103.7 106.9
Effect of dilutive securities:
Common share equivalents--common shares
issuable upon exercise of outstanding
stock options............................ 1.2 1.7 1.3 1.7
----- ----- ------ ------
Diluted........................................ 105.2 106.0 105.0 108.6
===== ===== ====== ======
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
2001 2000 2001 2000
----- ----- ------ ------
NET INCOME......................................... $ 7 $ 78 $ 42 $ 133
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments................... 48 (49) (12) (114)
Net unrealized loss on derivative instruments...... -- -- (2) --
Net (gain) loss on derivative instruments.......... 1 -- (1) --
----- ----- ------ ------
COMPREHENSIVE INCOME............................... $ 56 $ 29 $ 27 $ 19
===== ===== ====== ======
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 15 $ 19
Trade receivables, net of allowance of $15 in 2001 and $12
in 2000................................................... 412 406
Miscellaneous receivables and prepaid expenses.............. 103 126
Deferred income tax benefit................................. 117 107
Inventories................................................. 341 357
------ ------
TOTAL CURRENT ASSETS........................................ 988 1,015
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 60 60
Buildings................................................... 419 421
Machinery and equipment..................................... 2,974 2,982
Construction in progress.................................... 87 62
------ ------
Total property, plant and equipment......................... 3,540 3,525
Less accumulated depreciation............................... 2,379 2,320
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 1,161 1,205
INVESTMENTS IN AFFILIATES................................... 398 351
GOODWILL, net of accumulated amortization of $40 in 2001
and $24 in 2000........................................... 400 421
IDENTIFIED INTANGIBLE ASSETS, net of accumulated
amortization of $25 in 2001 and $16 in 2000............... 205 217
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 190 190
OTHER ASSETS................................................ 169 182
------ ------
TOTAL ASSETS................................................ $3,511 $3,581
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................ $ 254 $ 359
Wages and benefits.......................................... 55 45
Accrued liabilities......................................... 434 451
Short-term debt............................................. 587 494
------ ------
TOTAL CURRENT LIABILITIES................................... 1,330 1,349
LONG-TERM DEBT.............................................. 780 784
POSTRETIREMENT LIABILITIES.................................. 922 941
OTHER LIABILITIES........................................... 470 541
SHAREHOLDERS' EQUITY (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.......................... (156) (141)
Treasury stock, at cost (14,171,901 shares in 2001 and
15,484,194 shares in 2000)............................ (270) (296)
Unearned ESOP shares........................................ (4) (9)
Accumulated other comprehensive loss........................ (123) (108)
Reinvested earnings......................................... 561 519
------ ------
SHAREHOLDERS' EQUITY (DEFICIT).............................. 9 (34)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ $3,511 $3,581
====== ======
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2001 2000
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income.................................................. $ 42 $133
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes............................... (2) 6
Depreciation and amortization....................... 136 139
Amortization of deferred credits.................... (10) (8)
Restructuring expenses and other charges--net....... -- 41
Other............................................... (13) (24)
Working capital changes that provided (used) cash:
Trade receivables................................... (6) 50
Inventories......................................... 18 (24)
Accounts payable and accrued liabilities............ (114) 8
Other............................................... 28 (2)
Net pretax gains from asset disposals................... (34) (79)
Other items............................................. (91) (65)
----- ----
CASH FROM OPERATIONS........................................ (46) 175
----- ----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (65) (180)
Acquisition and investment payments, net of cash acquired... (32) (109)
Property disposals and investment proceeds, net............. 36 210
----- ----
CASH FROM INVESTING ACTIVITIES.............................. (61) (79)
----- ----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... 92 5
Long-term debt reductions................................... -- (10)
Treasury stock purchases.................................... -- (98)
Common stock issued under employee stock plans.............. 11 2
----- ----
CASH FROM FINANCING ACTIVITIES.............................. 103 (101)
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (4) (5)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 19 28
----- ----
END OF PERIOD............................................... $ 15 $ 23
===== ====
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 nine-month
periods ended September 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 AND DIVESTITURES
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 nine-month periods ended September 30, 2000.
