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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 MARCH 31, 2002
----- --------------
COMMON STOCK, $0.01 PAR VALUE 104,779,372 SHARES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME (LOSS)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
------ ------
NET SALES................................................... $ 654 $ 747
Cost of goods sold.......................................... 532 619
------ ------
GROSS PROFIT................................................ 122 128
Marketing expenses.......................................... 43 46
Administrative expenses..................................... 36 36
Technological expenses...................................... 15 17
Amortization expense........................................ 1 8
------ ------
OPERATING INCOME............................................ 27 21
Equity earnings from affiliates--net of tax................. 8 4
Interest expense............................................ (25) (22)
Other income--net........................................... 7 31
------ ------
INCOME BEFORE INCOME TAXES.................................. 17 34
Income taxes................................................ 3 12
------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. 14 22
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... (167) --
------ ------
NET INCOME (LOSS)........................................... $ (153) $ 22
====== ======
BASIC EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. $ 0.13 $ 0.21
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... $(1.59) $ --
------ ------
NET INCOME (LOSS)........................................... $(1.46) $ 0.21
====== ======
DILUTED EARNINGS PER SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. $ 0.13 $ 0.21
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... $(1.59) $ --
------ ------
NET INCOME (LOSS)........................................... $(1.46) $ 0.21
====== ======
Weighted average equivalent shares (in millions):
Basic................................................... 104.7 103.4
Effect of dilutive securities:
Common share equivalents--common shares issuable
upon exercise of outstanding stock options........ 0.4 1.4
------ ------
Diluted................................................. 105.1 104.8
====== ======
STATEMENT OF CONSOLIDATED COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
THREE MONTHS
ENDED MARCH 31,
---------------------
2002 2001
------ ------
NET INCOME (LOSS)........................................... $ (153) $ 22
OTHER COMPREHENSIVE LOSS:
Currency translation adjustments............................ (5) (36)
Unrealized investment gains, net of tax..................... 1 --
Net realized (gain) loss on derivative instruments, net
of tax.................................................... 1 (2)
------ ------
COMPREHENSIVE LOSS.......................................... $ (156) $ (16)
====== ======
See accompanying Notes to Consolidated Financial Statements.
1
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 19 $ 23
Trade receivables, net of allowance of $22 in 2002
and $22 in 2001............................................... 390 352
Miscellaneous receivables....................................... 85 105
Prepaid expenses................................................ 14 15
Deferred income tax benefit..................................... 123 123
Inventories..................................................... 314 303
------ ------
TOTAL CURRENT ASSETS............................................ 945 921
PROPERTY, PLANT AND EQUIPMENT:
Land............................................................ 58 58
Buildings....................................................... 425 425
Machinery and equipment......................................... 3,009 3,006
Construction in progress........................................ 43 51
------ ------
Total property, plant and equipment............................. 3,535 3,540
Less accumulated depreciation................................... 2,415 2,397
------ ------
NET PROPERTY, PLANT AND EQUIPMENT............................... 1,120 1,143
INVESTMENTS IN AFFILIATES....................................... 223 313
GOODWILL, net................................................... 291 386
IDENTIFIED INTANGIBLE ASSETS, net............................... 69 194
LONG-TERM DEFERRED INCOME TAX BENEFIT........................... 239 254
OTHER ASSETS.................................................... 188 197
------ ------
TOTAL ASSETS.................................................... $3,075 $3,408
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................ $ 236 $ 233
Wages and benefits.............................................. 46 56
Postretirement liabilities...................................... 93 82
Miscellaneous accruals.......................................... 350 362
Short-term debt................................................. 603 683
------ ------
TOTAL CURRENT LIABILITIES....................................... 1,328 1,416
LONG-TERM DEBT.................................................. 623 627
POSTRETIREMENT LIABILITIES...................................... 933 947
OTHER LIABILITIES............................................... 458 531
SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
Issued: 118,400,635 shares in 2002 and 2001................... 1 1
Net deficiency of assets at spinoff........................... (113) (113)
Treasury stock, at cost (13,621,263 shares in 2002 and
13,921,604 shares in 2001).................................. (251) (257)
Unearned ESOP shares............................................ -- (1)
Accumulated other comprehensive loss............................ (147) (144)
Reinvested earnings............................................. 243 401
------ ------
SHAREHOLDERS' DEFICIT........................................... (267) (113)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT..................... $3,075 $3,408
====== ======
See accompanying Notes to Consolidated Financial Statements.
