CK WITCO CORPORATION
1999 ANNUAL REPORT
GLOBAL SOLUTIONS
ABOUT THE COMPANY
CK Witco is a global producer and marketer of polymer products and
specialty chemicals and was formed with the 1999 merger of Crompton & Knowles
Corporation and Witco Corporation. The company has about 8,600 employees in
research, manufacturing, sales, and administrative facilities in every major
market around the world.
Available in 120 countries, our products and services solve customer
problems and add value to customers' products. Our 114 million shares of common
stock are traded on the New York Stock Exchange under the symbol CNW. Up-to-date
information about the company is available at www.ckwitco.com.
The company has more than 50 manufacturing facilities in 20
countries and receives 43% of its revenues from customers outside of the United
States.
MANUFACTURING LOCATIONS
NORTH AMERICA LATIN/SOUTH AMERICA ASIA/PACIFIC
Alabama Brazil Australia
Connecticut Mexico China
Illinois Indonesia
Louisiana EUROPE Malaysia
New Jersey Singapore
North Carolina Belgium South Korea
Pennsylvania Denmark Taiwan
Tennessee France Thailand
Texas Germany
West Virginia Italy
Bahamas Netherlands
Canada United Kingdom
CONTENTS
Financial highlights............................................. 1
Chairman's letter................................................ 2
Review of business............................................... 6
Management's discussion & analysis............................... 26
Consolidated financial statements................................ 34
Notes to consolidated financial statements....................... 38
Responsibility for financial statements.......................... 53
Independent auditors' report..................................... 53
Five-year selected financial data................................ 54
Responsible Care(R) statement.................................... 55
Corporate management............................................. 56
Board of Directors and corporate data
(INSIDE BACK COVER)
1999 ADJUSTED SALES*
[PIE CHART]
Polymer Additives 34%
Polymers 10%
Polymer Processing Equipment 10%
OrganoSilicones 15%
Crop Protection 13%
Other 18%
1999 ADJUSTED OPERATING PROFIT*
[PIE CHART]
Polymer Additives 28%
Polymers 22%
Polymer Processing Equipment 5%
OrganoSilicones 15%
Crop Protection 22%
Other 8%
The company has six primary business segments divided into two
groups:
POLYMER PRODUCTS
$1.7 Billion In Sales*
POLYMER ADDITIVES
The largest worldwide producer of heat stabilizers for polyvinyl
chloride. A leading worldwide producer of additives for plastics and rubber.
KEY PRODUCTS
Plastics additives include alkyls, amides, stearates, white oils,
heat stabilizers, plasticizers, lubricants, olefin additives, tin specialties,
antioxidants, antistats, polymer modifiers, foaming agents, polymerization
inhibitors, chemical intermediates, curatives, and dispersants. Rubber chemicals
include antioxidants, antiozonants, accelerators, and miscellaneous specialty
products. Urethane chemicals include polyester polyols, polyurethane
dispersions, microcellular systems, silicones, amine catalysts, and specialty
modifiers.
MARKETS SERVED
Products are sold to producers, compounders, extruders, and molders
of vinyl, rubber, styrenics, polyolefins, and fiberglass. Rubber and plastic
applications in construction,
- -------------------
* Pro forma as adjusted for divested businesses.
automotive, transportation, packaging, flooring, and synthetic fibers. Coatings
and adhesives for industrial and marine uses.
POLYMERS
The number one world supplier of castable urethane prepolymers. The
number one manufacturer of EPDM in North America. World's largest dedicated
nitrile rubber production facility.
KEY PRODUCTS
Abrasion and wear-resistant castable urethane prepolymers. Heat-,
sunlight-, and ozone-resistant EPDM rubber. Oil-resistant nitrile rubber
polymers.
MARKETS SERVED
Urethane end products include industrial and printing rolls, mining
machinery and equipment, mechanical goods, solid industrial tires & wheels, and
sporting/recreational goods. EPDM is used in automotive applications as well as
in roofing, hose, and wire & cable insulation. Nitrile rubber is used in
automotive hoses, seals, O-rings, and other consumer and industrial
applications.
POLYMER PROCESSING EQUIPMENT
The number one worldwide producer of plastics and rubber extruders
and extrusion systems.
KEY PRODUCTS
Integrated single-screw, twin-screw and compounding extruders, and
extrusion systems with advanced electronic controls.
MARKETS SERVED
Packaging, automotive, construction, appliance, medical, power &
communications cables, plastics.
1999 ADJUSTED REGIONAL SALES*
PIE CHART]
United States 57%
Canada 4%
Asia/Pacific 7%
Europe/Africa 28%
Latin America 4%
1999 END MARKET SALES
[PIE CHART]
Auto & Transport 25%
Construction/Home Furnishings 24%
Agriculture 12%
Non-Tire Rubber 9%
Packaging/Paper 7%
Apparel 7%
Other 16%
-------------------------
SPECIALTY PRODUCTS
$1.4 Billion in sales*
ORGANOSILICONES
World's leading supplier of specialty silicones and organofunctional
silanes serving a wide variety of industrial and consumer markets.
KEY PRODUCTS
Silane coupling agents and adhesion promoters. Silicone surfactants,
foam control agents, and other specialty silicones. Urethane foam additives,
including surfactants and catalysts.
MARKETS SERVED
Rubber, coatings, fiberglass, adhesives & sealants used for
automotive, transportation and tires, construction, and other industrial
applications. Urethane foam for automotive, appliances and construction.
Textiles and non-wovens, agriculture, personal care.
CROP PROTECTION
A world leader in seed treatment products, with the largest seed
treatment company in North America, our Gustafson joint venture with Bayer
Corporation.
KEY PRODUCTS
Fungicides, miticides, insecticides, herbicides, growth regulants,
seed treatments, and surfactants.
MARKETS SERVED
Focus on high-value crops such as fruits, nuts, cotton, turf and
ornamentals. Seed treatments cross all major crop segments and geographies.
OTHER SPECIALTIES
World's leading supplier of amine antioxidants serving the
lubricants industry. A leading global supplier of sodium sulfonates for the
metalworking industry. Leading producer of industrial dyes.
KEY PRODUCTS
Petroleum and lubricant additives. USP white mineral oils,
petrolatums, microcrystalline waxes, cable-filling compounds. Industrial dyes.
Fatty acids and glycerines.
MARKETS SERVED
Petroleum and lubricant additive components for automotive, marine
and metalworking. Paper, coatings and inks. Personal care, household, and
institutional.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (a) 1999 1998
-----------------------
Net sales $2,092,358 $1,796,119
Operating profit $ 1,383 $ 218,298
Interest expense $ 69,833 $ 78,520
Net earnings (loss) $ (175,038) $ 161,755
Basic earnings (loss) per share $ (2.10) $ 2.20
Diluted earnings (loss) per share $ (2.10) $ 2.14
Total assets $3,726,618 $1,408,893
Long-term debt $1,309,812 $ 646,857
Operating profit, EBITDA and net earnings before
special items (refer to page 54) are as follows:
EBITDA before special items (b) $ 342,549 $ 340,394
Operating profit before special items $ 225,901 $ 259,858
Net earnings before special items $ 94,988 $ 117,270
- --------------------------------------------------------------------------------
Sales
$ IN BILLIONS
[BAR GRAPH]
1995 - $1,744.8
1996 - $1,804.0
1997 - $1,851.2
1998 - $1,796.1
1999 - $2,092.4
RETURN ON AVERAGE TOTAL CAPITAL
BEFORE SPECIAL ITEMS
[BAR GRAPH]
1995 - 14.2%
1996 - 12.8%
1997 - 16.5%
1998 - 18.6%
1999 - 11.4%
EBITDA (b)
BEFORE SPECIAL ITEMS
$ IN MILLIONS
[BAR GRAPH]
1995 - $305.5
1996 - $301.2
1997 - $332.1
1998 - $340.4
1999 - $342.5
LONG-TERM DEBT
$ IN BILLIONS
[BAR GRAPH]
1995 - $ 974.2
1996 - $1,055.0
1997 - $ 896.3
1998 - $ 646.9
1999 - $1,309.8
(a) The 1999 amounts include the results of operations of Crompton & Knowles
Corporation for the twelve months ended December 1999 and the results of
operations of Witco Corporation for the months of September through
December 1999. The 1995 to 1998 amounts represent the results of Crompton &
Knowles Corporation.
(b) EBITDA represents operating profit plus depreciation and amortization and
excludes special items.
-2-
FELLOW SHAREHOLDERS:
We are pleased to report that 1999 marked the attainment of another
milestone in management's strategic plan to build a world-scale specialty
chemical company. We accomplished this by merging Crompton & Knowles with Witco,
creating CK Witco Corporation, a $3.1 billion company with core strengths in
polymer products and technology, crop protection and specialty organosilicones.
The combination gives our new company leadership positions in a
majority of our product lines, supported by global research and development and
production capacity able to meet customer needs with increased quality, speed
and reliability. As a result we have enhanced our platforms for growth,
increased our flexibility to optimize our business portfolio, and set the stage
for accelerated growth in revenues and earnings.
Our strengths are significant, and we're excited by the
opportunities. Nevertheless, we remain focused on a single overarching principle
that guides all of our thinking as well as our actions: TO INCREASE SHAREHOLDER
VALUE. Global scale, improved customer service and growth, in our view, are only
vehicles for delivering improved returns to shareholders. Our confidence in our
ability to achieve this is borne out by our accomplishments in the seven months
since the completion of the merger on September 1, 1999.
OUTSTANDING BUSINESS OPPORTUNITIES
We continue to integrate the businesses making up the two operating
groups of our company -- Polymer Products and Specialty Products -- and the
synergies are powerful. Our broad-based and diversified business portfolio
positions us to grow our share of existing markets and open new markets through
product innovation, advanced technology and production economies in the 120
countries where we do business.
In Polymer Products, with annual adjusted sales of $1.7 billion, our
worldwide product mix is unparalleled by any of our competitors regardless of
their size. The combined businesses, consisting of polymer additives, polymers
and polymer processing equipment, have leading technology in elastomer and
rubber and leadership positions in polymer and urethane chemistry. Our
substantial market position and broad range of product offerings are enabling us
to simplify our supply chain for our customers, pulling through more sales in
growth markets. The synergistic benefits are obvious to our customers as we
deliver solutions unavailable before our combination.
An illustration of this is our ability to test and market new
plastics additives using the extrusion processing expertise of our
Davis-Standard laboratories, the world's confirmed leader in plastics extrusion
systems. Specialized knowledge, internal access and cooperative development of
this nature gives us and our customers a quantifiable edge in the marketplace.
Our Specialty Products group, with annual adjusted sales of $1.4
billion, consists of OrganoSilicones, Crop Protection and Petroleum Additives,
businesses which offer an array of value-added products that solve customers'
problems and create profitable opportunities for them
-3-
to improve their products and processes. The complementary nature of our product
lines and overlapping customer bases have already enabled us to increase sales
of our products.
That customer overlap is very evident in our OrganoSilicones and
Rubber Chemicals businesses, both of which are leading suppliers of essential
products to the worldwide tire industry. Our antiozonants and antioxidants
continue to improve the life and performance of rubber tires as our silanes
replace carbon black, producing more fuel efficient and longer-lasting tires. To
satisfy accelerated growth in this market for silanes, we are investing $70
million in expanded proprietary production capacity.
[PHOTOGRAPH OF VINCENT A. CALARCO, CHAIRMAN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER]
The bottom line is that our core operating businesses have new
opportunities for enhanced profitability, growth and new product development as
a result of our merger. These developments have been very well received by our
customers as evidenced by increased sales with key accounts.
Our combined businesses also benefit from increased geographic
reach. The United States continues to be our single largest market, but
international operations now account for approximately 43 percent of our
revenues. In Europe, with about $850 million in sales, we have a manufacturing
infrastructure in place with well established customer access. Asia, with sales
of more than $200 million, has the capacity to meet the growing opportunities in
China and India. Similarly, in Canada and Latin America, our $250 million in
sales gives us a good footprint for expansion and growth. With this strong base
we fully expect to drive international sales to more than 50 percent of our
company's revenues within the next five years even as we continue to grow our
domestic business.
PRODUCTIVITY GAINS AND COST SAVINGS
We began this merger with specific actions to improve our new
company's productivity and to reduce costs.
We are well on our way to fulfilling our commitment to take out $60
million in costs in 2000. We have reduced our workforce by 600 employees, and
reduced the cost of logistics, insurance, consultants, and other outside
services. We are also benefiting from the efficiencies of a global purchasing
organization, which buys in excess of $1.2 billion in raw materials and
utilities annually.
Facilities consolidations will also improve our productivity in the
new year. Plant closures in Brooklyn, New York and Gretna, Louisiana and sales
office combinations in Asia, Europe and Latin America have already been
accomplished with other opportunities for consolidation currently being
analyzed.
FINANCIAL STRATEGIES
Concurrent with the cost reductions throughout our company, we have
taken other steps to improve our performance and to strengthen our financial
position.
-4-
We improved our portfolio by divesting two underperforming business
units: textile colors and oleochemicals. Witco sold the oleochemicals operation
in August, before the merger, and used the $249 million in cash to pay down
debt. The textile colors operation was sold in December for $86.5 million and
generated $78 million in cash that was used to buy back our company's common
stock under a Board authorization to repurchase 10 percent of the 119 million
shares then outstanding. We have identified additional businesses, with annual
sales of approximately $400 million, for potential divestment. We will continue
to review our portfolio of businesses to concentrate our investments in growth
areas, and to dispose of non-core operations.
At the end of 1999, we also repurchased our 10.5% and 9% notes in
order to secure more favorable financing terms and eliminate some restrictive
financial covenants. In the first quarter of 2000, we completed a $600 million
bond offering at a coupon rate of 8.5%. Our company's total year-end debt was
$1.4 billion, and a key corporate objective is to reduce it by approximately
$125 million annually. We believe this objective is reasonable in light of the
$150 to $200 million in free cash flow we will generate annually.
Following the merger, our Board set a five cents per share regular
quarterly dividend in line with our peer group in the specialty chemicals
industry.