During the third quarter of 2000, Solutia completed the sale of its
Polymer Modifiers business and related manufacturing facilities to
Ferro Corporation for approximately $130 million. As a result of this
transaction, Solutia recognized a $73 million pretax gain ($46 million
aftertax). Solutia's results of operations for the nine months ended
September 30, 2000, included net sales of approximately $93 million and
operating income of approximately $16 million, from the Polymer Modifiers
business.
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
4
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 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 nine months ended September 30, 2001, Solutia has
reduced its workforce by approximately 500 positions incurring cash
outlays associated with this restructuring action of approximately
$34 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
Amounts utilized................................... (8) -- (8)
---- ---- ----
BALANCE AT SEPTEMBER 30, 2001.......................... $ 16 $-- $ 16
==== ==== ====
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............................... -- -- --
Amounts utilized................................... -- -- --
---- ---- ----
BALANCE AT SEPTEMBER 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
5
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 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
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
BALANCE AT SEPTEMBER 30, 2001................. $ 2 $-- $ 4 $ 6
==== ==== ==== ====
4. INVENTORY VALUATION
The components of inventories as of September 30, 2001, and
December 31, 2000, were as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Finished goods............................. $ 217 $ 305
Goods in process........................... 123 105
Raw materials and supplies................. 105 108
----- -----
Inventories, at FIFO cost.................. 450 518
Excess of FIFO over LIFO cost.............. (104) (161)
----- -----
TOTAL...................................... $ 341 $ 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,
6
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. 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 reduce 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. Solutia uses foreign
currency hedging instruments 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 uses 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 (expense)--net in the period. The net impact
of the related gains and losses was not material.
In addition, Solutia uses 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 (expense)--net to match the
collection of accounts receivable and in cost of goods sold to match
the classification of depreciation. At September 30, 2001, hedge
ineffectiveness was assessed and deemed immaterial.
No cash flow hedges were discontinued during the quarter ended
September 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
7
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. Two outstanding contracts matured during the quarter ended
September 30, 2001, resulting in a $1 million aftertax loss. Net
unrealized losses on current open contracts totaled $2 million aftertax
during the quarter ended September 30, 2001. Commodity hedging activity
is not material to Solutia's financial statements.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
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 has not completed an analysis of the potential
impact upon adoption of the impairment test of goodwill; however,
Solutia expects that the adoption of SFAS No. 142 will reduce annual
amortization expense by approximately $20 million to $25 million
aftertax.
In July 2001, the Financial Accounting Standards Board issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." The
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement obligations. Such obligations have a legal
commitment requiring settlement as a result of existing or enacted law,
statute, written or oral contract or by legal construction under the
doctrine of promissory estoppel. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Solutia is evaluating SFAS No. 143
to determine its effects, if any, on Solutia's consolidated financial
statements.
In August 2001, the Financial Accounting Standards Board issued
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The statement addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, but retains SFAS No. 121's
fundamental provisions for (a) recognition/measurement of impairment
of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 also
supersedes the accounting/reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, for segments of a business to
be disposed of but retains APB 30's requirement to report discontinued
operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed
of or is classified as held for sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. Solutia is evaluating
SFAS No. 144 to determine its effects, if any, on Solutia's consolidated
financial statements.
8. DEBT OBLIGATIONS
Solutia has an $800 million, five-year revolving credit facility
with a syndicate of commercial banks and a $250 million, 364-day
multi-currency revolving credit agreement with a syndicate of
commercial banks. The $800 million facility and the $250 million
facility are available for working capital, commercial paper support
and other general corporate purposes.