2
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------
2002 2001
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)........................................... $(153) $ 22
Adjustments to reconcile to Cash From Operations:
Cumulative effect of change in accounting principle..... 167 --
Depreciation and amortization........................... 38 45
Amortization of deferred credits........................ (3) (3)
Net pretax gains from asset disposals................... (5) (28)
Changes in assets and liabilities:
Income and deferred taxes........................... 57 (2)
Trade receivables................................... (38) (20)
Inventories......................................... (11) (14)
Accounts payable.................................... 3 (39)
Other assets and liabilities........................ (64) (32)
----- ----
CASH FROM OPERATIONS........................................ (9) (71)
----- ----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (13) (24)
Acquisition and investment payments, net of cash acquired... -- (1)
Property disposals and investment proceeds.................. 98 31
----- ----
CASH FROM INVESTING ACTIVITIES.............................. 85 6
----- ----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... (81) 53
Common stock issued under employee stock plans.............. 1 5
Other financing activities.................................. -- (2)
----- ----
CASH FROM FINANCING ACTIVITIES.............................. (80) 56
----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (4) (9)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 23 19
----- ----
END OF PERIOD............................................... $ 19 $ 10
===== ====
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 make and sell a variety of
high-performance chemical-based materials. Solutia is a world leader in
performance films for laminated safety glass and after-market applications;
resins and additives for high-value coatings; process development and
scale-up services for pharmaceutical fine chemicals; specialties such as
water treatment chemicals, heat transfer fluids and aviation hydraulic
fluid and an integrated family of nylon products including high-performance
polymers and fibers.
These financial statements should be read in conjunction with the
audited financial statements and notes to consolidated financial statements
included in Solutia's 2001 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 7, 2002. A summary of our
critical accounting policies is presented on page 13 of our most recent
Form 10-K. There have been no material changes in the accounting policies
followed by Solutia during fiscal year 2002 except for those changes
described in Footnote 5.
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
loss, and cash flows for the interim periods reported. Such adjustments are
of a normal, recurring nature. The results of operations for the
three-month period ended March 31, 2002, 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 2002 presentation.
2. RESTRUCTURING RESERVES
As part of the integration of Vianova Resins with Solutia's resins
businesses, Solutia identified excess production capacity for certain
Solutia resins products that will allow for the consolidation of production
facilities. As a result, Solutia decided to exit its operations at the Port
Plastics site in Addyston, Ohio. An $8 million ($5 million aftertax) charge
to cost of goods sold was recorded in the second quarter of 2000 to carry
out the exit plan. The charge included $2 million to write down plant
assets to their fair value of approximately $1 million, $2 million of
dismantling costs and $4 million of estimated costs for which Solutia is
contractually obligated under an operating agreement. Fair value was
determined by discounting future cash flows using an appropriate discount
rate. Under the operating agreement, Solutia is required to provide
24 months notice of intent to exit and to pay contractually obligated costs
for an additional 18 months thereafter to a third-party operator. 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 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 December 31, 2001.................. 2 -- 4 6
Amounts utilized.......................... -- -- -- --
---- ---- ---- ----
BALANCE AT MARCH 31, 2002..................... $ 2 $-- $ 4 $ 6
==== ==== ==== ====
4
3. INVENTORY VALUATION
The components of inventories as of March 31, 2002, and December 31,
2001, were as follows:
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Finished goods................................ $ 216 $ 209
Goods in process.............................. 109 107
Raw materials and supplies.................... 101 100
----- -----
Inventories, at FIFO cost..................... 426 416
Excess of FIFO over LIFO cost................. (112) (113)
----- -----
TOTAL......................................... $ 314 $ 303
===== =====
4. CONTINGENCIES
Because of the size and nature of its business, Solutia is a party to
numerous legal proceedings. Most of these proceedings have arisen in the
ordinary course of business and involve claims for money damages. In
addition, at the time of the spinoff, 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's belief is that the final outcome of such
litigation, except as noted below, will not have a material adverse effect
on Solutia's consolidated financial position, liquidity or profitability in
any one year.