LONG-TERM PERFORMANCE GOALS
We are focused on accelerating the growth of our individual
businesses and improving their long-term strategic positions in order to improve
our return on invested capital. This is how shareholder value is created. We are
continually evaluating our businesses in the context of both financial
performance and market-driven parameters to determine which businesses will be
components of our corporation in the future.
The criteria we use to assess the potential to achieve and sustain
performance over the long term is simple and straightforward.
The first financial measure is operating profit margin of more than
15 percent, on a sustainable, long-term basis. This has to be accompanied by
operating profit growth of more than 10 percent per year and a return on capital
employed of more than 18 percent at the operating level.
Our non-financial, market-driven criteria for each business is
related specifically to sustainability of leadership positions, and each
business should have a mix of these characteristics. First, each should have a
leading market position, being number one or two in its identifiable market.
Second, the business should have a proprietary or unique product or process
technology that provides a competitive advantage, and, third, each should be a
low-cost producer. Additionally, the business should have a new product pipeline
that would sustain or put it in a position to meet the other criteria.
Most of our combined businesses have these market-driven attributes
and should be able to achieve our financial goals as we make progress in
implementing our programs. More details about these opportunities are outlined
in the business and markets review section of this report.
-5-
We are pleased to report that in early 2000, as part of our strategy
to enhance our growth opportunities via e-commerce, we made an equity investment
in ChemConnect Inc., the largest global internet exchange for chemicals and
plastics. We expect that our internet strategy will improve customer service,
grow sales and gain efficiencies throughout our company.
BOARD CHANGES
Since the completion of the merger there have been several changes
in our Board of Directors. In November, E. Gary Cook, chairman of CK Witco, and
former chairman, president and chief executive officer of Witco Corporation,
retired from the company and the Board. At year-end, Don L. Blankenship,
chairman, president and chief executive officer of A.T. Massey Coal Company,
Inc, retired from the Board. In January, Richard M. Hayden, limited partner of
Goldman Sachs, retired from the Board. Not standing for election at the April
2000 annual meeting of shareholders will be James A. Bitonti, chairman and chief
executive officer of BITCO International, Inc., and Nicholas Pappas, president,
chief executive officer and vice chairman of BioTraces, Inc., who have reached
our mandatory retirement age, and Simeon Brinberg, senior vice president of BRT
Realty Trust, who has chosen to retire. We thank them for their service to CK
Witco and our predecessor companies.
In summary, the merger of Crompton & Knowles and Witco was an astute
move for both companies. We have created a new and powerful global force in the
specialty chemical industry with significant business efficiencies and growth
opportunities in all of our core businesses. The potential for value creation is
significant, and we are highly confident of the ability of our 8,600 employees
to deliver on this potential. We will achieve our goals by adhering to this
management's guiding principles of keeping everyone focused on meeting
customers' needs and working to improve every day. By assuring the success of
our customers, we will succeed with them and thereby reward our shareholders.
While 1999 was a year of great change for our company, and while
there are significant challenges ahead, we fully expect to have a record year in
2000 that will set us on a course for continued prosperity and success in the
new century. The specialty chemical industry will, no doubt, continue to
consolidate as companies seek competitive global advantage. We view this as an
opportunity to strategically reinforce our market positions and to further
broaden our core business strengths. Our objective remains constant --
profitable growth.
-6-
Thank you for your support. We look forward to keeping you informed
of our progress.
Respectfully yours,
/s/ V. A. Calarco
Vincent A. Calarco
Chairman, President and
Chief Executive Officer
March 15, 2000
-7-
SOLUTION: UNIPRENE(R) THERMOPLASTIC VULCANIZATES
[PHOTO]
Our Royalene(R) EPDM technology is used in Uniprene(R) thermoplastic
vulcanizates (TPVs) to provide the functional performance of vulcanized rubber
combined with the processability of plastics. We have partnered with Teknor Apex
Company in Pawtucket, Rhode Island by contributing our EPDM technology and
technical service to its technical, manufacturing and marketing efforts for the
Uniprene product.
(UNIPRENE IS A REGISTERED TRADEMARK OF TEKNOR APEX COMPANY)
[PHOTO CAPTION]: INSET LEFT: AUGUST PETERSEN (RIGHT), OUR TECHNICAL
SALES SERVICE REPRESENTATIVE FOR ELASTOMERS, DISCUSSES PRODUCT BENEFITS OF
UNIPRENE(R) PELLETS WITH JITENDER BATRA, TEKNOR APEX'S UNIPRENE TECHNICAL
MANAGER. THIS COOPERATIVE EFFORT WILL ALLOW BOTH CK WITCO AND TEKNOR APEX TO
ACCELERATE THE PENETRATION OF TPVS INTO THE CONSUMER, AUTOMOTIVE AND
CONSTRUCTION MARKETS.
With the merger of Crompton & Knowles and Witco, we have created a
new global force in the chemical industry, a company with world-class product
lines and service capabilities in polymer products and specialty chemicals. The
superior service, technology and performance of our individual business units
provide our customers with the tools to excel in their markets. As a result of
the merger, our businesses have new products and services, new talent and
knowledge, and new product development and production capability. The
customer-focused cultures of both companies have been combined into a
market-driven enterprise.
The managers of our business units are experienced in growing
businesses and building value through our entrepreneurial business approach. Our
managers are accountable for performance, and they are rewarded for achieving
maximum targeted returns on the capital entrusted to them. Our businesses
operate as independent units while seeking opportunities for synergies with
other business units. They respond to customers with speed, innovation and
flexibility, knowing our success is dependent on the success of our customers.
The merger has given us operating and market strengths that are
unique in the chemical industry. Over 60 percent of our sales are to markets
where we have leading positions, and many of our products are sold to common
markets. The product lines are complementary not competitive, and we can achieve
remarkable efficiencies in sales and service through the improved integration of
our supply chains and the loyalty of long-time customers.
We are building on decades of Crompton & Knowles and Witco successes
that resulted from listening closely and working hard to understand customers'
businesses and markets. From product development and manufacturing to logistics
and technical service, our people strive to anticipate customer needs, and to
identify and solve their problems. We respond with maximum effort to make sure
our customers' products and processes are better than the competition. When our
customers are more competitive, we are more competitive, and our shared
successes build long-term relationships.
-8-
Customer service starts with our specialized sales forces of trained
scientists, engineers and technicians with an in-depth knowledge of our specific
products and their market applications, and our customers' products and markets.
Our technology is based on a customer-first approach to research &
development, concentrating on projects with the greatest market potential. Our
R&D activities are closely aligned with our customers' business objectives.
Our performance is measured by our ability to deliver quality
materials that are key to our customers' success by making their products
better, less expensive, easier to manufacture or more environmentally friendly.
Service, technology and performance add value to our customers'
products and to their businesses.
SOLUTION: MARK(R)VINYL ADDITIVES
[PHOTO]
Marley Mouldings depends on our Mark(R) organotin stabilizers for
the efficient production of its wide variety of vinyl products for the
construction market. Our stabilizers protect Marley's products from heat
degradation and discoloration during the extrusion process. The ability to
produce consistent quality form extrusions at economical rates helps make Marley
a leading global supplier of residential mouldings, window and other vinyl
profiles used in a wide variety of construction applications. In addition to
stabilizers, we offer a complete line of additives to provide manufacturing
solutions for PVC (polyvinyl chloride) producers including lubricants and
plasticizers. Our polymer additives are critical not only to PVC production, but
also to olefinic and styrenic polymers, rubber, and polyurethanes.
[PHOTO CAPTION]: CHRIS BOND (LEFT), OUR RIGID- VINYL PRODUCT
MANAGER, DISCUSSES THE USE OF MARK(R) STABILIZERS IN MARLEY MOULDING PRODUCTS
WITH LOWELL CARPENTER, MARLEY'S BLENDING MANAGER.
Our POLYMER ADDITIVES unit has one of the broadest and most
extensive product lines for the polymer industry providing products across the
entire industry's supply chain from polymerization to compounding to
fabrication. Our products are critical in the manufacture of polyvinyl chloride,
olefinic and styrenic polymers, rubber, and polyurethanes. We are benefiting
from a strong demand for plastics in general and engineered plastics in
particular.
We are the world's largest producer of polymer additives for PVC,
offering a complete line of metal and metal-free vinyl stabilizers.
Our products for the olefins and styrenics markets are used in every
stage of the manufacturing process.
We are a world leader in rubber chemicals with a comprehensive line
of more than 100 different products used in rubber processing.
-9-
Our urethane chemicals provide key products to global polyurethane
processors.
We are benefiting from growing demand for PVC in the global
construction and automotive markets and from our market position and product
development strengths. In 1999, we debottlenecked our PVC stabilizer line in
Louisiana, adding 25 percent more capacity for tin stabilizers, and we signed an
agreement with Songwon of Korea to market its methlytin heat stabilizers outside
of Korea, China and Taiwan. This product supplements our tin stabilizer capacity
and will help fuel our growth in Asia and enable us to compete aggressively in
key PVC growth segments around the world.
In addition to stabilizers, our complete product line for PVC
manufacturers includes lubricants, plasticizers and other solutions for our
customers' manufacturing challenges. Working with the readily available
technology of our Davis-Standard polymer processing equipment, we can both
adjust the recipe of additives used in materials, and better understand the
process conditions to deliver unique value to our customers for their
production.
Our experienced and highly trained sales force has been able to
introduce new products into the PVC additives market including Paracril(R)
nitrile rubber and blowing agents.
Makers of plastics around the world depend on us to specify the
appropriate products to meet their production needs and ensure the performance
of their end products.
Our Naugard(R) antioxidants significantly extend the life of
products such as wire and cable, and our additives are essential to a broad
range of new plastic products. For example, these additives enhance the
performance and durability of plastics enabling automobile manufacturers to
increase the use of plastics that reduce the weight of vehicles thus improving
gas mileage.
Our polymer modifiers, Royaltuf(R) modified EPDM, used to toughen
engineered thermoplastics, and Polybond(R) coupling agents, critical to the
production of advanced composite materials, are among the fastest growing
segments of the specialty chemicals industry.
Last year, we introduced a new Polybond(R) coupling agent with
easier mixing and enhanced performance characteristics for wire and cable
insulation and wood-filled compounds. Our new Royaltuf 498 gives Nylon 6
superior low-temperature impact resistance for use in sporting goods and
hand-held power tool housings. Our polymer modifier business is growing with
these and other new products including Polybond 3109 for toughened nylon and
Polybond 1158 for bonding polyethylene and polypropylene to metal.
We have growing opportunities in cutting-edge technologies such as
nanocomposites that offer the automotive industry and other plastic users
products with dramatic improvements in mechanical, thermal and flame-retardant
properties.
In 1999, we acquired the Unite(R) product line of polypropylene
coupling agents from Aristech Chemical Corporation. Complementing our existing
line of high value-added products, Unite(R) products serve the glass-filled
polypropylene market with uses from swimming pools to automobiles.
-10-
SOLUTION: ROYALEDGE(R)/ROYALENE(R) EPDM
[PHOTO]
A new grade of RoyalEdge(R) EPDM polymer was recently introduced in
response to growing customer needs for a high-performance EPDM material for the
wire & cable market. American Insulated Wire in Pawtucket, Rhode Island uses
Davis-Standard machinery to extrude RoyalEdge(R) and Royalene(R) EPDM strips
into wire & cable insulations for industrial, utility, automotive, and
residential applications.
We also provide Silcat(R) silanes and silane technology, Paracril(R)
nitrile rubber, Witcogel(R) filling compounds, and other synthetic, mineral-oil,
natural, and polymer-based compounds to this growing market.
[PHOTO CAPTION]: INSET LEFT: LOWELL LISKER (RIGHT), VICE PRESIDENT
OF ENGINEERING FOR AMERICAN INSULATED WIRE (AIW), AND BOUNITA FAVORITE, OUR
TECHNICAL SALES REPRESENTATIVE, DISCUSS THE PERFORMANCE OF ROYALEDGE(R) EPDM IN
LOW-TO-MEDIUM VOLTAGE INSULATION FOR WIRE & CABLE. CUSTOMERS LIKE AIW RELY ON
OUR TECHNICAL EXPERTISE TO HELP THEM DEVELOP NEW PRODUCTS FOR THEIR EVOLVING
MARKET NEEDS.
Our Naugard(R) polymerization inhibitors that prevent the formation
of polymers during the production of monomers, and our new Naugard(R) polyol
stabilizer for flexible foam achieved significant market acceptance in 1999. We
are continuing to develop new grades of inhibitors, polymer modifiers and
antioxidants to serve expanding international plastics markets.
Our Delac(R) accelerators, Flexzone(R) antiozonants, Naugard(R)
antioxidants, and other additives are recognized around the world for their
ability to effectively process and protect rubber from ozone, oxygen, heat, and
light, dramatically extending product life and lowering costs. While we provide
these products to a broad range of rubber producers including makers of hose,
sponge, belts, weather stripping, and wire and cable, over 50 percent of sales
are to tire manufacturers. Technologically, we capitalize on our 100-year-old
heritage in rubber chemicals and our proprietary catalysts, specialty equipment
and multi-step processing.
We are positioning a number of our products for accelerated growth
in rubber applications over the next five years including silanes, bonding
agents, accelerators, silicone-modified EPDM, solid polyurethanes, and liquid
polymers. These products will be at the core of a thrust to acquire synergistic
rubber chemical products and technologies in order to expand markets and develop
new products.
Asia is projected to be the strongest growth area for rubber
production over the next decade, and we have expanded our presence there by
buying out our joint venture partner in Korea and increasing our joint-venture
ownership in Thailand. We are also looking at opportunities to increase our
presence elsewhere in Asia and Europe.
The merger allowed us to increase sales of urethane chemicals to our
Adiprene(R)/Vibrathane(R) castable urethanes business where polyester polyols
are important raw materialS that give the product its wear resistance
characteristics. Our Fomrez(R) products are also critical in flexible foams for
a wide range of products from automotive to packaging.
-11-
We are experiencing strong demand for Witcobond(R) aqueous
polyurethane dispersions in automotive coatings, fiberglass and
textile-laminating markets. Witcobond(R) dispersions provide a hard, clear
topcoat for automotive finishes that stretch and bend and keep on shining.