Both the $800 million facility and the $250 million facility
contain various covenants that, among other things, require Solutia
to meet certain leverage and interest coverage ratios. A 60-day
waiver of these covenants was received on September 17, 2001, for
the third quarter of 2001. Without the waiver, Solutia would not
have been in compliance with the leverage coverage ratio. Solutia
expects to complete an amendment of its $800 million facility during
the fourth quarter of 2001, including modification of the financial
covenants. Under the terms of the expected amendment, borrowings
will be collateralized. Solutia will not renew the $250 million
facility when it expires in November 2001.
8
9. SUBSEQUENT EVENT
On October 11, 2001, Astaris LLC, a joint venture between
Solutia and FMC Corporation, announced that it will cease production
at its remaining elemental phosphorus production facility, which
is located in Pocatello, Idaho by the end of 2001, due to a non-
competitive cost position. Solutia expects its share of the
aftertax charge associated with the actions at the facility to be in
the range of $40 to $45 million. Approximately 70 percent of the
charge represents cash obligations of Astaris, specifically closure
costs, employee severance and contractual commitments, which will be
paid out over the next five to six years. Solutia will have no
additional responsibility for long-term costs and actions, including
environmental remediation of the Pocatello site.
10. 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 SYNTHACRYL(R)
glass for residential 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 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 (expense)--
net and certain non-recurring items such as gains and
9
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 nine months ended
September 30, 2001, and 2000, were as follows:
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 144 $-- $ 18 $ 165 $-- $ 24
Specialty Products............... 218 -- 7 237 -- 14
Integrated Nylon................. 328 -- 20 372 -- 11
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 690 -- 45 774 -- 49
RECONCILIATION TO CONSOLIDATED
TOTALS:
Corporate expenses............... (21) (12)
Equity earnings (loss) from
affiliates..................... 9 14
Interest expense................. (22) (22)
Gain on sale of Polymers
Modifiers Business (a)......... -- 73
Other income (expense)--net...... (3) 1
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $ 690 $-- $ 774 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 8 $103
==== ====
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
2001 2000
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 454 $-- $ 54 $ 547 $-- $ 89
Specialty Products (b), (c)...... 703 -- 70 790 -- 45
Integrated Nylon (d)............. 1,017 -- 24 1,118 1 43
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 2,174 -- 148 2,455 1 177
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............... -- -- (1) (1)
Corporate expenses (e)........... (47) (43)
Equity earnings from
affiliates (e), (f)............ 21 23
Interest expense................. (66) (63)
Gain on sale of Polymers
Modifiers Business (a)......... -- 73
Other income--net (e), (g)....... -- 15
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $2,174 $-- $2,454 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 56 $182
==== ====
<FN>
(a) For the three and nine 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).
10
(b) Specialty Products profit for the nine months ended September 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).
(c) Specialty Products profit for the nine months ended September 30, 2000, includes a restructuring charge
related to exiting operations at the Port Plastics site in Addyston, Ohio ($8 million pretax, $5 million
aftertax).
(d) Integrated Nylon profit for the nine months ended September 30, 2000, includes charges to write down certain
investments in Asia based upon indicators that the loss in their values was permanent ($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).
(e) For the nine months ended September 30, 2000, amounts include charges related to the formation and startup of
the Astaris joint venture ($16 million pretax, $11 million aftertax).
(f) For the nine months ended September 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).
(g) For the nine months ended September 30, 2000, amount includes a gain on the sale of substantially all of
Solutia's interest in P4 Production L.L.C., a phosphorus manufacturing venture ($15 million pretax,
$9 million aftertax).
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, 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 SEPTEMBER 30, 2001,
COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Net sales for the third quarter of 2001 decreased by 11 percent
as compared with the third quarter of 2000. Excluding the Polymer
Modifiers business that was sold in August 2000, net sales for the
third quarter 2001 were down 8 percent from the comparable period in
2000. Sales decreases reflect lower average selling prices, lower
volumes and unfavorable currency exchange rate fluctuations.