Solutia's Annual Report on Form 10-K for the year ended December 31,
2001, describes four consolidated cases, sometimes referred to as Abernathy
v. Monsanto or Bowie v. Monsanto, which have been in trial in Circuit Court
for Etowah County, Alabama. The trial court departed from its announced
schedule and did not submit the issue of compensatory damages for the 17
Phase I trial plaintiffs to the jury for determination. Instead the court
has proceeded to hear damages evidence for all plaintiffs making property
damage claims. In addition the court has completed hearing evidence on
plaintiffs' claims for an injunction directing defendants to implement a
cleanup in Anniston and has referred the matter to a Special Master for a
recommendation. On March 25, 2002, the United States Environmental
Protection Agency ("EPA") filed a Partial Consent Decree ("the Decree") in
U.S. District Court for the Northern District of Alabama. Pursuant to the
Decree Solutia has agreed to conduct a Remedial Investigation and
Feasibility Study which will provide the information upon which the EPA
will base its decision on the appropriate remedial action in Anniston. We
have argued that the filing of the Decree has preempted the state court's
jurisdiction over any cleanup in Anniston.
Solutia, Monsanto Company, and Pharmacia Corporation are named as
defendants in an action called Oliver v. Monsanto, filed on behalf of a
single plaintiff in U.S. District Court for the Northern District of
Alabama. Plaintiff alleges that she has been exposed to PCBs from the
Anniston plant and that PCBs are present on her property. Plaintiff seeks
compensatory and punitive damages in an unspecified amount, and claims
entitlement to medical monitoring. Solutia is vigorously defending this
action.
Management does not believe that the ultimate resolution of the matters
related to Anniston, Alabama will have a material adverse impact on its
consolidated financial position or liquidity. However, it is possible that
a resolution of these cases may have a material adverse impact on Solutia's
net income in a given year, although it is impossible at this time to
estimate the range or amount of any such liability.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, Solutia adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." In accordance with SFAS No. 142, Solutia discontinued the
amortization of goodwill and identifiable intangible assets that have
indefinite useful lives. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives. Goodwill will be
assessed annually for
5
impairment. This statement also required certain intangible assets that did
not meet the criteria for recognition apart from goodwill, to be subsumed
into goodwill. During the quarter ended March 31, 2002, Solutia subsumed
into goodwill $74 million of intangible assets net of related deferred tax
liabilities representing assembled workforce and noncontractual customer
relationships that did not meet the separability criteria under SFAS No. 141,
"Business Combinations."
