Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OVERVIEW
Nature of Operations
Solutia Europe S.A./N.V. ("SESA") is a wholly-owned subsidiary of
Solutia Inc. ("Solutia"). SESA and its subsidiaries make and sell a variety
of high-performance chemical-based materials including performance films for
laminated safety glass and after-market applications; process development
and scale-up services for pharmaceutical fine chemicals; and resale of high
performance polymers and fibers for Solutia's Integrated Nylon segment.
Solutia's Bankruptcy Proceedings
On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries
(collectively, "Debtors") filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of New York. The cases were consolidated for the purpose
of joint administration and were assigned case number 03-17949 (PCB).
Solutia's subsidiaries outside the United States, including SESA, were not
included in the Chapter 11 filing.
The filing was made to restructure Solutia's balance sheet by
reducing indebtedness to appropriate levels, to streamline operations and
reduce costs, in order to allow Solutia to emerge from Chapter 11 as a
viable going concern, and to obtain relief from the negative financial
impact of liabilities for litigation, environmental remediation and certain
postretirement benefits and liabilities under operating contracts, all of
which were assumed by Solutia at the time of the spinoff (collectively,
"legacy liabilities"). These factors, combined with the weakened state of
the chemical manufacturing sector, general economic conditions and
continuing high, volatile energy and crude oil costs have been an obstacle
to Solutia's financial stability and success.
On June 7, 2005, Solutia reached an agreement-in-principle with
Monsanto Company ("Monsanto") and the Official Committee of Unsecured
Creditors in Solutia's Chapter 11 case (the "Unsecured Creditors'
Committee") that will serve as a framework for Solutia's plan of
reorganization. The agreement-in-principle is subject to the negotiation of
definitive documents, approval by Solutia's board of directors and various
other conditions and contingencies, some of which are not within the control
of Solutia, Monsanto or the Unsecured Creditors' Committee. Until a plan of
reorganization consistent with the terms of the agreement-in-principle is
confirmed by the bankruptcy court, the terms of the agreement-in-principle
are not binding upon any party.
Although the agreement-in-principle provides for distributions of
common stock in a reorganized Solutia to holders of allowed unsecured
claims, Solutia is unable to predict what recovery its plan of
reorganization will provide to these holders of unsecured claims. The
ultimate ownership interests in the reorganized Solutia held by Monsanto and
other holders of unsecured claims will depend on, among other factors, the
amount of allowed unsecured claims in the bankruptcy case and the number of
rights exercised by unsecured creditors in the rights offering.
Prior to exiting from Chapter 11, the bankruptcy court must confirm
a plan of reorganization that satisfies the requirements of the U.S.
Bankruptcy Code. As provided by the U.S. Bankruptcy Code, Solutia had the
exclusive right to propose a plan of reorganization for 120 days following
the Chapter 11 filing date. The bankruptcy court has subsequently approved
several extensions of the exclusivity period, the most recent of which is
set to expire on October 10, 2005. Although Solutia expects to receive
further extensions of the exclusivity period, no assurance can be given that
any such future extension requests will be granted by the bankruptcy court.
Solutia plans to file with the bankruptcy court a plan of
reorganization and disclosure statement consistent with the terms of the
agreement-in-principle that provide for Solutia's emergence from bankruptcy
as a going concern. There can be no assurance, however, that such a plan of
reorganization would be confirmed by the bankruptcy court or that such plan
would be implemented successfully.
Basis of Presentation
The accompanying unaudited consolidated financial statements
include consolidated and consolidating balance sheets, consolidated and
consolidating statements of operations and consolidated and consolidating
statements of cash flows for SESA and its subsidiaries, each as of and for
the three and six months ended June 30, 2005 and 2004, respectively. The
information contained in the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations is unaudited and is presented in a format prescribed by Section
9(m) of the amended and restated terms and conditions of SESA's (euro) 200
million, 10% Euro Notes ("Euronotes"). All significant intercompany
transactions and balances between SESA's subsidiaries have been eliminated
in consolidation. However, intercompany transactions and balances between
SESA's subsidiaries and Solutia's other subsidiaries outside of the
consolidated SESA entity have not been eliminated in consolidation. These
unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and notes to consolidated financial
statements included in the Solutia 2004 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on March 10, 2005.
The unaudited consolidated financial statements included in Exhibit
99.1 to this Form 8-K have been prepared in accordance with accounting
principles generally accepted in the United States of America and are
presented in U.S. dollars. In addition, the unaudited consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary to present fairly the financial position, results of operations,
and cash flows for the interim periods reported. Such adjustments are of a
normal, recurring nature.
RESULTS OF OPERATIONS-- SECOND QUARTER 2005 COMPARED WITH SECOND QUARTER 2004
Net Sales and Earnings Before Interest Expense and Income Taxes (EBIT)
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THREE MONTHS
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ENDED JUNE 30,
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(dollars in millions) 2005 2004
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Net Sales............................................ $130 $116
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EBIT................................................. $ 15 $ 13
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Charges included in EBIT......................... $ 1 $ --
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The $14 million, or 12 percent, increase in net sales as compared
to the three months ended June 30, 2004 resulted primarily from favorable
currency exchange rate fluctuations of approximately 5 percent, higher sales
volumes of approximately 4 percent, and higher average selling prices of
approximately 3 percent. The favorable currency impact was primarily a
result of the strengthening euro in relation to the U.S. dollar in
comparison to the three months ended June 30, 2004. Higher sales volumes
were experienced primarily in SAFLEX(R) plastic interlayer products,
partially offset by a decrease in the resale of products for Solutia's
Integrated Nylon segment. Higher average selling prices were experienced
primarily in the SAFLEX(R) plastic interlayer products and in the resale of
products for Solutia's Integrated Nylon segment.