Performance Films
Net sales for the third quarter of 2001 in the Performance Films
segment decreased by 13 percent over the same period of the prior
year almost exclusively because of the sale of the Polymer Modifiers
business. Excluding the Polymer Modifiers business, net sales
declined 1 percent. Net sales were negatively affected by
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.
Performance Films' segment profit for the three-month period
ended September 30, 2001, decreased 25 percent over the three-month
period ended September 30, 2000, because of the loss of income
associated with the sale of the Polymer Modifiers business and the
loss of income associated with lower segment sales. Lower personnel
expense associated with restructuring activities partially offset
lower segment profit.
Specialty Products
Net sales in the Specialty Products segment for the third
quarter of 2001 decreased 8 percent over the comparable quarter of
2000. This was principally due to lower sales volumes in the Resins
and Additives business because of decreased demand by European
customers and unfavorable currency exchange movements resulting from
the devaluation of the euro in relation to the U.S. dollar. To a
lesser extent, lower sales volumes in the Industrial Products
businesses negatively affected sales because of decreased demand for
chlorobenzenes.
Segment profit for the quarter ended September 30, 2001,
decreased 50 percent over the year-ago quarter primarily because of
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 three-month
period ended September 30, 2001, decreased 12 percent from the third
quarter of 2000. The decrease in net sales was attributable to lower
average selling prices in almost all businesses in this segment. The
most significant price declines occurred in intermediates and nylon
carpet fibers. Price decreases in the intermediates business were
primarily attributable to contract business with formula pricing
tied to raw material costs. Nylon carpet fiber prices have decreased
because of the effects of competitive pressures. Prices have come
down as carpet fiber manufacturers pursue volumes in a weak U.S.
economy. Sales volumes increased slightly over the prior-year period
because of higher merchant acrylonitrile sales to Asian and European
customers. The effect of these higher sales volumes were partially
offset by continued lower sales volumes in nylon carpet and
industrial fibers, nylon plastics and polymers and acrylic fibers.
12
Segment profit for Integrated Nylon for the third quarter of
2001 was up 82 percent as compared to the third quarter of 2000. The
increase resulted almost exclusively from lower personnel expense
associated with restructuring activities. Lower raw material and
energy costs due to the dramatic decrease in petrochemical and
natural gas costs were offset by the effect of lower average selling
prices in the segment.
Operating Income
Operating income for the third quarter of 2001 declined to
$24 million as compared to $34 million for the third quarter of 2000
because of lower segment profit discussed above as well as higher
corporate expenses which were principally attributed to higher
litigation expenses.
Equity Earnings (Loss) from Affiliates
The equity earnings from affiliates were $9 million in the third
quarter of 2001 compared to $14 million of earnings in the
comparable 2000 quarter because of lower earnings from the Flexsys
and Astaris joint ventures.
Sale of Polymer Modifiers Business
In August 2000, Solutia completed the sale of its Polymer
Modifiers business and related manufacturing facilities to Ferro
Corporation for approximately $130 million. As a result of this
transaction, Solutia recognized a $73 million pretax gain
($46 million aftertax). Solutia's results of operations for the
three months ended September 30, 2000, included net sales of
approximately $19 million and operating income of approximately
$3 million, from the Polymer Modifiers business.
Income Taxes
In July 2000, the German Bundestag approved the Tax Reduction
Act. Among other items, the Tax Reduction Act reduced the corporate
tax rate beginning January 1, 2001. In accordance with SFAS No. 109,
"Accounting for Income Taxes," Solutia recognized income of
$7 million to income taxes to record the net effect of the change on
deferred income tax assets and liabilities. Other items reducing
Solutia's overall effective tax rate include effective tax planning
strategies and a greater percentage of aftertax equity earnings from
affiliates in pretax operating income.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2001,
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2000
Net sales for the nine-month period ended September 30, 2001,
decreased by 11 percent as compared with the nine-month period ended
September 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 nine months of 2001 were down 5 percent from the
comparable period in 2000. Sales decreases reflect lower volumes,
lower average selling prices and unfavorable currency exchange rate
fluctuations.