Witcothane(R) microcellular systems provide increased wear and lightweight
characteristics to footwear and industrial applications. Our Baxenden joint
venture in the United Kingdom provides Trixene(R) for waterborne polyurethanes
for leather and textiles.
Our POLYMERS business is benefiting from strong global demand for
Royalene(R) EPDM and Adiprene(R)/Vibrathane(R) castable urethanes.
We are the largest North American manufacturer of EPDM, commonly
known as "crackless rubber" because it can withstand sunlight and ozone without
deteriorating. With three production lines devoted to Royalene(R) EPDM, we have
significant production flexibility and high-volume production capability with
consistent product quality to meet a full range of customer demands.
We produce over 30 different variations of this polymer primarily
for applications in automotive parts including hoses, belts, weather stripping,
brake components, and seals and gaskets, as well as in roofing, industrial hose
and wire and cable. Royalene(R) EPDM is used by most of the world's auto makers,
and the typical new car contains 20 pounds of EPDM rubber. We expect that will
grow to 25 pounds over the next five years as new uses, such as engine mounts,
are refined.
SOLUTION: ADIPRENE(R) URETHANES
[PHOTO]
Adiprene(R) LFTDI castable urethane prepolymers improve the
durability and performance of golf ball covers and are used extensively in
top-performing golf ball brands around the world. We also supply Witcobond(R)
polyurethane dispersions for coating systems for golf balls and Royalene(R) EPDM
synthetic rubber for golf club grips.
[PHOTO CAPTION]: PERFORMANCE CHARACTERISTICS SUCH AS RESILIENCE,
TOUGHNESS, DISTANCE, AND SPIN RATES ARE KEY TO THE NEXT-GENERATION OF PREMIER
GOLF BALLS. CHET ZAWACKI (LEFT), WORLDWIDE MARKETING MANAGER FOR
ADIPRENE(R)/VIBRATHANE(R) URETHANES, AND RON ROSENBERG, R&D MANAGER, CHECK THE
PROPERTIES OF A GOLF BALL COVERED WITH OUR URETHANES MATERIAL.
We are enjoying considerable success with RoyalEdge(R), a new
generation of EPDM introduced two years ago for the weather seal and wire and
cable markets. In July, we introduced a new RoyalEdge(R) product with improved
electrical stability and processing properties for wire and cable. The new
product was developed in response to customers' requests for custom-formulated
material for low-to-medium voltage applications.
EPDM demand continues to be strong. In 1998, we completed the
debottlenecking of our Geismar, Louisiana plant, and we were sold out of the
full increase in capacity in 1999. We are evaluating options for increasing
production capacity in Europe, where demand is growing.
-12-
We are confident that we will maintain our leadership position and
retain the loyalty of our customers with aggressive marketing efforts and new
product innovations in EPDM. In addition, we expect that our profitability will
continue to benefit from improved production efficiencies.
We are the world's largest supplier of castable urethanes with over
200 prepolymers in our product line. Golf ball covers are one of the newest
applications for Adiprene(R)/Vibrathane(R) urethanes adding to a growing use in
sporting goods applications. We are supplying our urethane material to major
golf ball manufacturers to use as covers on their new lines of premium balls.
Our products impart a unique combination of durability and performance.
The unique abrasion resistance and durability characteristics of our
castable urethane products continue to open new markets. Our customer service,
technical support and ability to customize products ensure our leadership
position in the market.
A number of new urethane prepolymers achieved market success last
year. Adiprene(R) LFTDI (low-free toluene diisocyanate) prepolymers offer strong
growth potential in transportation and industrial markets by providing improved
processability, performance and workplace safety for the user and higher
performance in end-use applications.
Adiprene(R) PPDI (para-phenylene diisocyanate) urethane prepolymers
are responding to growing market demand for ultra-high-performance products such
as wheels for "People Mover" transit systems and amusement park rides and
bearing seals for steel mill rolls. We have developed a proprietary process to
produce these PPDI-based polymers in more environmentally friendly low-free
forms.
In the second quarter of 2000, we will open our first Adiprene(R)
LFTDI plant in Europe in response to growing demand for high-performance
products with environmentally sound characteristics. The plant in Latina, Italy
will provide customers with products that contribute to workplace safety and
provide a superior material for use in high-speed, high-load-bearing
applications such as industrial rolls and tires.
Meanwhile, we completed expansion of our Adiprene(R) low-free PPDI
plant in Gastonia, North Carolina, in the first quarter of 2000. Again, the
product satisfies the customers' industrial hygiene concerns while providing a
product with exceptional dynamic properties for use in products such as
hydraulic seals, drive belts and sheave liners.
Our innovative products are backed by our advanced manufacturing
technology such as our Ribbon Flow(R) Systems, a moldless casting alternative to
traditional hot casting, which is making substantial inroads into new
applications. This economic combination of rotational casting and room
temperature curing provides a more cost-effective system to produce
high-performance rolls for the paper and steel industries.
-13-
SOLUTION: DAVIS-STANDARD EXTRUSION SYSTEMS
AND PARACRIL(R) NITRILE RUBBER
[PHOTO]
Quabaug Corporation in North Brookfield, Massachusetts relies on
Davis-Standard extruders to help it convert our Paracril(R) nitrile rubber for
use in Vibram(R) shoe soles. The Vibram brand name is recognized worldwide as
the leader in high-performance soling products for rugged outdoor, work and
service footwear.
(VIBRAM IS A REGISTERED TRADEMARK OF QUABAUG CORPORATION)
The merger has given us the immediate benefit of vertical
integration in manufacturing urethanes. Witco had been the primary supplier of
polyester polyols for Adiprene(R)/ Vibrathane(R) urethanes, supplying over 50
percent of this critical raw material.
Our production capacity for oil-resistant Paracril(R) nitrile rubber
will double as the result of a joint venture with DESC, a diversified Mexican
chemical company. In 1999, we closed a high-cost plant in Ohio and moved
production to a state-of-the-art, 40,000 metric ton facility near Tampico,
Mexico, the largest dedicated nitrile rubber plant in the world. We expect that
this expanded capacity will allow us to supply new automotive and industrial
customers worldwide. Customers will also benefit from a new line of
Paraclean(TM) NBR polymers that prevent mold deposits from forming in today's
high-speed injection molding machines.
[PHOTO CAPTION]: INSET LEFT: CHITTA LAHIRI (RIGHT), OUR RESEARCH
SCIENTIST FOR PARACRIL(R) NBR, EXPLAINS THE ENVIRONMENTAL AND PERFORMANCE
ADVANTAGES OF PARACLEAN(TM) NBR POLYMERS TO DAN HIBBARD (LEFT), SUPERVISOR, AND
TIM MINER, LABORATORY MANAGER, BOTH OF QUABAUG CORPORATION.
[PHOTO CAPTION]: DAVIS-STANDARD IS THE LEADING WORLDWIDE SUPPLIER OF
PLASTIC AND RUBBER EXTRUDERS, ELECTRONIC CONTROLS AND EXTRUSION SYSTEMS.
POLYMER PROCESSING EQUIPMENT customers rely on Davis-Standard for
the most responsive customer service and the most advanced and productive
systems available for polymer processing. Our integrated systems, which combine
extruders with advanced computer-based controls and other equipment, produce
rubber and plastic extruded forms for a wide range of everyday products. These
include: food, snack and display packaging, construction products such as window
profiles, insulated wire, appliance housings, automotive seals and tubing,
medical tubing and bags, copper and fiber communication cables, footwear, picnic
coolers, toys, and outdoor furniture.
With backlog in excess of $100 million at year-end and improved
order intake, we expect to rebound in the spring of 2000 from a cyclical
slowdown in orders that began in the second quarter of 1999.
We have restructured the business in response to market conditions
and strengthened our development labs and technical centers in the U.S. and
Europe. The restructuring en-
-14-
hanced our ability to develop new products and processes for the equipment
market as well as new polymer materials and additives for our polymer customers.
With over 50 years of experience in developing the most advanced
systems for polymer processing, our technological expertise also supports our
leading market positions in polymers and polymer additives. With a common
customer base with polymers and polymer additives, Davis-Standard systems can be
used to test the elasticity, viscosity and plasticity of new materials saving
our customers significant time in commissioning new products. Our ability to
service the market with technically proven products is unique in the industry,
and allows us to bring both equipment and polymer products to market faster and
at lower cost than our competition.
Our impetus for technological product innovation is the driving
factor that allows us to provide the productivity improvements demanded by our
customers. By combining several state-of-the-art products, we produce
comprehensive systems that allow our customers to reduce manufacturing steps and
increase the return on their investment. Our twin-screw, in-line compounding
systems are used in conjunction with our single-screw extruders to process
engineered plastics into very technically sophisticated products.
SOLUTION: SILQUEST(R) SILANES
[PHOTO]
Silica-tires, the next generation of passenger car tires, use sulfur
silanes to couple silica with rubber. Using silica instead of carbon black in
tires decreases rolling resistance, and improves comfort, safety and fuel
economy. The tires are also referred to as "Greentyres" because of their
environmentally friendly properties of better vehicle fuel economy and longer
wear life. We are a leading global supplier of rubber chemicals with a
comprehensive line of more than 100 different products used in rubber
processing.
In pursuit of the goals of zero defects and timely delivery, we have
opened a 40,000 square foot testing area, adjacent to our Connecticut production
plant, where we set up, wire and test complete systems prior to shipping. To
improve service to our customers, we assign assembly specialists to new complex
systems when production begins. The specialist follows the machine through
manufacturing, inspection, testing, and shipment, so an intimate knowledge of
the product is brought to the customer site when the system is reassembled and
installed. The benefit is a dramatic reduction in the time spent on the final
installation at the customer's facility.
With a thorough understanding of our customers' requirements, we
continue to develop new products to serve new markets. By combining our
twin-screw and single- screw technologies, Davis-Standard has been able to
supply lumber systems which produce a variety of wood-type products utilizing
plastic and wood filler. The ability to provide extrusion systems that can
produce products at economical rates and with consistent quality is the
cornerstone of Davis-Standard. Lumber products, that are expected to combine up
to 60 percent wood fiber with 40 percent polymer, will be manufactured on our
systems that will enable manufacturers to use a broad range of natural fibers
including sawdust. We have patents pending on several new
-15-
product developments including a new barrier screw technology that improves melt
and mixing performance and is expected to surpass industry expectations.
We have expanded our European presence through acquisitions in
Germany, France and the United Kingdom, and we are growing in Asia and Latin
America with aggressive marketing and sales efforts. In 1999, we acquired
Kunstsoff und Kabelmaschinenbau of Haan, Germany. Its technology made a
substantial contribution to our ability to serve the European wire and cable
market. Our business plan is to reinforce our position as the leading full-line
supplier of extrusion equipment to worldwide markets.
[PHOTO CAPTION]: HARWICK CHEMICAL MANUFACTURING CORP. OF AKRON, OHIO
PRODUCES AN EASY-TO-HANDLE DRY SILANE CONCENTRATE FROM OUR LIQUID SILQUEST(R)
ORGANOFUNCTIONAL SILANES. IN THIS FORM, HARWICK SUPPLIES THE SILANE PRODUCT TO
THE GOODYEAR RUBBER COMPANY FOR USE AS A COUPLING AGENT IN MINERAL-FILLED RUBBER
COMPOUNDS USED FOR GASOLINE HOSES AND A VARIETY OF OTHER PRODUCTS. PICTURED AT
HARWICK (LEFT TO RIGHT) ARE: ART FRITZ, GENERAL MANAGER OF HARWICK, PAUL
SCHUMACHER, OUR ACCOUNT EXECUTIVE, AND SUSAN DECKARD OF GOODYEAR'S INDUSTRIAL
PRODUCTS GROUP.
Our ORGANOSILICONES business is the world's leading supplier of
organofunctional silanes that are used in a wide variety of materials including
rubber products, adhesives and sealants, coatings, thermoplastics, and
fiberglass. Silanes are critical as coupling agents between organic and
inorganic materials allowing the cross-linking of materials and imparting
outstanding adhesion, durability and abrasion-resistant properties.
We are able to offer customers state-of-the-art products and
services by working closely with them at their facilities to develop products
they need and find answers to their technical questions. While we are solving
current problems, we are anticipating future needs.
Our sulfur silanes have been instrumental in the development of
"Greentyres", the most advanced product offering in the passenger car tire
market. Our silanes act as a coupling agent allowing tire makers to use silica
instead of carbon black in the rubber compound. Silica lowers the rolling
resistance of tires improving handling characteristics and fuel economy. The
automobile industry expects the growth of "Greentyres" to equal or surpass the
explosive growth of radial tires 30 years ago. OrganoSilicones is a significant
force in this market with most of the world's major tire companies as customers.
Our silanes technology continues to enable recent product advances
in the coatings industry. Silanes have always provided substantial benefits in
adhesion and durability for coatings, but until recently, the use of silanes in
waterborne coatings had been restricted. Their extreme water reactivity made it
impossible to take full advantage of the benefits silanes can offer waterborne
coatings. We have developed breakthrough, patented chemistry that has opened an
expanded market for a unique line of water-stable silanes in paints, sealants,
adhesives, and polymer solutions. Using these new silanes, environmentally
friendly waterborne coatings and adhesives can compete with solvent-based
products.
-16-
SOLUTION: NIAX(R) AND FOMREZ(R) URETHANE ADDITIVES
[PHOTO]
With products in over 180 vehicle models, Woodbridge Foam is the
world's largest independent supplier of polyurethane foam components for the
automotive industry. Woodbridge values dependable and innovative partners in its
global supply chain, and our proprietary urethane additives and technology are
important to Woodbridge products including seating components, energy-absorbing
safety foams and acoustical foams.
[PHOTO CAPTION]: WOODBRIDGE FOAM, HEADQUARTERED IN TORONTO, IS A
LEADING MANUFACTURER OF SPECIALTY URETHANE FOAMS. WOODBRIDGE DRAWS ON OUR GLOBAL
MANUFACTURING CAPABILITY AND SUPPLY CHAIN TO DELIVER QUALITY PRODUCTS AND
SERVICES TO ITS 39 FACILITIES IN EUROPE, ASIA, AUSTRALIA, THE MIDDLE EAST, NORTH
AMERICA, AND LATIN AMERICA.