Net income (loss) and earnings (loss) per share for the first quarter
of 2002 and 2001, adjusted to exclude the non-amortization provisions of
SFAS No. 142, net of tax, are as follows:
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Net income:
Income before cumulative effect of change in accounting
principle............................................ $ 14 $ 22
Goodwill amortization.................................. -- 5
Subsumed intangible assets amortization................ -- 1
Equity method goodwill and trademark amortization...... -- 1
Cumulative effect of change in accounting principle.... (167) --
------ ------
ADJUSTED NET INCOME (LOSS).................................. $ (153) $ 29
====== ======
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Basic earnings (loss) per share:
Income before cumulative effect of change in accounting
principle............................................. $ 0.13 $ 0.21
Goodwill amortization................................... -- 0.05
Subsumed intangible assets amortization................. -- 0.01
Equity method goodwill and trademark amortization....... -- 0.01
Cumulative effect of change in accounting principle..... (1.59) --
------ ------
ADJUSTED BASIC EARNINGS (LOSS) PER SHARE.................... $(1.46) $ 0.28
====== ======
MARCH 31, MARCH 31,
2002 2001
--------- ---------
Diluted earnings (loss) per share:
Income before cumulative effect of change in accounting
principle............................................. $ 0.13 $ 0.21
Goodwill amortization................................... -- 0.05
Subsumed intangible assets amortization................. -- 0.01
Equity method goodwill and trademark amortization....... -- 0.01
Cumulative effect of change in accounting principle..... (1.59) --
------ ------
ADJUSTED DILUTED EARNINGS (LOSS) PER SHARE.................. $(1.46) $ 0.28
====== ======
6
Identified intangible assets are as follows:
GROSS MARCH 31, 2002 NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- -------------- --------
Amortized intangible assets:
Contractual customer relationships................ $ 23 $ (3) $ 20
Patents........................................... 6 (2) 4
Employment agreements............................. 5 (1) 4
Other............................................. 6 (4) 2
---- ---- ----
TOTAL AMORTIZED INTANGIBLE ASSETS..................... $ 40 $(10) $ 30
---- ---- ----
Unamortized intangible assets:
Trademarks........................................ $ 45 $ (6) $ 39
---- ---- ----
TOTAL UNAMORTIZED INTANGIBLE ASSETS................... $ 45 $ (6) $ 39
---- ---- ----
GROSS DECEMBER 31, 2001 NET
CARRYING ACCUMULATED CARRYING
VALUE AMORTIZATION VALUE
-------- ----------------- --------
Intangible assets:
Customer relationships............................ $149 $(14) $135
Trademarks........................................ 45 (6) 39
Assembled workforce............................... 10 (2) 8
Patents........................................... 7 (2) 5
Employment agreements............................. 5 -- 5
Other............................................. 6 (4) 2
---- ---- ----
TOTAL INTANGIBLE ASSETS............................... $222 $(28) $194
==== ==== ====
There were no acquisitions of intangible assets during the first
quarter of 2002. Intangible asset amortization expense was $1 million for
the first quarter of 2002. As a result of adoption of SFAS No. 142, there
have been no changes to amortizable lives or methods. Amortization expense
for the net carrying amount of intangible assets is estimated to be
$4 million in 2002, $4 million in 2003, $4 million in 2004, $4 million in
2005 and $4 million in 2006.
Goodwill as allocated by reportable segment is as follows:
PERFORMANCE SPECIALTY INTEGRATED
FILMS PRODUCTS NYLON TOTAL
----------- --------- ---------- -----
Gross goodwill, December 31, 2001................ $ 84 $ 347 $-- $ 431
Accumulated amortization......................... (11) (34) (45)
---- ----- ---- -----
Net goodwill, December 31, 2001.................. $ 73 $ 313 $-- $ 386
Intangible assets subsumed:
Noncontractual customer relationships........ -- 114 -- 114
Assembled workforce.......................... -- 8 -- 8
Deferred tax liabilities..................... -- (48) -- (48)
Impairment loss.................................. -- (167) -- (167)
Translation...................................... -- (2) -- (2)
---- ----- ---- -----
Goodwill, March 31, 2002......................... $ 73 $ 218 $-- $ 291
==== ===== ==== =====
Fair value measurements of the reporting units were estimated by a
third-party specialist utilizing both an income and market multiple
approach. Based on this analysis, Solutia recorded an impairment loss of
$167 million for the Resins and Additives business in the Specialty
Products segment due to declining estimates of future
7
results given current economic and market conditions. This goodwill is
non-deductible for tax purposes. The impairment charge is reflected as the
cumulative effect of change in accounting principle in the accompanying
statement of consolidated income (loss).
6. INVESTMENTS IN AFFILIATES
During the first quarter of 2002, Solutia sold its 50 percent interest
in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical
Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset
Management Partnership, a subsidiary of Exxon Mobil Corporation for
approximately $102 million. The sale resulted in a gain of $5 million
($3 million aftertax).