Performance Films
Performance Films' net sales for the first nine months of 2001
decreased 17 percent in comparison to the first nine months of 2000
as a result of the loss of sales from the Polymer Modifiers
business. Excluding the Polymer Modifiers business, net sales were
essentially flat with the comparable prior year period. Net sales
were negatively affected by 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 nine months of 2001 increased over the prior-year
period because of increased demand for 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 nine months ended
September 30, 2001, decreased 39 percent from the comparable
year-ago period because of the loss of income associated with the
sale of the Polymer
13
Modifiers business, higher raw material and energy costs and
unfavorable manufacturing costs associated with production cutbacks
to control inventory. This decrease was partially offset by lower
personnel expense associated with restructuring activities.
Specialty Products
Net sales in the Specialty Products segment decreased
11 percent for the nine months ended September 30, 2001, over the
comparable period of the prior year. This was 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 decreased by 1 percent principally
due to lower sales volumes in the Resins and Additives business
because of decreased demand by European customers and unfavorable
currency exchange rate movements resulting from the devaluation of
the euro in relation to the U.S. dollar. Partially offsetting these
decreases were higher average selling prices in the Resins and
Additives business and three full quarters of net sales from the
Pharmaceutical Services businesses.
Segment profit for the nine-month period ended September 30,
2001, increased 56 percent as compared to the nine-month period
ended September 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
21 percent due to the loss of income associated with the Phosphorus
Derivatives business and to a lesser extent, lower sales volumes and
higher raw material costs for the Resins and Additives business.
Integrated Nylon
The Integrated Nylon segment's net sales for the nine months
ended September 30, 2001, decreased 9 percent as compared with the
nine months ended September 30, 2000. The decrease in sales occurred
in almost all businesses in this segment as both volumes and average
selling prices declined. The effects of a slowing U.S. economy
continued to unfavorably impact the Integrated Nylon segment.
Significant volume declines occurred in almost all businesses,
including nylon carpet and industrial fibers, nylon plastics and
polymers and acrylic fibers. Carpet fiber sales volumes decreased as
carpet mills continued 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. Sales volumes for nylon industrial products 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. The effects of these lower sales were partially offset
by higher sales volumes of merchant acrylonitrile sales to Asian and
European customers. Price decreases were primarily attributable to
contract business with formula pricing tied to raw material costs
and competitive pricing pressures.
Integrated Nylon's segment profit for the nine-month period
ended September 30, 2001, decreased 44 percent from the nine-month
period ended September 30, 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 payment of debt
obligations associated with one of the investments, segment profit
decreased 61 percent. The decline resulted primarily from lower net
sales in the segment, higher energy prices and unfavorable
manufacturing variances associated with lower capacity utilization
rates. Lower raw material costs and lower personnel expense
associated with restructuring activities partially offset lower
segment profit. Lower Integrated Nylon sales volumes will continue
to adversely affect profitability over the near term. In addition
to increased energy costs and decreased sales volumes, segment
profitability was negatively affected by the shutdown of the
Chocolate Bayou intermediates facility in February as a result
of a power outage.
Operating Income
Operating income for the first nine months of 2001 declined to
$67 million from $151 million in the first nine months of 2000.
However, operating income for the second quarter of 2000 reflected
an asset impairment
14
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 the lower segment profit discussed above.
As more fully described in footnote 3, during the first nine
months of 2001 under its two restructuring actions, Solutia reduced
its workforce by approximately 570 positions (500 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 $42 million. As a result
of these actions, Solutia expects to realize approximately $26 million
in savings during 2001, primarily reflected in cost of goods sold,
from reduced employee expense.
Equity Earnings from Affiliates
Equity earnings from affiliates of $21 million were even with
earnings for the first nine months of 2000. However, 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 nine
months ended September 30, 2001, decreased approximately $15 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
joint venture contributed to lower earnings.