PIERRE MARTINEAU (LEFT), OUR WOODBRIDGE ACCOUNT REPRESENTATIVE, AND
ROBERT BRULOTTE (RIGHT), OUR CANADIAN BUSINESS DIRECTOR, DISCUSS THE PROPERTIES
NEEDED IN FOAM SEATING WITH DR. HAMDY KHALIL, WOODBRIDGE'S CORPORATE DIRECTOR OF
CHEMICAL RESEARCH AND DEVELOPMENT.
As a result of our innovative, customer-driven product and process
improvements, we are market leaders in silanes, and we have an aggressive growth
plan in place to build on this leadership position that is supported by
innovative thinking and appropriate capital investments. Our direct TMS
(Trimethoxysilane) process has been commercialized at our facility in Termoli,
Italy, and is an integral part of our $50 million expansion now underway. This
is an efficient, environmentally friendly process that provides significant
waste reduction over traditional methods, eliminating chlorides. Additional
process improvements are expected to cut waste even further in future
expansions. This direct TMS process was the recipient of the 1999 Kirkpatrick
Achievement Award, the most prestigious technology award in the chemical process
industry. The delivery of continuous product innovations and technology
improvements that benefit our customers will continue to drive the growth of our
silanes business.
For the consumer market, our Silsoft(R) OrganoSilicone copolymers
are just one example of products that enhance performance for consumers in a
number of major brands. Silsoft(R) OrganoSilicone copolymers provide for
exceptional hair conditioning without buildup in products such as shampoos,
conditioners and styling products.
Our Magnasoft(R) brands of organo-modified silicones are the
preferred choice of the textile industry to provide superior softening for
high-end fabrics for garments, bedding and toweling. Our seven manufacturing and
blending sites located around the world allow us to react swiftly to changing
needs in the marketplace.
The broad product lines of SAG(R) and Sentry(R) foam control
additives find theiR way into such diverse markets as food and beverage
processing, pharmaceuticals and waste water treatment. In 1999, we fully
commercialized the most effective silicone-based foam control agent for
high-speed pulp and paper manufacturing, allowing producers to effectively
eliminate the use of a potentially harmful additive.
-17-
Performance, quality and consistency are attributes that customers
have come to expect from our urethane additives. We are among the leaders in the
urethane industry with a broad range of product offerings including Niax(R)
silicone surfactants, amine and Fomrez(R) tin catalysts, and performance
additives such as Geolite(R) modifiers, antioxidants and processing aids. We are
known for our problem-solving innovation in an industry that is challenged with
transitioning to alternative processing technology in all significant market
segments.
Our products are indispensable in many applications important to the
consumer. To keep up with emission requirements in specialty foam manufacturing
used in furniture and bedding, new surfactant technology has been designed and
introduced to meet the challenges of processing foam blown with environmentally
acceptable carbon dioxide. Our rigid surfactant technology improves dimensional
stability and insulation integrity in refrigeration, transportation and
construction applications, including small home refrigeration units, heated
insulated trucks and insulated panels for housing. Product offerings for molded
foam markets improve comfort at an acceptable cost for automotive seating. As
interior car parts are designed to improve safety margins and promote a quieter
ride, urethane foam formulations, using our unique and in many cases proprietary
additives, are replacing other materials. As urethane foam is considered for
carpet backing, laser printing components and decorative floor coverings, our
products and services are valued by our customers.
SOLUTION: COMITE(R) MITICIDE
[PHOTO]
Australia's $1.1 billion cotton crop was threatened by a severe mite
infestation in 1999. In a record sales effort, Comite(R) miticide protected the
crop against mite damage and improved the performance of other products used to
control bollworms. As with all of our crop protection products, success requires
not only the best chemistry but also service and technology based on careful
planning and close monitoring of climatic conditions and other agriculture
variables. Mites, tiny parasitic arachnids, are a global threat to many crops.
We have a major share of the $525 million miticide market with Comite(R),
Omite(R), Micromite(R), and the newly introduced Floramite(R).
[PHOTO CAPTION]: INSET LEFT: RICHARD WRIGHT (FAR RIGHT), OUR SALES
AGRONOMIST IN MOREE, NEW SOUTH WALES, AUSTRALIA, WORKED CLOSELY WITH HIS
COLLEAGUES FROM IAMA LTD. TO CONTROL THE MITE OUTBREAK IN AUSTRALIAN COTTON IN
JANUARY 1999. PICTURED FROM LEFT TO RIGHT ARE; MAURIE FAY, IAMA SENIOR COTTON
AGRONOMIST; GREG MCLAREN, IAMA COMITE(R) COORDINATOR; AND NICOLE ROOKE, IAMA
DEMAND MANAGER. IAMA IS OUR SINGLE-STEP DISTRIBUTION PARTNER FOR COTTON PRODUCTS
IN AUSTRALIA.
[PHOTO CAPTION]: ABOVE: JOHN WESTCOTT (LEFT), WORLDWIDE BUSINESS
DIRECTOR-INSECTICIDES, REVIEWS HIS 12-MONTH ROLLING PRODUCTION/SUPPLY PLAN FOR
COMITE(R) MITICIDE WITH CHRIS HAYNER, OPERATIONS COORDINATOR.
Our CROP PROTECTION business provides farmers in over 120 countries
with products and services to improve crop quality and increase yields. We focus
our marketing efforts on high-value crops such as nuts, citrus, cotton, rice,
tree and vine fruits, and ornamental plants.
-18-
With the merger, we added strong technology and products in agricultural
surfactants that increase the effectiveness of the active ingredients in
fungicides, herbicides and insecticides. Surfactants also have a broad range of
uses in oilfield chemicals used in well drilling, production and enhanced oil
recovery.
Our specialized crop protection product lines include fungicides,
miticides, insecticides, herbicides, and growth regulants formulated for
specific crops and geographic regions. Our superior service based on formulation
expertise and application advice is responsible for a loyal and expanding
customer base.
Our focus on high-value market niches is based on our knowledge of
the crops and growing conditions of specific geographic areas and enables us to
generate higher sales margins. Larger commodity markets such as cotton and corn
are served with targeted, value-added products. Our Harvade(R) defoliant aids in
the harvesting of cotton, canola and sunflowers.
We are constantly expanding our presence in niche markets by
developing new products, obtaining new use registrations, and acquiring new
labels.
In 1999, our Harvade(R) defoliant for cotton received EPA
registration for new use as a cotton herbicide. With spray directed under the
young cotton plant, Harvade(R) is very effective in weed control and is later
used as a defoliant at harvest time. One Tennessee cotton farmer reported 100
percent control of troublesome sicklepod and morning glory vines and a 25
percent cost savings over last season's product application.
Our newly developed Floramite(R) miticide sold out after its summer
registration for the ornamental market. It received accelerated review by the
EPA as a reduced risk product. In 2000, we expect to receive registration for
food crops including apples, citrus and tea in Japan and Korea, where we will
introduce the product under the tradename Acramite(TM). Floramite(R) complements
our highly successful line of Omite(R), Comite(R) and Micromite(R) miticides
that already have a major share of the annual $525 million worldwide market.
A new granular formulation of Micromite(R) miticide for citrus makes
the product more user friendly and easier to measure and mix. In 1999, we
received registration for use of Dimilin(R) to combat rice water weevils. This
opens a new market with a much more ecologically friendly alternative to
chemistry now in use.
Over 65 percent of our sales are offshore and geographic expansion
is essential to achieving continuing sales growth as third-world economic growth
improves the diets of people around the world. In Poland, we have entered a
joint venture with FMC and Rohm & Haas to sell our products directly in one of
Europe's largest agricultural economies. In Brazil, the world's fourth-largest
agricultural economy, we introduced Pantera(R) herbicide that promises solid
sales growth after it was used with success on 60,000 acres of soybeans. In
addition, we added FMC's citrus products to our Brazilian sales lines in 1999.
In China, we expanded our direct sales force of Chinese nationals and achieved
substantial sales growth especially in Omite(R) for citrus.
We are a world leader in seed treatment products to assure
germination and healthy seedlings. Our Vitavax(R) fungicide is one of the
world's best-selling seed treatment
-19-
products and stimulates growth as well as controlling disease. About half of our
Crop Protection business, including the Gustafson joint venture, is related to
seed treatment products and application systems. Our Gustafson joint venture
with Bayer is the largest seed treatment company in North America. The
partnership is a powerful combination of agricultural chemical strengths: Bayer
is a leading developer of active ingredients for seed treatment, and Gustafson
is a leader in formulating and delivering seed treatment products.
SOLUTION: CALCINATE(R)/NAUGALUBE(R) PETROLEUM ADDITIVES
[PHOTO]
Cutting-edge best describes our additives for the industrial
lubricant market. In metalworking fluids, our products protect manufacturers'
investments in sophisticated machinery and insure the quality of finished
machined products. Calcinate(R) calcium sulfonate provides the lubricant with
anti-corrosion and anti-wear properties, and Naugalube(R) additives protect
fluids from oxidation.
In 1999, Gustafson received three new product registrations for use
on grains, and we expect substantial success starting with spring wheat
applications in the 2000 planting season. We anticipate accelerating growth in
seed treatment because of the enhanced environmental attractiveness of the
localized use of chemicals at very low application rates.
In Australia, our Hannaford Seedmaster Services subsidiary holds a
major share of the seed treatment market and has leveraged that market position
to expand its product offerings to crop application chemicals with direct
selling. We had a record Comite(R) miticide sales season in Australia driven by
our aggressive direct product distribution program and high mite infestations in
cotton.
[PHOTO CAPTION]: WITH THE MERGER, WE HAVE OPENED NEW OPPORTUNITIES
FOR ONE OF THE MOST COMPLETE PRODUCT OFFERINGS IN THE PETROLEUM ADDITIVES
INDUSTRY. WE SERVE A WIDE RANGE OF CUSTOMERS WHO FORMULATE AND MANUFACTURE
PRODUCTS FOR THE TRANSPORTATION, INDUSTRIAL, GREASE, AND FUELS MARKETS. MARINE
TRANSPORTATION IS AMONG THE INDUSTRIES THAT CAN BENEFIT FROM OUR SYNTON(R) AND
TRILENE(R) PRODUCTS TO HELP INCREASE THE PERFORMANCE EFFICIENCY OF LUBRICANT
SYSTEMS.
Our INDUSTRIAL SURFACTANTS business serves global agriculture
markets with an impressive product line. Our wetting agents, primarily used in
herbicides and insecticides, reduce the surface tension of the product,
increasing its ability to spread and penetrate. Farmers can cover more acreage
with less active ingredients and lower spray volume, providing both economic and
ecological benefits.
We find solutions to farmers' problems in the field. This customer
focus is instrumental in how we develop specialty products such as our patented
Silwet(R) super-spreading dispersants, that enable customers to reduce the
amount of active chemicals required to protect crops, and our Morwet(R) silicone
surfactants, that contribute to the success of a wide range of products marketed
by the crop protection industry.
-20-
In the oil field market, our industrial surfactants are achieving
increased customer acceptance with growing oil exploration and production
activity. Applications technology centers in Switzerland, Singapore and Brazil
have improved our ability to support customers' needs with promising new gas
hydrate inhibitors and enhanced oilfield recovery (EOR) technologies. Gas
hydrate inhibitors are used in deep water gas wells to prevent gas from
crystallizing at cold temperatures and high pressure.
Our innovative EOR products and technologies allow customers to
efficiently and profitably extend the life of existing underground oil
reservoirs. Prior to EOR advancements, drillers were forced to leave as much as
60 to 70 percent of available oil in the ground. EOR provides an environmentally
acceptable method for oil companies to extract as much as 40 percent more oil
from a reservoir than the traditional pressure or water-based extraction
methods. It is estimated that EOR will add over one billion barrels of oil to
current U.S. reserves.
Our PETROLEUM ADDITIVES unit offers one of the most comprehensive
product lines of components to lubricant additive package formulators and
manufacturers of products for the transportation, industrial, grease, and fuels
markets. With the merger, we have achieved a synergy that opens broader new
markets for one of the largest product offerings in the industry. Our
performance components allow our customers to formulate products that can meet
demanding new industry specifications driven by more demanding performance and
environmental requirements.
We have combined Crompton & Knowles' century of experience in
sulfur-nitrogen chemistry with Witco's advanced detergent technology to provide
performance enhancements in lubricants and fuels. Proposed new and more
stringent lubricant specifications that our customers will be required to meet
will provide us with new product opportunities in friction modifiers,
antioxidants, anti-wear compounds, and deposit control additives, all of which
are critical to cleaner, more efficient lubricant systems.
SOLUTION: SILQUEST(R) SILANES
[PHOTO]
Prestone(R) antifreeze/coolant uses our organofunctional silanes to
provide stability to the product's performance. Used in small additive
proportions, this silane, proprietary to Prestone(R), is an important enhancer
to the world's best-selling antifreeze. The global automotive market depends on
our silanes for silica-tires, the most advanced product in passenger car tires,
and for durable clear coat automotive finishes.
[PHOTO CAPTION]: INSET LEFT: MELANIE BISACCIO (RIGHT), OUR TECHNICAL
SALES REPRESENTATIVE, DISCUSSES PRESTONE'S SILANES DELIVERY SCHEDULES WITH
PRESTONE PERSONNEL, LEFT TO RIGHT: CHRISTINE HOH, MATERIAL COORDINATOR,
GABRIELLE DALY, PURCHASING/DISTRIBUTION MANAGER, AND ERNESTINE HINES, PURCHASING
COORDINATOR.
[PHOTO CAPTION]: DEEP-DYED SPECIALTY NAPKINS ARE AMONG THE BROAD
RANGE OF PRODUCTS THAT BENEFIT FROM OUR HIGH-QUALITY INDUSTRIAL DYES.
-21-
With the merger, the benefits of liquid polymers and synthetic
fluids to increase performance efficiency are now available to the metalworking
and marine transportation industries, markets that Synton(R) PAO (poly alpha
olefins) and Trilene(R) liquid polymers had not focused on previously.