7. SEGMENT DATA
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, Nylon intermediate "building
including ALFTALAT(R) block" chemicals
KEEPSAFE(R), SAFLEX polyester resins,
INSIDE(R) (in Europe only) RESIMENE(R) and MAPRENAL(R) Merchant polymer and nylon
and KEEPSAFE MAXIMUM(R) crosslinkers, SYNTHACRYL(R) extrusion polymers,
glass for residential acrylic resins and GELVA(R) including VYDYNE(R) and
security and hurricane pressure-sensitive adhesives ASCEND(R)
protection windows
LLUMAR(R), VISTA(R) and Industrial products, including Carpet fibers, including the
GILA(R) professional and THERMINOL(R) heat transfer WEAR-DATED(R) and ULTRON
after-market window films fluids, DEQUEST(R) water VIP(R) brands
treatment chemicals,
VANCEVA(TM) design, enhanced SKYDROL(R) hydraulic fluids Industrial nylon fibers
security and sound and SKYKLEEN(R) cleaning
attenuation films fluids for aviation and
chlorobenzenes
Conductive and anti-reflective Pharmaceutical services, ACRILAN(R) acrylic fibers for
coated films and deep-dyed including process research, apparel, upholstery fabrics,
films process development craft yarns and other
services, scale-up applications
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 (loss) 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.
8
Segment data for the three months ended March 31, 2002, and 2001 are as
follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
SEGMENT:
Performance Films................ $ 142 $-- $ 19 $ 151 $-- $ 16
Specialty Products (a)........... 216 -- 20 251 -- 49
Integrated Nylon................. 296 -- 7 345 -- (5)
------ ---- ---- ------ ---- ----
SEGMENT TOTALS..................... 654 -- 46 747 -- 60
RECONCILIATION TO CONSOLIDATED
TOTALS:
Corporate expenses............... (17) (10)
Equity earnings from affiliates,
net of tax..................... 8 5
Interest expense................. (25) (22)
Other income--net (b)............ 5 1
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $ 654 $-- $ 747 $--
====== ==== ---- ====== ==== ----
INCOME BEFORE INCOME TAXES....... $ 17 $ 34
==== ====
<FN>
(a) Specialty Products profit for the three months ended March 31, 2001, includes a gain from an insurance
settlement associated with the explosion and fire that destroyed the Vianova printing inks and phenolics
production facility in Wiesbaden, Germany ($28 million pretax, $17 million aftertax).
(b) Other income--net for the three months ended March 31, 2002, includes a gain from the sale of Solutia's
50 percent interest in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical Company, a
division of Exxon Mobil Corporation and Exxon Chemical Asset Management Partnership, a subsidiary of
Exxon Mobil Corporation ($5 million pretax, $3 million aftertax).
9
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 expected future financial position, results of
operations, profitability, cash flows, liquidity and financing. 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, ability to
divest existing businesses, ability and cost to refinance debt, exposure to
product liability and other litigation and cost of environmental
remediation, changes in accounting principles generally accepted in the
United States of America and ability to implement cost reduction initiatives
in a timely manner.
CRITICAL ACCOUNTING POLICIES
A summary of our critical accounting policies is presented on page 13 of
our 2001 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 7, 2002.
RESULTS OF OPERATIONS--FIRST QUARTER 2002 COMPARED WITH FIRST QUARTER 2001
Net sales for the first quarter of 2002 decreased by 12 percent as
compared with the first quarter of 2001. The net sales decrease reflected
lower average selling prices, lower volumes and unfavorable currency
exchange rate fluctuations.
Performance Films
Net sales in the Performance Films segment for the first quarter of
2002 decreased by 6 percent over the same period of the prior year. Net
sales decreased primarily because of lower average selling prices than
those of the year-ago quarter due to competitive pricing pressures. Also,
to a lesser extent, net sales were negatively affected by unfavorable
currency exchange rate fluctuations in the Saflex business primarily due to
the devaluation of the euro and Japanese yen in relation to the U.S.
dollar. Increased demand for SAFLEX(R) plastic interlayer products by
European automotive glass manufacturers was offset by lower specialty films
sales into the electronic display market.