The $2 million, or 15 percent, increase in EBIT in comparison to
the three months ended June 30, 2004 resulted primarily from higher net
sales and favorable currency fluctuations, partially offset by higher
raw material and energy costs. The $1 million charge in 2005 primarily
related to severance and retraining costs.
Interest Expense
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THREE MONTHS
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ENDED JUNE 30,
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(dollars in millions) 2005 2004
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Interest Expense......................................... $ 6 $ 7
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Interest expense decreased by $1 million, or 14 percent,
principally from the elimination of interest expense on SESA's approximate
$150 million, 5 percent convertible note with Solutia that was converted
from debt to equity in May 2004. However, this was partially offset by an
increase in interest expense resulting from the strengthening euro in
relation to the U.S. dollar in comparison to the three months ended June 30,
2004.
RESULTS OF OPERATIONS-- SIX MONTHS ENDED JUNE 2005 COMPARED WITH SIX MONTHS
ENDED JUNE 2004
Net Sales and EBIT
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SIX MONTHS
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ENDED JUNE 30,
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(dollars in millions) 2005 2004
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Net Sales............................................... $265 $228
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EBIT.................................................... $ 34 $ 11
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Charges included in EBIT............................ $ 1 $ 15
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The $37 million, or 16 percent, increase in net sales as compared
to the six months ended June 2004 resulted primarily from higher sales
volumes of approximately 8 percent, favorable currency exchange rate
fluctuations of approximately 5 percent and higher average selling prices of
approximately 3 percent. Higher sales volumes were experienced primarily in
SAFLEX(R) plastic interlayer products and the pharmaceutical services
business. The favorable currency impact was primarily a result of the
strengthening euro in relation to the U.S. dollar in comparison to the six
months ended June 2004. Higher average selling prices were experienced
primarily in the SAFLEX(R) plastic interlayer products in comparison to the
six months ended June 30, 2004. In addition, higher average selling prices
were experienced in the resale of products for Solutia's Integrated Nylon
segment.
The $23 million increase in EBIT in comparison to the six months
ended June 30, 2004 resulted primarily from higher net sales, increased
capacity utilization, controlled spending and lower charges, partially
offset by higher raw materials and energy costs. The $1 million charge in
2005 primarily resulted from severance and retraining costs while the charge
in 2004 resulted from the $15 million premium recorded in conjunction with
the modification of SESA's Euronotes in January 2004.
Interest Expense
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SIX MONTHS
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ENDED JUNE 30,
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(dollars in millions) 2005 2004
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Interest Expense........................................ $ 12 $ 16
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Interest expense decreased by $4 million, or 25 percent,
principally from the elimination of interest expense on SESA's approximate
$150 million, 5 percent convertible note with Solutia that was converted
from debt to equity in May 2004. However, this was partially offset by an
increase in interest expense resulting from the strengthening euro in
relation to the U.S. dollar in comparison to the six months ended June 30,
2004.
FINANCIAL CONDITION AND LIQUIDITY
Financial Analysis
Total debt of $252 million as of June 30, 2005 decreased by $3
million as compared to $255 million as of June 30, 2004. This decrease was
principally a result of the amortization of the $15 million premium recorded
in conjunction with the modification of SESA's Euronotes in January 2004.
SESA's working capital increased by $23 million to $87 million at
June 30, 2005, compared to $64 million at June 30, 2004. The increase in the
working capital position resulted primarily from increased cash on-hand at
June 30, 2005, higher intercompany receivables principally a result of the
timing of net intercompany lending to Solutia entities outside of the
consolidated SESA entity and lower overall accrued liabilities.
SESA had shareholders' equity of $164 million at June 30, 2005
compared to $172 million at June 30, 2004. The $8 million decrease in
shareholders' equity resulted principally from the $8 million cumulative
loss recorded from June 30, 2004 to June 30, 2005. This net loss was
primarily a result of the $40 million of asset impairments recorded in the
pharmaceutical services business in the fourth quarter 2004.
At June 30, 2005 and 2004, SESA's liquidity was in the form of cash
in the amount of $22 million and $13 million, respectively.
Contingencies
Competition authorities in Belgium and several other European
countries are investigating past commercial practices of certain companies
engaged in the production and sale of butyl benzyl phthalates ("BBP"). One
of the BBP producers under investigation by the Belgian Competition
Authority is Ferro Belgium sprl, the European subsidiary of Ferro
Corporation. Ferro's BBP business in Europe was purchased from Solutia in
2000. Solutia received an indemnification notice from Ferro and has
exercised its right, pursuant to the purchase agreement relating to Ferro's
acquisition of the BBP business from Solutia, to assume and control the
defense of Ferro in proceedings relating to these investigations. On July 7,
2005, the Belgian Competition Authority issued a Statement of Objections
regarding its BBP investigation in which SESA, along with Ferro and two
other producers of BBP, is identified as a party under investigation with
respect to its ownership of the BBP business from 1997 until the business
was sold to Ferro in 2000. Solutia Inc. is not named as a party under
investigation in the Statement of Objections. Written comments to the
Statement of Objections are due on August 31, 2005 and a preliminary oral
hearing before the Belgian Competition Authority is currently scheduled to
take place on September 6, 2005. Solutia is fully cooperating with the
Belgian Competition Authority in this investigation. Solutia
currently believes that any liability that may result from the Belgian
investigation will not be significant to its results of operations or
financial position. However, Solutia cannot provide any assurance that the
liability assessed against it as a result of this matter would not have a
material adverse effect on Solutia's results of operations or financial
position.