For automotive and industrial lubricants makers, Synton(R) PAO
synthetic fluids can lower life-cycle costs by extending drain intervals and
enhancing high-temperature performance in machinery and gear-boxes. PAO-based
lubricants have excellent thermal and oxidative stability in demanding
applications. This capability is now offered to makers of products for the
metalworking industry that have stringent safety and environmental requirements
as well as high performance demands.
In 2000, we will complete our fifth plant expansion in the past five
years in Elmira, Ontario, Canada for Synton(R) PAO, doubling the capacity while
improving the manufacturing process. We expect this new capacity to be sold out
quickly, and we will continue to invest in new capacity to support the rapidly
increasing demand for these high-performance products.
Responding to the demands of the transportation industry, we are
developing new dispersants to enable diesel engines to operate more cleanly. We
are also working on new Naugalube(R) antioxidants, MolyFM(TM) friction
modifiers, and enhanced grades of Trilene(R) liquid polymers to protect engines
while enhancing efficiency that improves fuel economy for larger vehicles.
After a thorough evaluation of the potential of the textile dyes
business and the options available to us, we elected to exit the business and
sold Textile Colors in December. We are now concentrating on the paper, plastics
and other specialized areas of the industrial marketplace in North and South
America. Our INDUSTRIAL COLORS business accounts for about $50 million in annual
sales.
Good progress was made in 1999 in growing our market share for
liquid and powder direct dyes to the paper industry with our strong domestic
manufacturing position and technical service capabilities combined with our
customer-focused technical programs.
One example of what was accomplished is our new position as the
long-term exclusive dyestuff supplier to a market leader in the production of
deep-dyed specialty napkin goods for the U.S. hospitality industry. Our
consistent high-quality, powdered, direct dyes in accurate pre-weighed,
repulpable paper bags, that minimize waste and environmental impact by
eliminating direct handling and measurement, assure us of this strong market
position.
Industrial Colors is also growing in a wide range of user industries
including specialty printing inks and wood stains as a result of our technical
capabilities and intense service and marketing efforts.
Our REFINED PRODUCTS business serves a broad range of industries
including cosmetics, inks and industrial markets with white oils, cable fillers
and refrigeration oils. Last year, the cosmetics industry embraced our new
Hydrobrite(R) 1000 white mineral oil that we introduced
-22-
for skin care creams and lotions. This unique product has all the moisturizing
qualities of petrolatum but remains in a liquid form.
Sonolube(R), a blend of white oils and performance additives that
serves industrial customers, has been accepted by industrial users as a superior
product for protecting machinery from wear and rust. Our Witcogel(R) patented
white oil and polymer blend is a leading fiber-optic cable filler for the
telecommunications market.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES
The December 31, 1999 working capital balance of $141.8 million
decreased $61.6 million from the December 26, 1998 balance of $203.4 million,
while the current ratio decreased to 1.1 from 1.5 in 1998. The decrease in
working capital and the current ratio were primarily due to the merger (the
"Merger") of Crompton and Knowles Corporation (Crompton) and Witco Corporation
(Witco) effective September 1, 1999. Days sales in receivables averaged 46 days
in 1999, versus 54 days in 1998, principally due to the impact of the accounts
receivable securitization programs. Inventory turnover averaged 3.4, compared to
3.1 in 1998.
Net cash provided by operations of $88.6 million decreased $80.9
million from the net cash provided by operations of $169.5 million in 1998, due
primarily to lower earnings. Net cash provided by operations, acquired cash of
Witco, additional credit agreement and short-term borrowings, and the proceeds
from the sales of the specialty ingredients business and the textile colors
business, were used primarily to repurchase common shares, finance capital
expenditures, pay merger costs, make dividend payments, repurchase the 9% and
10.5% Senior Notes, and pay $48.2 million of income taxes related to the 1998
Gustafson gain. The Company's debt to total capital ratio decreased to 65% from
91% in 1998, primarily as a result of the Merger. The Company's liquidity needs,
including debt servicing, are expected to be financed from operations.
On October 28, 1999, the Company entered into a $600 million 364-day
senior unsecured revolving credit facility and a $400 million five-year senior
unsecured credit facility with a syndicate of lenders. Borrowings on these
facilities are at various rate options to be determined on the date of
borrowing. Borrowings under these facilities totaled $680 million at December
31, 1999, with a weighted average interest rate of 7%.
In addition, the Company has available accounts receivable
securitization programs to sell up to $232 million of domestic accounts
receivable to agent banks. As of December 31, 1999, $164.7 million of domestic
accounts receivable had been sold under these agreements.
In September 1998, the Company announced a share repurchase program
to buy back 7.5 million shares, or approximately 10% of the common shares then
outstanding. In January 1999, the Company announced a share repurchase program
for 6.8 million shares, or approximately 10% of the common shares then
outstanding. From September 1998 through the completion of these programs in
1999, the Company repurchased 9.5 million common shares at an average price of
$17.85 per share.
In November 1999, the Board of Directors approved another share
repurchase program for 10% of the common shares then outstanding, or
approximately 11.9 million shares. As of December 31, 1999, the Company had
repurchased 2.2 million common shares under that program at an average price of
$12.16 per share.
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In November 1999, the Company announced that it is committed to a
cost savings program that will enable it to reduce costs by $60 million in 2000.
Cost savings of $44 million are expected to be achieved through salaried staff
reductions. The remaining savings are expected to be achieved through the
consolidation of plants and offices, purchasing and logistics efficiencies, and
the elimination of outside services and consultants. As of December 31, 1999,
the Company reduced its workforce by 478 employees.
In January 1999, the Company sold its specialty ingredients business
to Chr. Hansen Holding A/S of Denmark for $103 million, which resulted in a
pre-tax gain of $42.1 million in the first quarter of 1999.
In December 1999, the Company sold its textile colors business to
Yorkshire Group PLC for $86.5 million ($78 million in cash proceeds and a 12.4%
equity interest in Yorkshire valued at approximately $8.5 million). The sale
resulted in a pre-tax loss of $83.3 million.
Capital expenditures for 1999 amounted to $131.8 million as compared
to $66.6 million in 1998. The increase is primarily due to the Merger, year 2000
related expenditures and cost savings initiatives. Capital expenditures are
expected to approximate $175 million in 2000, primarily for the Company's
replacement needs and improvement of domestic and foreign facilities.
YEAR 2000 ISSUES
The Company successfully implemented its SAP and non-SAP projects
prior to December 31, 1999. As a result, the Company did not experience any
significant Year 2000 related system failures.
The total costs associated with the SAP and non-SAP projects were
$19.4 million (including $13.4 million capitalized and $6 million expensed).
Expenditures of $14.6 million were made during 1999 ($11.5 million capitalized
and $3.1 million expensed).
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" which delays the effective date of FASB Statement No.
133 to fiscal years beginning after June 15, 2000. The Company plans to adopt
the provisions of this statement in the first quarter of 2001. The Company has
not yet determined what the effect of FASB Statement No. 133 will be on its
earnings and financial position.
ENVIRONMENTAL MATTERS
The Company is involved in claims, litigation, administrative
proceedings and investigations of various types in a number of jurisdictions. A
number of such matters involve claims for a material amount of damages and
relate to or allege environmental liabilities, in-
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
cluding clean-up costs associated with hazardous waste disposal sites, natural
resource damages, property damage and personal injury. The Company and some of
its subsidiaries have been identified by federal, state or local governmental
agencies, and by other potentially responsible parties (each a "PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or comparable state statutes, as a PRP with respect to costs associated
with waste disposal sites at various locations in the United States. In
addition, the Company is involved with environmental remediation and compliance
activities at some of its current and former sites in the United States and
abroad.
Each quarter, the Company evaluates and reviews estimates for future
remediation and other costs to determine appropriate environmental reserve
amounts. For each site a determination is made of the specific measures that are
believed to be required to remediate the site, the estimated total cost to carry
out the remediation plan, the portion of the total remediation costs to be borne
by the Company and the anticipated time frame over which payments toward the
remediation plan will occur. As of December 31, 1999, the Company's reserves for
environmental remediation activities totaled $198 million. It is reasonably
possible that the Company's estimates for environmental remediation liabilities
may change in the future should additional sites be identified, further
remediation measures be required or undertaken, the interpretation of current
laws and regulations be modified or additional environmental laws and
regulations be enacted.
The Company intends to assert all meritorious legal defenses and all
other equitable factors which are available to it with respect to the above
matters. The Company believes that the resolution of these environmental matters
will not have a material adverse effect on its consolidated financial position.
While the Company believes it is unlikely, the resolution of these environmental
matters could have a material adverse effect on its consolidated results of
operations in any given year if a significant number of these matters are
resolved unfavorably.
MARKET RISK & RISK MANAGEMENT POLICIES
The operations of the Company are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates. The
Company uses derivative financial instruments to mitigate its exposure to these
risks. The Company does not use derivative financial instruments for trading or
speculative purposes.
The Company's primary interest rate risk exposure results from
changes in the fair value of its long-term, U.S. dollar fixed rate debt, as well
as cash flow risk associated with long-term variable rate debt. The Company used
interest rate swap contracts to convert a portion of its long-term, variable
rate foreign denominated debt to fixed rate debt. Each interest rate swap
contract is designated with the principal balance and the term of the specific
debt obligation. These contracts involve the exchange of interest payments over
the life of the contract without an exchange of the notional amount upon which
the payments are based. The differential to be paid or received as interest
rates change is accrued as other liabilities or assets and recognized as an
adjustment to interest expense. The changes in the fair value of the swap
contracts due to changes in market interest rates are not recognized in the
financial statements. In the event of early extinguishment of the designated
debt obligations, any realized or unrealized gain
-26-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
or loss from the swap would be recognized in income coincident with the
extinguishment gain or loss.
The following table provides information about the Company's
derivative and other financial instruments that are sensitive to changes in
interest rates. For long-term financial instruments, the table presents
principal cash flows and related weighted average interest rates by expected
maturity date. Weighted average variable interest rates are based on the
applicable floating rate index as of the reporting date. For interest rate
swaps, the table presents the notional amount and weighted average interest
rates by maturity date. The notional amounts are used to calculate the
contractual cash flows to be exchanged under the respective contracts.
-27-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
INTEREST RATE SENSITIVITY
Fair
2005 and Value at
(IN THOUSANDS) 2000 2001 2002 2003 2004 Thereafter Total 12/31/99
- -------------------------------------------------------------------------------------------------------------
NOTE RECEIVABLE:
Fixed rate $9,000 $ 9,000 $8,694
Average interest 6.54%
rate
LONG-TERM PAYABLE:
Fixed rate $2,597 $2,597 $1,947 $1,298 $ 8,439 $ 7,720
Average interest rate 6.30% 6.30% 6.30% 6.30%
LONG-TERM DEBT:
Fixed rate $4,033 $1,806 $2,039 $166,361 $1,454 $702,411 $878,104 $799,509
Average interest rate 7.32% 7.31% 7.28% 7.29% 7.48% 7.49%
Variable rate-swapped $66,298 $66,298 $66,298
Average interest rate AIBOR AIBOR AIBOR AIBOR
+.80% +.80% +.80% +.80%
Other variable rate $400,000 $ 8,500 $408,500 $408,500
Average interest rate(a) 6.55% 6.55% 6.55% 6.55% 6.55% 5.60%
INTEREST RATE SWAPS:
Total pay fixed/receive
variable $66,298 $66,298 $ (635)
Average pay rate 5.20% 5.20% 5.20% 5.20%
Average receive rate AIBOR AIBOR AIBOR AIBOR
+.80% +.80% +.80% +.80%
- -------------------------------------------------------------------------------------------------------------------------
AIBOR - Amsterdam Interbank Offered Rate
(a) Average variable interest rate is based on rates in effect at December 31,
1999.
The Company's short-term exposure to changes in foreign currency
exchange rates results from transactions entered into by the Company and its
foreign subsidiaries in currencies other than their local currency (primarily
trade payables and receivables). The Company manages these transactional
currency risks on a consolidated basis, which allows it to net its trade payable
and receivable exposure. The Company is also exposed to currency risk on
intercompany transactions. The Company purchases foreign currency forward
contracts, primarily denominated in Hong Kong dollars, British pounds, Singapore
dollars, Canadian dollars and the Euro, to hedge its transaction exposure.
Contracts to hedge its net payable/receivable transaction exposure are generally
outstanding for one to six months and contracts to hedge intercompany
transactions are settled on a monthly basis. Realized and unrealized gains and
losses on foreign currency forward contracts that are designated and effective
as hedges of recorded transactions are recognized in earnings to offset the
impact of valuing recorded foreign currency trade payables, receivables and
intercompany transactions. Unrealized gains and losses are cumulatively measured
as the differential between the spot exchange rate at the contract's inception
and the spot exchange rate as of the balance sheet date and are included in
other current assets. Discounts and premiums on foreign currency forward
contracts that are designated and effective as hedges are recorded as a deferred
asset and amortized over the respective contract life. Realized and unrealized
gains and losses on contracts that do not satisfy the requirements of an
effective hedge are reported as other expense (income). The fair value of the
foreign currency forward contracts used to hedge the Company's intercompany
loan, trade payable and trade receivable exposures are not significant.
-28-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company's long-term foreign currency exchange risk exposure
results from its net investments in international subsidiaries (including
long-term intercompany loans). The Company uses foreign currency swap contracts
denominated in German marks and Italian lira to reduce its exposure to foreign
currency risk from its net investments in its international subsidiaries. For
foreign currency swap contracts designated and effective as hedges, realized and
unrealized gains and losses, net of related taxes, are included in the
accumulated other comprehensive income component of shareholders' equity.
Discounts or premiums resulting from the differential between the contractual
payments and receipts are amortized over the life of the contract. The related
amounts due to or from counterparties are included in other assets.
The following table summarizes information on the foreign currency
swap contacts, including the notional amounts and the related weighted average
contract rates by contractual maturity date. The notional amounts are used to
calculate the contractual cash flows to be exchanged under the contract. The
table does not include the net investments for which the foreign exchange
translation adjustments would offset the realized and unrealized gains and
losses on the related swap contracts.