Sale of Polymer Modifiers Business
In August 2000, Solutia completed the sale of its Polymer
Modifiers business and related manufacturing facilities to Ferro
Corporation for approximately $130 million. As a result of this
transaction, Solutia recognized a $73 million pretax gain ($46 million
aftertax). Solutia's results of operations for the nine months ended
September 30, 2000, included net sales of approximately $93 million
and operating income of approximately $16 million, from the Polymer
Modifiers business.
Other Income (Expense)--Net
Other income for the nine months ended September 30, 2001, was
$34 million higher than the same period in 2000. However, both
periods were affected by various gains and charges. The nine months
ended September 30, 2001, included a $28 million gain ($17 million
aftertax) from an insurance settlement. The nine months ended
September 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 nine
months ended September 30, 2001, was $6 million compared to
$12 million for the same period in 2000.
Income Taxes
In July 2000, the German Bundestag approved the Tax Reduction
Act. Among other items, the Tax Reduction Act reduced the corporate
tax rate beginning January 1, 2001. In accordance with SFAS No. 109,
"Accounting for Income Taxes," Solutia recognized income of $7 million
to income taxes to record the net effect of the change on deferred
income tax assets and liabilities. Other items reducing Solutia's
overall effective tax rate include effective tax planning strategies
and a greater percentage of aftertax equity earnings from affiliates
in pretax operating income.
15
Summary of Events Affecting Comparability
Charges recorded in the three- and nine-month periods ended
September 30, 2001, and September 30, 2000, and other events
affecting comparability have been summarized in the table below
(dollars in millions).
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -----------------------
2001 2000 2001 2000
----- ----- ---- ----
Cost of goods sold........................ $ -- $ -- $-- $ 8 (a)
Marketing, administrative and
technological expenses................ -- -- -- 6 (b)
----- ----- ---- ----
OPERATING INCOME.......................... -- -- -- (14)
----- ----- ---- ----
Equity earnings from affiliates........... (2)(b)
-- -- -- (13)(c)
----- ----- ---- ----
Gain on sale of Polymer Modifiers
business.............................. -- 73 (g) 73 (g)
Other income (expense)--net............... -- -- -- (8)(b)
-- -- -- 15 (d)
-- -- -- (14)(e)
-- -- 28 (f) (5)(e)
----- ----- ---- ----
INCOME BEFORE INCOME TAXES................ -- 73 28 32
Income taxes (benefit).................... -- 20 (h) 11 10 (h)
----- ----- ---- ----
NET INCOME (LOSS)......................... $ -- $ 53 $ 17 $ 22
===== ===== ==== ====
<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 permanent 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).
(g) Solutia recorded a gain on the sale of its Polymer Modifiers business and related manufacturing facilities
($73 million pretax, $46 million aftertax).
(h) Amount represents the tax effect of the charges and other events affecting comparability. Included in this
line is the impact of a $7 million reduction in income tax expense for changes in the German tax rates.
16
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 2001, Solutia had short-term borrowings of
$583 million, consisting of borrowings under the $800 million
facility and commercial paper balances. At December 31, 2000, the
short-term borrowings totaled $485 million. The $98 million increase
in short-term borrowings resulted from the effects of lower cash
flow attributed to lower profitability, severance and other
restructuring payments and an increase in overall working capital
levels.
Solutia has an $800 million, five-year revolving credit facility
with a syndicate of commercial banks and, a $250 million, 364-day
multi-currency revolving credit agreement with a syndicate of
commercial banks. The $800 million facility and the $250 million
facility are available for working capital, commercial paper support
and other general corporate purposes. Solutia will not renew the
$250 million facility when it expires in November of 2001. During
the third quarter of 2001, one of the rating agencies, Standard &
Poor's, lowered its short-term and commercial paper ratings on
Solutia to 'A-3' from 'A-2.' As a result, Solutia has replaced most
of its commercial paper balances with borrowings under the
$800 million facility. At September 30, 2001, borrowings under the
$800 million facility totaled $562 million.