Segment profit for the three-month period ended March 31, 2002,
increased 19 percent over the three-month period ended March 31, 2001,
primarily due to lower raw material costs, lower marketing, administrative
and technological spending, lower personnel expense associated with
restructuring activities carried out during 2001 and lower amortization
expense due to the adoption of SFAS No. 142.
Specialty Products
Net sales in the Specialty Products segment decreased 14 percent for
the first quarter 2002 over the comparable quarter of the prior year. The
decrease in net sales was primarily caused by lower sales volumes in the
Resins and Additives business because of decreased demand by European
customers and lower sales of chlorobenzenes. Also, to a lesser extent,
businesses in this segment experienced lower average selling prices than
those of the year-ago quarter primarily because of competitive pressures
and unfavorable currency exchange rate fluctuations due to the devaluation
of the euro in relation to the U.S. dollar.
Segment profit for the Specialty Products segment decreased 59 percent
for the quarter ended March 31, 2002, over the year-ago quarter. Excluding
the gain of $28 million ($17 million aftertax) recorded in the first
quarter of 2001 from an insurance settlement associated with the explosion
and fire that destroyed the Vianova printing inks and phenolics production
facility in Wiesbaden, Germany, segment profit decreased 5 percent. The
effects of lower net sales described above were partially offset by lower
raw material costs, lower personnel expense associated with restructuring
activities carried out during 2001 and lower amortization expense due to
the adoption of SFAS No. 142.
Integrated Nylon
Net sales for the first quarter of 2002 in the Integrated Nylon segment
decreased 14 percent from the first quarter of 2001. The effects of a weak
U.S. economy continue to unfavorably impact the Integrated Nylon segment.
The decrease in sales occurred primarily because of declines in average
selling prices in all businesses in
10
this segment. Sales volume increases in intermediate chemicals and
ACRILAN(R) acrylic fibers were partially offset by volume declines in nylon
industrial products and unfavorable product mix in carpet fiber. Price
decreases in intermediate chemicals primarily resulted from contracts with
formula pricing tied to raw material costs. Price decreases in the remaining
businesses were due to competitive pricing pressures. Higher sales volumes
in intermediate chemicals resulted from increased merchant acrylonitrile
sales to Asian and European customers. Sales volumes for acrylic fibers
increased because of higher export sales to Asian and Latin American
customers. Sales volumes for nylon industrial products decreased because of
the slowdown in the U.S. automotive industry.
The Integrated Nylon segment's profit was $7 million for the quarter
ended March 31, 2002, compared to a loss in the first quarter of 2001 of
$5 million. The increase in segment profitability resulted primarily from
lower raw material and energy prices and to a lesser extent, lower
marketing, administrative and technological spending and lower personnel
expense associated with restructuring activities carried out during 2001.
Operating Income
Operating income for the first quarter of 2002 was $27 million compared
with $21 million in the first quarter of 2001. Excluding the effects of
amortization expense from operating results in the first quarter of 2001
associated with the adoption of SFAS No. 142 (see Footnote 5), operating
income in the first quarter of 2002 decreased $1 million from the prior
year. The negative impact of lower net sales in the operating segments was
partially offset by lower raw material and energy costs and lower marketing
and technological expenses. The decrease in marketing and technological
expenses can be attributed principally to lower personnel costs resulting
from restructuring activities carried out during 2001. Operating income was
also negatively affected by a year-over-year increase in corporate expenses
of approximately $5 million due to protracted litigation in Anniston,
Alabama.
Equity Earnings From Affiliates
For the three months ended March 31, 2002, equity earnings from
affiliates were $8 million compared to $4 million for the same time period
in 2001 because of higher earnings from the Astaris joint venture, and to a
lesser extent, higher earnings from the Flexsys joint venture. Higher
equity earnings were partially offset by having only two months of equity
earnings from the Advanced Elastomer Systems joint venture.