EXPOSURES RELATED TO DERIVATIVE CONTRACTS WITH EUROPEAN FUNCTIONAL CURRENCIES
Fair
2005 and Value at
(IN THOUSANDS) 2000 2001 2002 2003 2004 Thereafter Total 12/31/99
- -------------------------------------------------------------------------------------------------------------
SWAP CONTRACT TO
BUY U.S. DOLLARS:
PAY GERMAN MARKS
Notional amount $162,974 $162,974 $21,987
Average contract .6519 .6519
rate
SWAP CONTACT TO BUY
GERMAN MARKS:
PAY ITALIAN LIRA
Notional amount $7,814 $7,814 $(570)
Average contract .000994 .000994
rate
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union
adopted the Euro as their common legal currency. Between January 1, 1999 and
July 1, 2002, transactions may be conducted in either the Euro or the
participating countries' national currency. However, by July 1, 2002, the
participating countries will withdraw their national currency as legal tender
and complete the conversion to the Euro.
The Company conducts business in Europe and does not expect the
conversion to the Euro to have an adverse effect on its competitive position or
consolidated financial position. The Company believes that the implementation of
its SAP Project will allow the Company to conduct business transactions in both
the Euro as well as the participating countries' national currency.
The Company has determined that failure to implement systems that
are able to process both the Euro and participating countries' national currency
may cause disruptions to
-29-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities. These
problems could be substantially alleviated with manual processing. However, this
would cause delays in certain normal business activities.
FORWARD-LOOKING STATEMENTS
Certain statements made in this annual report are forward-looking
statements that involve risks and uncertainties. These statements are based on
currently available information and the Company's actual results may differ
significantly from the results discussed. Investors are cautioned that there can
be no assurance that the actual results will not differ materially from those
suggested in such forward-looking statements.
OPERATING RESULTS -- 1999 COMPARED TO 1998
OVERVIEW
Consolidated net sales increased 16% to $2.09 billion in 1999 from
$1.8 billion in 1998. After adjusting 1998 net sales to exclude $216.1 million
from deconsolidated joint ventures and the divestiture of the specialty
ingredients business, and to include $550.8 million from Witco operations for
the months of September through December 1998, net sales decreased 2%. This
decrease is primarily the result of lower sales in the Polymer Processing
Equipment and Crop Protection businesses. International sales, including U.S.
exports, were 45% of total sales, up from 40% in 1998.
The net loss for 1999 was $175 million, or $2.10 per common share
basic and diluted, as compared to net earnings of $161.8 million, or $2.20 per
common share basic and $2.14 per common share diluted in 1998. Earnings before
after-tax special items (as detailed on page 54) were $95 million, or $1.14 per
common share basic and diluted, as compared to $117.3 million, or $1.59 per
common share basic and $1.55 per common share diluted, in 1998.
Gross margin as a percentage of sales decreased to 34.9% from 36.2%
in 1998. The decrease was primarily due to the impact of including four months
of Witco results, lower pricing and unfavorable product mix. Consolidated
operating profit before special items decreased $34 million to $225.9 million
from $259.9 million in 1998. After further adjusting to exclude $19.6 million
from the consolidated joint ventures and the divestiture of the specialty
ingredients business, and to include $24 million from Witco operations for the
months of September through December 1998, operating profit decreased 14.5% from
$264.3 million in 1998.
-30-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(IN THOUSANDS) 1999 1998
------------------ -------------------------------------------------------------
Witco
Operations
Four Months
AS As Ended Deconsolidated Divested As
REPORTED Reported December 31 Joint Ventures Business Adjusted
--------- -----------------------------------------------------------------
NET SALES
Polymer Products
Polymer
Additives $620,188 $391,964 $214,608 $ -- $ -- $606,572
Polymers 316,300 342,527 -- (41,520) -- 301,007
Polymer Processing
Equipment 300,016 344,480 -- -- -- 344,480
Eliminations (3,469) -- -- -- -- --
--------- ------------------------------------------------------------------
1,233,035 1,078,971 214,608 (41,520) -- 1,252,059
--------- -------------------------------------------------------------------
Specialty Products
OrganoSilicones 158,925 -- 144,718 -- -- 144,718
Crop Protection 294,798 348,000 49,376 (84,966) -- 312,410
Other 405,600 369,148 142,075 -- (89,590) 421,633
---------- --------------------------------------------------------------------
859,323 717,148 366,169 (84,966) (89,590) 878,761
---------- --------------------------------------------------------------------
Total net sales $2,092,358 $1,796,119 $ 550,777 $(126,486) $(89,590) $2,130,820
========== ====================================================================
OPERATING PROFIT
Polymer Products
Polymer Additives $ 67,880 $ 49,215 $ 16,325 $ -- $ -- $ 65,540
Polymers 82,951 79,892 -- (709) -- 79,183
Polymer Processing
Equipment
Eliminations 19,981 46,653 -- -- -- 46,653
--------- --------------------------------------------------------------------
170,812 175,760 16,325 (709) -- 191,376
--------- --------------------------------------------------------------------
Specialty Products
OrganoSilicones 16,784 -- 16,621 -- -- 16,621
Crop Protection 69,194 84,882 820 (10,840) -- 74,862
Other 25,144 35,760 1,544 -- (7,863) 29,441
--------- --------------------------------------------------------------------
111,122 120,642 18,985 (10,840) (7,863) 120,924
--------- --------------------------------------------------------------------
General corporate
expense including
amortization (56,033) (36,544) (11,273) (187) -- (48,004)
--------- ------------------------------------------------------------------
Total operating profit
before special items 225,901 259,858 $ 24,037 $ (11,736) $(7,863) 264,296
====================================================
Special items (a) (224,518) (41,560)
--------- ---------
Total operating profit $ 1,383 $218,298
========= ========
(a) Special items affecting operating profit include the following expenses:
1999 1998
- -----------------------------------------------------------------------------------------------------
Write-off of in-process and development $195,000 $ --
Merger related costs 29,518 --
Facility closure costs -- 33,600
Other -- 7,960
- -----------------------------------------------------------------------------------------------------
Total special items $224,518 $41,560
=====================================================================================================
POLYMER PRODUCTS
Polymer products sales of $1.23 billion represent a decrease of 2%
from an adjusted $1.25 billion for 1998. Operating profit for polymer products
of $170.8 million declined 11% from an adjusted $191.4 million for 1998.
-31-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Polymer additives sales of $620.2 million increased 2% from an
adjusted $606.6 million for 1998 primarily due to volume growth of 6%, partially
offset by 2% declines attributable to lower pricing and foreign currency
translation. Plastic additives sales were up 4% primarily as a result of higher
volume, partially offset by lower foreign currency translation. Rubber chemicals
sales were essentially unchanged from 1998 as greater volume of 5% was offset by
lower pricing. Urethane chemicals sales rose 3% primarily due to higher volume
of 8%, partially offset by lower foreign currency translation of 3% and lower
pricing of 2%. Polymer additives operating profit of $67.9 million rose 4% from
an adjusted $65.5 million in 1998 primarily as a result of higher sales volume,
partially offset by lower pricing in rubber chemicals.
Polymers sales of $316.3 million rose 5% versus an adjusted $301
million for 1998 primarily due to volume growth of 4% and improved pricing of
2%. Urethane sales were up 6% primarily as a result of higher volume. EPDM sales
increased 4% primarily due to improved pricing. Polymers operating profit of $83
million increased 5% from an adjusted $79.2 million in 1998 primarily as a
result of improved pricing and greater sales volume, partially offset by higher
EPDM raw material costs.
Polymer processing equipment sales of $300 million decreased 13%
from 1998 primarily due to lower sales volume and pricing which was reflective
of the downward cycle experienced by the plastics machinery market during the
second half of 1999. Operating profit of $20 million decreased 57% from 1998
primarily as a result of competitive pricing pressure, lower volume and
increased sales of lower margin equipment systems. The equipment order backlog
totaled $113 million at the end of 1999 compared to $118 million at the end of
1998.
SPECIALTY PRODUCTS
Specialty products sales of $859.3 million represent a decrease of
2% from an adjusted $878.8 million for 1998. Operating profit of $111.1 million
decreased 8% from an adjusted $120.9 million for 1998.
OrganoSilicones sales of $158.9 million were 10% above an adjusted
$144.7 million for 1998 primarily due to volume growth of 14%, partially offset
by lower foreign currency translation of 4%. The business benefited from a
recovering Asian economy, new product introductions, growth in the "greentyre"
market and increased orders with major customers. Operating profit of $16.8
million was 1% above an adjusted $16.6 million for 1998 primarily due to
increased sales volume, partially offset by higher 1999 consulting costs and
certain non-recurring items that had a favorable impact on 1998 earnings.
Crop protection sales of $294.8 million declined 6% from an adjusted
$312.4 million in 1998 primarily due to lower volume particularly in the
herbicides and fungicides businesses. These businesses were adversely affected
by a general weakness in the U.S. and European farm economies, unfavorable
weather conditions and increased competition associated with genetically
engineered seeds. Operating profit of $69.2 million decreased 8% from an
adjusted $74.9 million in 1998 primarily as a result of lower sales volume.
-32-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Other sales of $405.6 million declined 4% from an adjusted $421.6
million in 1998 primarily due to lower pricing of 3% and lower foreign currency
translation of 1%. Colors sales were down 14% primarily due to lower volume and
pricing for textile colors. The textile colors business was sold in December
1999. Glycerine/fatty acids sales rose 5% primarily due to volume growth,
partially offset by lower pricing. Refined products and petroleum additives
sales increased 12% and 7%, respectively, primarily as a result of higher sales
volume. Other operating profit of $25.1 million decreased 15% from an adjusted
$29.4 million in 1998 primarily due to lower pricing in the colors business,
partially offset by higher sales volume in the remaining businesses.
OTHER
Selling, general and administrative expenses of $331.1 million
increased 25% versus 1998 primarily due to the Merger, offset partially by the
impact of the deconsolidation of the joint ventures and the divestiture of the
specialty ingredients business. Depreciation and amortization (up 45%) and
research and development costs (up 29%) also increased as a result of the
Merger. Interest expense of $69.8 million decreased 11% primarily due to lower
levels of indebtedness prior to the Merger, which more than offset the four
months impact of the debt acquired in the Merger. Other expense of $48 million
in 1999 includes a loss on the sale of Colors for $83.3 million, a gain on the
sale of Specialty Ingredients for $42.1 million and fees related to the accounts
receivable securitization for $6.3 million. Other income of $158.9 million in
1998 includes a gain of $153.4 million resulting from the sale of a 50% interest
in the Gustafson seed treatment business. The effective tax rate, excluding the
impact of special items was 36.4% compared to 37.2% in 1998.
OPERATING RESULTS -- 1998 COMPARED TO 1997
OVERVIEW
Consolidated net sales decreased 3% to $1.80 billion from $1.85
billion in 1997. The decrease was primarily attributable to lower volume of 2%
and lower foreign currency translation of 1%. International sales, including
U.S. exports, increased slightly as a percentage of total sales to 40% from 39%
in 1997.
Net earnings for 1998 were $161.8 million, or $2.20 per share basic
and $2.14 per share diluted, compared to earnings of $86.8 million, or $1.18 per
share basic and $1.15 per share diluted, in 1997. Before after-tax special items
(as detailed on page 54), net earnings were $117.3 million, or $1.59 per share
basic and $1.55 per share diluted, compared with $92.1 million, or $1.25 per
share basic and $1.22 per share diluted, in 1997.
Gross margins as a percentage of net sales increased to 36.2% from
35.4% in the prior year. The increase was primarily attributable to lower raw
material costs, improved pricing and product mix. Consolidated operating profit
of $218.3 million declined 3% from the prior year; however, excluding the impact
of special items, operating profit increased 3% to $259.9 million from $252.3
million in the prior year.
-33-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
POLYMER PRODUCTS
Polymer products sales of $1.08 billion represent an increase of 1%
from 1997. Operating profit of $175.8 increased 6% from 1997.
Polymer additives sales of $392 million decreased 6% versus 1997
primarily attributable to lower pricing of 3%, lower volume of 2% and lower
foreign currency translation of 1%. Rubber chemical sales were 9% lower than
1997 primarily due to lower volume and pricing. Plastic additive sales were
essentially unchanged as higher volume of 1% was offset by lower foreign
currency translation. Polymer additives operating profit of $49.2 million
decreased 31% from 1997. The decrease was primarily attributable to lower
volume, unfavorable manufacturing variances and an unfavorable product mix.
Polymers sales of $342.5 million were essentially unchanged from
1997 as improved pricing of 4% was offset primarily by lower volume. EPDM sales
increased 6% from 1997 primarily due to improved pricing. Urethane and nitrile
rubber sales were lower by 3% and 9%, respectively, due primarily to lower
volume. Polymers operating profit of $79.9 million increased 38% from 1997
primarily attributable to improved pricing and lower raw material costs in the
EPDM business.
Polymer processing equipment sales of $344.5 million increased 11%
from 1997 primarily due to higher volume. Operating profit of $46.7 million
increased 26% from 1997 due to increased volume and improved product mix. The
equipment order backlog totaled $118 million at the end of 1998 compared to $106
million at the end of 1997.
SPECIALTY PRODUCTS
Specialty products sales of $717.1 million represent a decrease of
8% from 1997. Operating profit for specialty products was $120.6 million
compared to $123.6 in 1997.
Crop protection sales of $348 million decreased 6% versus 1997
primarily due equally to the deconsolidation of the Gustafson seed treatment
business in December 1998 and lower volume, particularly in the insecticide
business. Operating profit of $84.9 million increased 2% from 1997 primarily due
to lower operating costs, and improved pricing and product mix.
Other sales of $369.1 million decreased 10% versus 1997 primarily
attributable to lower volume of 8%, lower pricing of 1% and lower foreign
currency translation of 1%. Petroleum additives sales were 5% lower primarily
due to lower volume. Colors sales decreased 11% primarily due to lower volume in
apparel dyes. Specialty ingredients sales decreased 11% also principally due to
lower volume. This business was sold effective the first day of fiscal 1999.
Operating profit of $35.8 decreased 11% versus 1997, due primarily to lower
volume.
