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 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 approved several
extensions of the exclusivity period, the most recent of which was set to
expire on October 11, 2005. However, the bankruptcy court entered an order
on October 6, 2005 extending the exclusivity period until the bankruptcy
court rules on Solutia's current motion for an extension of the exclusivity
period, which sought to extend the exclusivity period through January 9,
2006. 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 nine months ended September 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-- THIRD QUARTER 2005 COMPARED WITH THIRD QUARTER 2004
Net Sales and Earnings Before Interest Expense and Income Taxes ("EBIT")
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THREE MONTHS ENDED
SEPTEMBER 30,
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(dollars in millions) 2005 2004
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Net Sales................................................................. $ 122 $ 113
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EBIT...................................................................... $ 13 $ 14
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Gain included in EBIT................................................. $ -- $ 1
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The $9 million, or 8 percent, increase in net sales as compared to
the three months ended September 30, 2004 resulted primarily from higher
sales volumes of approximately 6 percent and higher average selling prices
of approximately 3 percent, partially offset by unfavorable currency
fluctuations of approximately 1 percent. Higher sales volumes were
experienced primarily in SAFLEX(R) and VANCEVA(R) plastic interlayer
products, pharmaceutical services and the resale of Therminol(R) heat
transfer fluids, 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 resale of products for Solutia's Integrated
Nylon segment. The unfavorable currency impact on net sales was primarily a
result of the weakening euro in relation to the U.S. dollar in comparison to
the three months ended September 30, 2004.
The $1 million, or 7 percent decrease in EBIT in comparison to the
three months ended September 30, 2004 resulted primarily from higher raw
material and energy costs, as well as increased legal expenses;
partially offset by higher net sales and favorable manufacturing variances
from cost containment and increased capacity utilization. EBIT in the third
quarter 2004 included a $1 million gain from the favoriable settlement of
reserves established in 2003 related to the closure of non-strategic
facilities in the pharmaceutical services business.
RESULTS OF OPERATIONS-- NINE MONTHS ENDED SEPTEMBER 2005 COMPARED WITH NINE
MONTHS ENDED SEPTEMBER 2004
Net Sales and EBIT
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NINE MONTHS ENDED
SEPTEMBER 30,
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(dollars in millions) 2005 2004
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Net Sales................................................................. $ 387 $ 341
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EBIT...................................................................... $ 47 $ 25
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Charges included in EBIT.............................................. $ (1) $ (15)
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The $46 million, or 13 percent, increase in net sales as compared
to the nine months ended September 2004 resulted primarily from higher sales
volumes of approximately 7 percent, favorable currency exchange rate
fluctuations of approximately 4 percent and higher average selling prices of
approximately 2 percent. Higher sales volumes were experienced primarily in
SAFLEX(R) and VANCEVA(R) plastic interlayer products, pharmaceutical
services and the resale of Therminol(R) heat transfer fluids. The favorable
currency impact was primarily a result of the strengthening euro in relation
to the U.S. dollar in comparison to the nine months ended September 2004.
Higher average selling prices were experienced primarily in the SAFLEX(R)
and VANCEVA(R) plastic interlayer products and in the resale of products for
Solutia's Integrated Nylon segment in comparison to the nine months ended
September 30, 2004.
The $22 million, or 88 percent, increase in EBIT in comparison to
the nine months ended September 30, 2004 resulted primarily from higher net
sales and favorable manufacturing variances from cost containment and
increased capacity utilization, partially offset by higher raw materials and
energy costs, as well as increased legal expenses. In addition, 2005 EBIT
included a special charge of the $1 million resulting from severance and
retraining costs. The net charges included in EBIT in the nine months ended
September 30, 2004 included a $15 million charge due to the modification of
SESA's Euronotes in January 2004, severance and retraining costs of $1
million from headcount reductions; and a $1 million gain from the favorable
settlement of reserves established in 2003 related to the closure of
non-strategic facilities in the pharmaceutical services business.
Interest Expense
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NINE MONTHS ENDED
SEPTEMBER 30,
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(dollars in millions) 2005 2004
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Interest Expense....................................................... $ 18 $ 21
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Interest expense decreased by $3 million, or 14 percent,
principally from the elimination of interest expense on SESA's approximate
$150 million, 5% convertible note with Solutia that was converted from debt
to equity in May 2004.
FINANCIAL CONDITION AND LIQUIDITY
Financial Analysis
Total debt of $250 million as of September 30, 2005 decreased by $9
million as compared to $259 million as of September 30, 2004. This decrease
was principally a result of the weakened Euro at the end of the third
quarter 2005 compared to the end of the third quarter 2004, as well as the
continued amortization of the $15 million premium recorded in conjunction
with the modification of SESA's Euronotes. This premium resulting from the
modification in January 2004 is being amortized over the remaining term of
the Euronotes, which mature in 2008.
SESA's working capital increased by $25 million to $93 million at
September 30, 2005, compared to $68 million at September 30, 2004. The
increase in the working capital position resulted primarily from increased
cash on-hand at September 30, 2005 and higher customer receivables,
partially offset by higher accrued liabilities.
SESA had shareholders' equity of $169 million at September 30, 2005
compared to $181 million at September 30, 2004. The $12 million decrease in
shareholders' equity resulted principally from the $12 million cumulative
loss recorded from September 30, 2004 to September 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 September 30, 2005 and 2004, SESA's liquidity was in the form of
cash in the amount of $30 million and $19 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 ("BCA") is Ferro Belgium sprl, the European subsidiary of Ferro
Corporation. Ferro's BBP business in Europe was purchased from Solutia Inc.
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 BCA issued a Statement of Objections regarding its BBP
investigation in which Solutia Europe S.A/N.V., a European subsidiary of
Solutia, 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.
Solutia's written comments to the Statement of Objections were submitted on
August 31, 2005 and presented at an oral hearing before the BCA on September
6, 2005. A Reasoned Report to be submitted by the investigator to the BCA
has not yet been received. Solutia is fully
cooperating with the BCA 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.