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. A 60-day waiver of
these covenants was received on September 17, 2001, for the third
quarter of 2001. Without the waiver, Solutia would not have been in
compliance with the leverage coverage ratio. Solutia expects to
complete an amendment of its $800 million facility during the fourth
quarter of 2001, including modification of the financial covenants.
Under the terms of the expected amendment, borrowings will be
collateralized. Solutia does not anticipate that future borrowings
will be significantly limited by the terms of this amendment.
In connection with the external financing agreement for Astaris
completed 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 has
contributed $30 million through the third quarter of 2001 to Astaris
and anticipates an additional $2 million contribution during the
fourth quarter of 2001. This obligation is not expected to have a
material 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 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 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 has not
completed an analysis of the potential impact upon adoption of the
impairment test of goodwill; however, Solutia expects that the
adoption of SFAS No. 142 will reduce annual amortization expense
by approximately $20 million to $25 million aftertax.
In July 2001, the Financial Accounting Standards Board issued
SFAS No. 143, "Accounting for Asset Retirement Obligations."
The statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement obligations. Such
obligations have a legal commitment requiring settlement as a result
of existing or enacted law, statue, written or oral contract or
by legal construction under the doctrine of promissory estoppel.
SFAS No. 143 is effective for fiscal
17
years beginning after June 15, 2002. Solutia is evaluating SFAS
No. 143 to determine its effects, if any, on the consolidated financial
statements.
In August 2001, the Financial Accounting Standards Board issued
SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The statement addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, but retains SFAS No. 121's
fundamental provisions for (a) recognition/measurement of impairment
of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 also
supersedes the accounting/reporting provisions of APB Opinion
No. 30, for segments of a business to be disposed of but retains
APB 30's requirement to report discontinued operations separately
from continuing operations and extends that reporting to a component
of an entity that either has been disposed of or is classified as held
for sale. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. Solutia does not expect the adoption of SFAS
No. 144 to have a material effect on its consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FACTORS
There have been no material changes in market risk exposures
during the first nine 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.
18
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 United States District Court for the
Northern District of Alabama on behalf of a purported class of all
persons who live or lived near the Anniston plant, and who were exposed
to polychlorinated biphenyls ("PCBs"). The District Court certified
the following question to the Alabama Supreme Court: "Does a complaint
which does not allege any past or present personal injury to the
plaintiff state a cause of action for medical monitoring and study
when the plaintiff alleges that he has been exposed to hazardous
contamination and pollution by the conduct of the defendant?" On
September 14, 2001, the Alabama Supreme Court answered that question
in the negative. Finding that under Alabama law an injury is required
for a cause of action to accrue, the Court held that in the absence
of such injury, Alabama does not recognize a cause of action for
medical monitoring. This holding by the Alabama Supreme Court is a
definitive statement of the law of Alabama, and bars claims for medical
monitoring by any individual who does not have a manifest bodily
injury, past or present, causally associated with exposure to PCBs.
On August 2, 2001, Solutia and Monsanto Company were served in
an action brought in United States District Court for the Northern
District of Mississippi on behalf of 1,984 plaintiffs who allegedly
live or lived in areas near the Anniston plant, or regularly visited
the area, and were allegedly exposed to PCBs released from the
plant. Plaintiffs claim to suffer unspecified injuries, assert their
entitlement to medical monitoring and testing, and seek compensatory
and punitive damages in unspecified amounts. Solutia is defending
this action vigorously and believes that the decision of the Alabama
Supreme Court described above is applicable to these claims for
medical monitoring.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit index at page 21 of this report.
(b) Solutia did not file any reports on Form 8-K during the
quarter ended September 30, 2001.
19
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: October 25, 2001
20
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 Omitted--Inapplicable
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
21