OTHER
Selling, general and administrative expenses of $264.7 million
decreased 2% versus 1997, but as a percentage of sales remained essentially
unchanged at 14.7%. Depreciation
-34-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
and amortization of $80.5 million increased 1% from 1997 primarily as a result
of a higher fixed asset base. Research and development costs of $52.8 million
decreased 2% from 1997, but as a percentage of sales remained constant at 2.9%.
Facility closure costs of $33.6 million represent primarily the
write-off of plant and equipment, severance and other costs related to the
closure of the Company's nitrile rubber facility in Painesville, Ohio.
Interest expense of $78.5 million decreased 24% from 1997 primarily
due to lower levels of indebtedness and lower interest cost on borrowings used
to redeem high cost debt in 1998. Other income of $158.9 million in 1998
includes a gain in the amount of $153.4 million resulting from the sale of a 50%
interest in the Gustafson seed treatment business. Other income of $27.8 million
in 1997 includes a gain of $28 million relating to a settlement with the U.S.
Department of the Army. The effective tax rate excluding the impact of special
items was 37.2% compared to 38.1% in 1997.
-35-
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended 1999, 1998, and 1997
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1999 1998 1997
---------------------------------------------
NET SALES $ 2,092,358 1,796,119 1,851,180
COSTS AND EXPENSES
Cost of products sold 1,361,373 1,146,200 1,196,030
Selling, general and administrative 331,050 264,710 269,405
Depreciation and amortization 116,648 80,536 79,856
Research and development 67,954 52,775 53,611
Equity (income) loss (10,568) -- --
Acquired in-process research and development 195,000 -- --
Merger and related costs 29,518 -- --
Facility closure costs -- 33,600 --
Severance and other costs -- -- 13,000
Special environmental change -- -- 15,000
---------------------------------------------
OPERATING PROFIT 1,383 218,298 224,278
Interest expense 69,833 78,520 103,349
Other expense (income) 47,979 (158,938) (27,817)
---------------------------------------------
EARNINGS
Earnings (loss) before income taxes and extraordinary loss (116,429) 298,716 148,746
Income Taxes 42,922 115,493 56,675
---------------------------------------------
Earnings (loss) before extraordinary loss (159,351) 183,223 92,071
Extraordinary loss on early extinguishment of debt (15,687) (21,468) (5,242)
---------------------------------------------
Net earnings (loss) $ (175,038) $ 161,755 $ 86,829
---------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before extraordinary loss $ (1.91) $ 2.48 $ 1.25
Extraordinary loss (.19) (.28) (.07)
---------------------------------------------
Net earnings (loss) (2.10) 2.20 1.18
---------------------------------------------
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before extraordinary loss $ (1.91) $ 2.42 $ 1.22
Extraordinary loss (.19) (.28) (.07)
---------------------------------------------
Net earnings (loss) (2.10) 2.14 1.15
=============================================
See accompanying notes to consolidated financial statements
CK WITCO CORPORATION AND SUBSIDIARIES
-36-
CONSOLIDATED BALANCE SHEETS
Fiscal years ended 1999 and 1998
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1999 1998
---------------------------------
ASSETS
CURRENT ASSETS
Cash $ 10,543 $ 12,104
Accounts receivable 411,536 173,668
Inventories 523,363 334,562
Other current assets 174,311 77,422
-------------------------------
Total current assets 1,119,753 597,756
NON-CURRENT ASSETS 1,262,345 473,403
Property, plant and equipment 969,625 166,184
Cost in excess of acquired net assets 374,895 171,550
--------------------------------
Other assets $ 3,726,618 $ 1,408,893
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 81,162 $ 17,305
Accounts payable 330,591 117,338
Accrued expenses 422,252 139,401
Income taxes payable 121,366 103,179
Other current liabilities 22,599 17,149
--------------------------------
Total current liabilities 977,970 394,372
--------------------------------
NON-CURRENT LIABILITIES
Long-term debt 1,309,812 646,857
Postretirement health care liability 216,797 142,727
Other liabilities 462,127 158,234
STOCKHOLDERS' EQUITY
Common stock, $.01 and $.10 par value - issued 119,071,693
and 77,332,751 shares 1,191 7,733
Additional paid-in capital 1,047,518 238,615
Accumulated deficit (200,374) (15,985)
Accumulated other comprehensive income (61,238) (38,414)
Treasury stock at cost (27,185) (125,246)
--------------------------------
Total stockholders' equity 759,912 66,703
--------------------------------
$ 3,726,618 $ 1,408,893
================================
See accompanying notes to consolidated financial statements
CK WITCO CORPORATION AND SUBSIDIARIES
-37-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended 1999, 1998 and 1997
Increase (decrease) to cash (In thousands of dollars) 1999 1998 1997
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (175,038) $ 161,755 $ 86,829
Adjustments to reconcile net earnings
(loss) to net cash provided by operations:
Acquired in-process research and development 195,000 -- --
Loss on sale of textile colors 83,333 -- --
Gain on sale of specialty ingredients (42,060) -- --
Merger and related costs 29,518 -- --
Extraordinary loss on early debt extinguishment 15,687 21,468 5,242
Gustafson joint venture gain -- (153,429) --
Facility closure costs -- 33,600 --
Depreciation and amortization 116,648 80,536 79,856
Equity income (10,568) -- --
Deferred taxes (26,281) (5,366) 18,184
Changes in assets and liabilities:
Accounts receivable 4,539 497 (2,997)
Inventories (25,475) 7,314 (3,960)
Other current assets 25,422 (11,508) 5,688
Other assets 7,333 3,358 2,165
Accounts payable and accrued expenses (73,963) (32,188) 8,573
Income taxes payable (10,776) 79,568 13,055
Other current liabilities 4,983 (10,562) 7,244
Postretirement health care liability (2,342) (3,727) (32,460)
Other liabilities (24,624) (7,161) 12,306
Other (2,712) 5,367 16,062
------------------------------------------------
Net cash provided by operations 88,624 169,522 215,787
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of specialty ingredients 103,000 -- --
Proceeds from sale of textile colors 75,322 -- --
Proceeds from Gustafson joint venture -- 180,000 --
Capital expenditures (131,782) (66,628) (50,176)
Acquired cash of Witco Corporation 236,658 -- --
Other investing activities (32,941) (9,717) 5,569
------------------------------------------------
Net cash provided by (used in) investing activities 250,257 103,655 (44,607)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term notes (356,449) (460,034) (76,860)
Proceeds (payments) on credit agreement 93,720 199,894 (91,529)
borrowings
Proceeds (payments) on short-term borrowings 61,267 15,535 (5,903)
Proceeds from sale of accounts receivable -- 80,000 --
Premium paid on early extinguishment of debt (20,431) (22,984) (7,065)
Treasury stock acquired (101,781) (94,974) --
Dividends paid (9,351) (3,721) (3,671)
Other financing activities (6,222) 14,425 4,240
------------------------------------------------
Net cash used in financing activities (339,247) (271,859) (180,788)
------------------------------------------------
CASH
Effect of exchange rates on cash (1,195) 179 (905)
------------------------------------------------
Change in cash (1,561) 1,497 (10,513)
Cash at beginning of period 12,104 10,607 21,120
------------------------------------------------
Cash at end of period $ 10,543 $ 12,104 $ 10,607
================================================
See accompanying notes to consolidated financial statements
CK WITCO CORPORATION AND SUBSIDIARIES
-38-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Fiscal years ended 1999, 1998 and 1997
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Treasury
Stock Capital Deficit Income Stock Total
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1996 $ 7,724 $ 232,010 $ (257,177) $ (30,892) $ (48,083) $ (96,418)
Comprehensive income:
Net earnings 86,829 86,829
Equity adjustment for translation
of foreign currencies (16,453) (16,453)
Other 1,556 1,556
Total comprehensive income 71,932
Cash dividends ($.05 per share) (3,671) (3,671)
Stock options, warrants and other
issuances (668,552 shares) 9 203 7,855 8,067
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 27, 1997 7,733 232,213 (174,019) (45,789) (40,228) (20,090)
--------------------------------------------------------------------------------------
Comprehensive income:
Net earnings 161,755 161,755
Equity adjustment for translation
of foreign currencies 5,427 5,427
Other 1,948 1,948
Total comprehensive income 169,130
Cash dividends ($.05 per share) (3,721) (3,721)
Stock options, warrants and other
issuances (1,130,258 shares) 6,402 9,956 16,358
Treasury stock acquired
(5,368,600 shares) (94,974) (94,974)
---------------------------------------------------------------------------------------
BALANCE, DECEMBER 26, 1998 7,733 238,615 (15,985) (38,414) (125,246) 66,703
---------------------------------------------------------------------------------------
Comprehensive
income:
Net loss (175,038) (175,038)
Equity adjustment for translation of
foreign currencies (22,984) (22,984)
Other 160 160
Total comprehensive income (197,862)
Cash dividends ($.10 per share) (9,351) (9,351)
Stock options and other issuances
(17,030 common shares and
243,017 treasury shares) 3,703 2,132 5,835
Treasury stock acquired
(6,366,900 shares) (101,781) (101,781)
Change in par value (5,893) 5,893 -
Cancellation of treasury stock
(11,850,119 shares) (1,185) (196,525) 197,710 -
Acquisition of Witco
(53,572,031 shares) 536 995,832 996,368
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 1,191 $ 1,047,518 $ (200,374) $ (61,238) $ (27,185) $ 759,912
======================================================================================
See accompanying notes to consolidated financial statements
CK WITCO CORPORATION AND SUBSIDIARIES
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MERGER
On September 1, 1999, the shareholders of Crompton and Knowles
Corporation (Crompton) and Witco Corporation (Witco) approved a tax-free
stock-for-stock merger of Crompton and Witco (the "Merger"). The terms of the
Merger provided that (a) Crompton merge with and into CK Witco Corporation (the
"Company") and (b) immediately thereafter, Witco merge with and into the
Company, so that the Company is the surviving corporation. Also, under the terms
of the Merger, each share of Crompton's common stock was automatically converted
into one share of the Company's common stock, and each share of Witco's common
stock was exchanged for 0.9242 shares of the Company's common stock.
The Merger was accounted for as a purchase and accordingly, the
results of operations of Witco have been included in the consolidated financial
statements from the date of acquisition. An allocation of the purchase price
resulted in cost in excess of the estimated fair value of acquired net assets
(goodwill) of approximately $834 million. This is being amortized on a
straight-line basis over forty years.
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of all majority-owned subsidiaries. Other affiliates in which the
Company has a 20% to 50% ownership are accounted for in accordance with the
equity method. All significant intercompany balances and transactions have been
eliminated in consolidation.
Effective with the Merger, the Company adopted a fiscal year ending
on December 31. Prior to the Merger, Crompton's fiscal year ended on the last
Saturday in December.
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which requires the
Company to make estimates and assumptions that affect the amounts and
disclosures reported in the financial statements and accompanying notes. Actual
results could differ from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
the current year presentation.
INVENTORY VALUATION
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) basis.
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, less accumulated
depreciation. Depreciation expense ($89.2 million in 1999, $59.4 million in 1998
and $58.7 million in 1997) is computed generally on the straight-line method
using the following ranges of asset lives: buildings and improvements: 10 to 40
years, machinery and equipment: 3 to 25 years, and furniture and fixtures: 3 to
10 years.
Renewals and improvements which extend the useful lives of the
assets are capitalized. Capitalized leased assets and leasehold improvements are
depreciated over their useful lives or the remaining lease term, whichever is
shorter. Expenditures for maintenance and repairs are charged to expense as
incurred.
LONG-LIVED ASSETS
The Company evaluates the recoverability of the carrying value of
long-lived assets, including intangible assets, of each of its businesses by
assessing whether the projected cash flows of each of its businesses is
sufficient to recover the existing unamortized cost of these assets. In
addition, the Company periodically evaluates the future period over which the
benefit of long-lived assets will be received, based on the undiscounted value
of future cash flows. If the Company determines that any assets have been
permanently impaired, the amount of the impaired assets is written-off against
earnings in the quarter in which the impairment is determined.
INTANGIBLE ASSETS
The excess cost over the fair value of net assets of businesses
acquired is being amortized on a straight-line basis over 20 to 40 years.
Accumulated amortization was $49.4 million and $44.6 million in 1999 and 1998,
respectively.
Patents, unpatented technology, trademarks and other intangibles
(net) of $152.3 million in 1999 and $59 million in 1998, included in other
assets, are being amortized principally on a straight-line basis over their
estimated useful lives ranging from 6 to 40 years. Accumulated amortization was
$135.5 million and $120.9 million in 1999 and 1998, respectively.
FINANCIAL INSTRUMENTS
Financial instruments are presented in the accompanying consolidated
financial statements at either cost or fair value as required by generally
accepted accounting principles.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts denominated in foreign currencies are
translated generally at the current rate of exchange as of the balance sheet
date, while revenues and expenses are translated at average rates of exchange
during the periods presented. The cumulative foreign currency adjustments
resulting from such translation are included in accumulated other comprehensive
income. For foreign subsidiaries operating in highly inflationary economies,
monetary balance sheet accounts and related revenue and expenses are translated
at current rates of exchange while non-monetary balance sheet accounts and
related revenues and expenses are trans-
-41-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
lated at historical exchange rates. The resulting translation gains and losses
related to those countries are reflected in operations and are not significant
in any of the years presented.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
COMPREHENSIVE INCOME
Effective in the first quarter of 1998, the Company adopted FASB
Statement No. 130 "Reporting Comprehensive Income." The Statement establishes
standards for reporting "Comprehensive Income" and its components in the
consolidated financial statements. The adoption of this statement had no impact
on the Company's net earnings (loss) or stockholders' equity. Further
information is provided in the footnote on Comprehensive Income.
STATEMENTS OF CASH FLOWS
Cash includes bank term deposits of three months or less. Cash
payments during the fiscal years ended 1999, 1998 and 1997 included interest
payments of $89.6 million, $79.5 million and $90.8 million and income tax
payments of $67 million, $33.5 million and $28.3 million, respectively.
OTHER DISCLOSURES
Included in accounts receivable are allowances for doubtful accounts
in the amount of $23.4 million in 1999 and $9.8 million in 1998.