Other Income--Net
For the three months ended March 31, 2002, other income--net includes a
$5 million ($3 million aftertax) gain from the sale of Solutia's 50 percent
interest in the Advanced Elastomer Systems joint venture to ExxonMobil
Chemical Company, a division of Exxon Mobil Corporation and Exxon Chemical
Asset Management Partnership, a subsidiary of Exxon Mobil Corporation. For
the quarter ended March 31, 2001, other income--net includes a gain of
$28 million ($17 million aftertax) from an insurance settlement recorded in
the Specialty Products segment.
Cumulative Effect of Change in Accounting Principle
Effective January 1, 2002, Solutia adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." In accordance with SFAS No. 142, Solutia
discontinued the amortization of goodwill and identifiable intangible
assets that have indefinite useful lives. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives.
Goodwill will be assessed annually for impairment. This statement also
required certain intangible assets that did not meet the criteria for
recognition apart from goodwill, to be subsumed into goodwill. During the
quarter ended March 31, 2002, Solutia subsumed into goodwill $74 million of
intangible assets net of related deferred tax liabilities representing
assembled workforce and noncontractual customer relationships that did not
meet the separability criteria under SFAS No. 141, "Business Combinations."
Fair value measurements of the reporting units were estimated by a
third-party specialist utilizing both an income and market multiple
approach. Based on this analysis, Solutia recorded an impairment loss of
$167 million for the Resins and Additives business in the Specialty Products
segment due to declining estimates of future results given current economic
and market conditions. This goodwill is non-deductible for tax purposes. The
impairment charge is reflected as the cumulative effect of change in accounting
principle in the accompanying statement of consolidated income (loss).
11
FINANCIAL CONDITION AND LIQUIDITY
During the first quarter of 2002, Solutia sold its 50 percent interest
in the Advanced Elastomer Systems joint venture to ExxonMobil Chemical
Company, a division of Exxon Mobil Corporation and Exxon Chemical Asset
Management Partnership, a subsidiary of Exxon Mobil Corporation for
approximately $102 million. The sale resulted in a gain of $5 million
($3 million aftertax). In March of 2002, the "Job Creation and Worker
Assistance Act" was enacted which allowed for, among other things, a
five-year carryback of net operating losses. As a result of this new law,
Solutia received a $30 million income tax refund from the United States
taxing authorities in addition to its $30 million anticipated income tax
refund during the first quarter of 2002. Solutia used the net proceeds from
the sale of its 50 percent interest in the Advanced Elastomer Systems joint
venture and the income tax refunds to pay down debt, fund operations and
for other general corporate purposes.
Solutia's debt obligations include borrowings against the $800 million,
five-year revolving credit facility ($800 million facility) with a
syndicate of commercial banks, notes and debentures. At March 31, 2002,
debt maturing in one year consisted primarily of borrowings of $450 million
from the $800 million facility and $150 million of 6.5 percent notes due in
October of 2002.
The $800 million credit facility matures in August of 2002 and
$150 million of 6.5 percent notes mature in October of 2002. Solutia plans
to refinance both maturities with a combination of long-term notes, a secured
term loan and a secured revolving credit facility. Interest rates will be
commensurate with Solutia's credit rating and market conditions at the time
of the refinancing. Based on Solutia's credit ratings and current market
conditions, Solutia expects the interest rates on these new facilities to
be higher than the interest rates on Solutia's current debt. Solutia
anticipates that the refinancing of both maturities will require additional
collateral. Proceeds of the refinancing will be used to repay outstanding
borrowings under the $800 million facility and $150 million of 6.5 percent
notes and for other general corporate purposes. The refinancing is expected
to be completed in the first half of 2002. Inability to complete this
refinancing or a similar financing vehicle prior to August 2002 would have
a material adverse affect on Solutia's liquidity.
In 1993, a co-generation facility was constructed at the Pensacola,
Florida manufacturing site to provide the plant with electricity and steam.
Solutia financed the construction by placing the co-generation facility in
a trust that was funded by a syndicate of commercial banks. Solutia makes
monthly operating lease payments and the lease term expires in August 2002.
Solutia expects that the lease term of this facility will be extended to be
co-terminous with the refinanced secured revolving credit facility.
In connection with the completion of the external financing agreement
for Astaris which expires in September of 2005, Solutia contractually
agreed to provide Astaris with funding in the event the joint venture fails
to meet certain financial benchmarks. Solutia anticipates that a
contribution of up to $25 million will be required in 2002. Solutia
believes that this obligation is not likely to have a significant impact on
its consolidated financial position, liquidity or profitability.
Solutia believes that its cash flow from operations, available
borrowing capacity under the $800 million facility and the anticipated
refinancing provide sufficient resources to finance its operations and
planned capital needs for the next 12 months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." The statement
addresses accounting and reporting requirements for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement obligations. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Solutia is evaluating SFAS No. 143 to
determine the effects, if any, 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 three months of 2002 that affect the disclosures
presented in the information appearing under "Derivative Financial
Instruments" on pages 26 and 27 of Solutia's Annual Report on Form 10-K
for the year ended December 31, 2001.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's Annual Report on Form 10-K for the year ended December 31,
2001, describes four consolidated cases, sometimes referred to as
Abernathy v. Monsanto or Bowie v. Monsanto, which have been in trial in
Circuit Court for Etowah County, Alabama. The trial court departed from
its announced schedule and did not submit the issue of compensatory damages
for the 17 Phase I trial plaintiffs to the jury for determination. Instead
the court has proceeded to hear damages evidence for all plaintiffs making
property damage claims. In addition the court has completed hearing evidence
on plaintiffs' claims for an injunction directing defendants to implement a
cleanup in Anniston, and has referred the matter to a Special Master for a
recommendation. On March 25, 2002, the United States Environmental
Protection Agency ("EPA") filed a Partial Consent Decree ("the Decree") in
U.S. District Court for the Northern District of Alabama. Pursuant to the
Decree Solutia has agreed to conduct a Remedial Investigation and
Feasibility Study which will provide the information upon which the EPA will
base its decision on the appropriate remedial action in Anniston. We have
argued that the filing of the Decree has preempted the state court's
jurisdiction over any cleanup in Anniston.
Solutia, Monsanto Company, and Pharmacia Corporation are named as
defendants in an action called Oliver v. Monsanto, filed on behalf of a
single plaintiff in U.S. District Court for the Northern District of
Alabama. Plaintiff alleges that she has been exposed to PCBs from the
Anniston plant and that PCBs are present on her property. Plaintiff seeks
compensatory and punitive damages in an unspecified amount, and claims
entitlement to medical monitoring. Solutia is vigorously defending this
action.
Solutia's Annual Report on Form 10-K for the year ended December 31,
2001, describes administrative and judicial proceedings brought by the
U.S. Environmental Protection Agency against Solutia, Monsanto Company (now
known as Pharmacia Corporation), and P4 Production L.L.C. These proceedings
arose out of alleged environmental violations at a coal coking facility in
Rock Springs, Wyoming, currently owned by P4 Production. On March 29, 2002,
the United States District Court for the District of Wyoming entered an order
denying both the companies' and the United States' motions for summary
judgment in the declaratory judgment action filed by the companies. On
April 19, 2002, the companies filed a petition to certify the court's order
for an interlocutory appeal and stay of proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit index at page 15 of this report.
(b) A Form 8-K announcing Solutia's financial results for the
fourth quarter and the full year of 2001 was filed on January 25, 2002.
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOLUTIA INC.
-----------------------------------
(Registrant)
/s/ JAMES M. SULLIVAN
-----------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: April 25, 2002
14
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10 Letter Agreement between Solutia Inc. and Russell J. Belle dated
January 14, 2002
11 See "Statement of Consolidated Income (Loss)" on page 1.
99 Computation of the Ratio of Earnings to Fixed Charges
15