Included in accrued expenses are environmental liabilities of $47.8
million in 1999 and $18.4 in 1998 and merger related accruals of $110.7 million
in 1999.
Included in other liabilities are environmental liabilities in the
amount of $150.2 million in 1999 and $75.6 million in 1998 and pension
liabilities of $148.5 million in 1999 and $51.6 million in 1998.
In 1997, the Company incurred a $13 million charge related to
severance ($6.9 million) and other non-recurring costs ($6.1 million). As of
December 31, 1999 all amounts had been realized.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Acquired in-process research and development (IPR&D) represents the
value assigned in a purchase business combination to research and development
projects of the acquired business that had commenced, but had not yet been
completed at the date of acquisition, and which, if unsuccessful, have no
alternative future use in research and development activities or otherwise. In
accordance with FASB Statement No. 2 "Accounting for Research and Development
Costs" as clarified by FASB Interpretation No. 4, amounts assigned to purchased
IPR&D that meet the above stated criteria must be charged to expense as part of
the allocation of the purchase price of the business combination. Accordingly,
charges totaling $195 million were re-
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
corded in the third quarter of 1999 as part of the allocation of the purchase
price related to the acquisition of Witco.
The Company engaged an independent appraiser to provide a basis for
allocating a portion of the purchase price of Witco to the purchased IPR&D. The
fair value assigned to purchased IPR&D was determined by the independent
appraiser applying the income approach and a valuation model, incorporating
revenue and expense projections, probability of commercial and technological
success, stage of development and present value factors.
The more significant IPR&D projects were principally in the Polymer
Additives and OrganoSilicones segments. The following is a summary of the IPR&D
projects and the values assigned:
Projected IPR&D
Business Percent Completion Value
Segment Complete Date (In thousands)
- -------------------------------------------------------------------------------
Polymer
Additives (a) 24-86% 2000-2003 $ 62,000
OrganoSilicones (b) 8-65% 2000-2001 106,000
Crop Protection (c) 21-37% 2000-2004 27,000
- -------------------------------------------------------------------------------
Total IPR&D $195,000
- -------------------------------------------------------------------------------
(a) Includes the development of an internal anti-static agent for use in
acrylic sheets and pellets for extrusion and injection molding ($18,000),
replacement of lead-based stabilizers utilized in PVC ($15,000) and
approximately 35 other projects ($29,000).
(b) Includes the development of a family of chemicals utilized in finished
tires, which are expected to provide improved compounding and dispersion of
silica in a single compounding pass ($11,000), production of a chemical to
be used in the manufacture of silica tires, resulting in improved
performance and longer life ($21,000) and approximately 78 other projects
($74,000).
(c) Includes approximately 29 projects.
Due to the uniqueness of each of the projects, the costs and effort
required are estimated based on the latest available information. Additionally,
the completion date reflects management's best estimate of the time that the
company will begin to benefit from cash inflows or cost reductions from the
projects. However, there is a risk that certain projects may not be completed
successfully for a variety of reasons including change in strategies, changes in
market demand or customer requirements, technology issues, etc. However, the
projected revenues, costs, and margins in the cash flow forecasts are
substantially consistent with projections utilized by management in evaluating
the feasibility of research and development projects.
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited results of operations for the
twelve months ended 1999 and 1998, assume the merger had been consummated as of
January 1, 1998, and exclude the write-off of acquired in-process research and
development of $195 million:
-43-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1999 1998
---------- ------------
Net sales $3,421,651 $3,797,742
---------- ------------
Earnings before extraordinary loss (a) $ 52,611 $ 234,652
---------- ------------
Net earnings (a) $ 36,924 $ 213,184
---------- ------------
Net earnings before extraordinary loss per
basic common share $ 0.44 $ 1.85
---------- ------------
Net earnings before extraordinary loss per
diluted common share $ 0.44 $ 1.82
---------- ------------
Net earnings per basic common share $ 0.31 $ 1.68
---------- ------------
Net earnings per diluted common share $ 0.31 $ 1.65
---------- ------------
Weighted average basic shares outstanding 119,489 126,854
---------- ------------
Weighted average diluted shares outstanding 120,846 128,961
---------------------------
(a) The pro forma net earnings before extraordinary loss and net earnings
include the following after-tax special items:
(IN THOUSANDS) 1999 1998
---------- ------------
Restructuring charges (credits) - net $ 1,954 $ (21,100)
Environmental charge - 13,435
(Gain) loss on sale of businesses and
investment - net 38,731 (95,288)
Merger and related costs 20,608 -
Facility closure costs - 21,100
Other - 5,000
---------- ------------
(Earnings) loss from special items $ 61,293 $ (76,853)
---------- ------------
MERGER ACCRUALS
As a result of the Merger, the Company recorded $176.1 million of
merger related accruals as a component of the cost in excess of acquired net
assets (goodwill), summarized as follows:
1999
(IN THOUSANDS) Accrual Payments Balance
---------------------------------
Severance and related accruals $ 128,261 $ 53,961 $ 74,300
Merger related fees 41,619 10,400 31,219
Other merger related costs 6,174 967 5,207
---------------------------------
$ 176,054 $ 65,328 $ 110,726
---------------------------------
Also, as a result of the Merger, the Company recorded a charge of
$29.5 million during the fourth quarter of 1999, summarized as follows:
-44-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1999
(IN THOUSANDS) Charge Realized Balance
---------------------------------
Severance and other employee benefit
related costs $ 18,959 $ 8,942 $ 10,017
Facility closure and maintenance costs 8,988 125 8,863
Other merger related costs 1,571 406 1,165
----------------------------------
$ 29,518 $ 9,473 $ 20,045
----------------------------------
JOINT VENTURES AND DIVESTITURES
In December 1999, the Company sold its textile colors business to
Yorkshire Group PLC for $86.5 million ($78 million in cash proceeds and a 12.4%
equity interest in Yorkshire valued at approximately $8.5 million). The sale
resulted in a pre-tax loss of $83.3 million.
In January 1999, the Company sold its specialty ingredients business
to Chr. Hansen Holding A/S of Denmark for $103 million, which resulted in a
pre-tax gain of $42.1 million in the first quarter of 1999.
In November 1998, the Company and Bayer Corporation formed a 50/50
joint venture to serve the agricultural seed treatment markets in North America.
The basis of the joint venture is the Company's Gustafson seed treatment
business. The Company received cash proceeds of $180 million in the transaction
which resulted in a fourth quarter 1998 pre-tax gain of $153.4 million. Also, in
November 1998, the Company announced the formation of a joint venture with
GIRSA, a subsidiary of DESC, S.A. de C.V. to produce nitrile rubber products in
Mexico. The joint venture resulted in the closure of the Company's existing
nitrile rubber facility in Painesville, Ohio. In connection with the facility
closure, the Company incurred a charge of $33.6 million summarized as follows:
1998 1999
(IN THOUSANDS) Charge Realized Balance
---------------------------------
Write-off of long lived assets $ 13,811 $ 13,811 $ -
Facility closure and maintenance costs 12,239 4,505 7,734
Severance and other costs 7,550 7,550 -
---------------------------------
$ 33,600 $ 25,866 $ 7,734
---------------------------------
ACCOUNTS RECEIVABLE PROGRAM
The Company has entered into two separate agreements to sell
domestic accounts receivable to agent banks. The first agreement, dated December
1998, is a five year agreement to sell up to $82 million in receivables, of
which $80 million had been sold at December 31, 1999 and December 26, 1998 at a
cost of approximately 6.43% and 5.85%, respectively. The second agreement, dated
June 1999, is a three year agreement to sell up to $150 million in receivables,
of which $84.7 million had been sold at December 31, 1999 at a cost of
approximately 6.12%. These programs reduce financing costs versus borrowings
under the revolving credit agreement and diversifies the Company's sources of
financing.
-45-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES
(IN THOUSANDS) 1999 1998
---------------------------
Finished goods $ 410,513 $ 226,663
Work in process 27,394 45,237
Raw materials and supplies 85,456 62,662
---------------------------
$ 523,363 $ 334,562
---------------------------
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS) 1999 1998
---------------------------
Land and improvements $ 50,922 $ 30,380
Buildings and improvements 189,982 155,578
Machinery and equipment 1,264,954 634,136
Furniture and fixtures 41,170 37,989
Construction in progress 163,663 50,000
---------------------------
1,710,691 908,083
Less accumulated depreciation 448,346 434,680
---------------------------
$ 1,262,345 $ 473,403
---------------------------
LEASES
At December 31, 1999, minimum rental commitments related to
continuing operations under non-cancelable operating leases amounted to $27.8
million (2000), $24.2 million (2001), $22.2 million (2002), $20.2 million
(2003), $19.3 million (2004) and $149.4 million (2005 and thereafter).
Rental expenses under operating leases were $20.9 million (1999),
$15.8 million (1998) and $16.8 million (1997).
Future minimum lease payments under capital leases at December 31,
1999, were as follows:
(IN THOUSANDS)
- -------------------------------------------------------------------------------
2000 $ 1,327
2001 1,327
2002 1,327
2003 1,327
2004 1,327
2005 and thereafter 3,981
- -------------------------------------------------------------------------------
Total minimum lease payments 10,616
Amounts representing interest (3,298)
- -------------------------------------------------------------------------------
Present value of net minimum lease payments 7,318
Current portion (689)
- -------------------------------------------------------------------------------
Long-term obligation $ 6,629
- -------------------------------------------------------------------------------
-46-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Real estate taxes, insurance and maintenance expenses generally are
obligations of the Company and, accordingly, are not included as part of rental
payments. It is expected that, in the normal course of business, leases that
expire will be renewed or replaced by similar leases.
INDEBTEDNESS
LONG-TERM DEBT
(IN THOUSANDS) 1999 1998
------------------------
Credit facilities $ 680,000 $ 286,280
6.60% Notes due 2003 net of unamortized discount
of $5,752, with an effective interest rate of 159,248 -
7.67%
6.125% Notes due 2006, net of unamortized discount
of $14,501, with an effective interest rate of 135,499 -
7.71%
6.875% Debentures due 2026, net of unamortized
discount of $27,485, with an effective interest
rate of 7.58% 122,515 -
7.75% Debentures due 2023, net of unamortized
discount of $1,696, with an effective interest
rate of 7.82% 108,304 -
AIBOR Based Bank Loans due 2003 66,298 -
9% Senior Notes due 2000 1,655 182,261
10.5% Senior Notes due 2002 714 173,128
Other 35,579 5,188
-------------------------
$1,309,812 $ 646,857
-------------------------
The Company's long-term debt instruments are recorded at face value,
net of unamortized discounts and premiums. Such discounts and premiums will be
amortized to interest expense over the life of the related debt instrument.
At December 31, 1999, the Company had outstanding interest rate swap
contracts with an aggregate notional amount of $66.3 million. These contracts
are used to convert the Company's variable interest rate (AIBOR - Amsterdam
Interbank Offered Rate), Dutch guilder denominated debt to fixed rate debt. The
weighted average fixed interest rate on these swap contracts was 5.2% at
December 31, 1999.
DEBT REDEMPTIONS AND REPURCHASES
On November 4, 1999, the Company offered to purchase for cash any
and all of its outstanding 9% Senior Notes and 10.5% Senior Notes. As a result
of the offer, during the fourth quarter of 1999, the Company repurchased $180.6
million of 9% Senior Notes and $149.5 million of 10.5% Senior Notes at a
purchase price of 102% and 110%, respectively, plus accrued
-47-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
and unpaid interest. Also during 1999, the Company repurchased in the open
market $22.9 million of 10.5% Senior Notes. As a result of these repurchases,
the Company recognized an extraordinary loss of $15.7 million, net of a tax
benefit of $8.9 million.
During 1998, the Company redeemed the outstanding 11% Senior
Subordinated Notes at a price of 105.5% of the principal amount thereof and the
12% Subordinated Discount Notes at a price of 100% of the principal amount
thereof. In addition, the Company repurchased in the open market $44.4 million
of 9% Senior Notes and $62.8 million of 10.5% Senior Notes. As a result of the
redemptions and repurchases, the Company recognized an extraordinary loss of
$21.5 million, net of tax benefit of $13.1 million.
During 1997, the Company repurchased in the open market $24 million
of 9% Senior Notes, $47.1 million of 10.5% Senior Notes, $3.5 million of 11%
Senior Subordinated Notes, and $2.5 million of 12% Subordinated Discount Notes.
As a result of the repurchases, the Company recognized an extraordinary loss of
$5.3 million, net of tax benefit of $3.5 million.
CREDIT FACILITIES
On October 28, 1999, the Company entered into a $600 million 364-day
senior unsecured revolving credit facility (with an option to renew for an
additional year) and a $400 million five-year senior unsecured credit facility
with a syndicate of lenders. Borrowings on these facilities are at various rate
options to be determined on the date of borrowing. In addition, the Company must
pay a facility fee on the aggregate amount of the 364-day and the five-year
credit facilities (currently these rates are .15% and .20%, respectively). The
Company is also required to pay a utilization fee on the outstanding balance of
each of the credit facilities, if such balances are in excess of 33% of the
available credit (currently the rate is .25% for both facilities). At December
31, 1999, borrowings under the 364-day and the five-year credit facilities were
$280 million and $400 million, respectively, with weighted average interest
rates of 7.16% and 6.86%.
The Company has classified the 364-day credit facility as long-term
based on its ability and intent to refinance this facility with an offering of
new long-term notes. On March 7, 2000, $600 million of 8.5% Senior Notes due
2005 and $25 million of floating rate Senior Notes due 2001 were issued via a
private placement.
The Company also has access to short-term uncommitted facilities
based on current money market rates. At December 31, 1999, borrowings under
these short-term uncommitted facilities were $75.3 million, with a weighted
average interest rate of 6.72%. The Company also has arrangements with various
banks for lines of credit for its international subsidiaries aggregating $19.9
million, of which $2.8 million was outstanding at December 31, 1999.
DEBT COVENANTS
The Company's various debt agreements contain covenants which limit
the ability to incur additional debt, create or assume mortgages or engage in
mergers, consolidations, and certain sales or leases of assets. In addition, the
credit agreement requires the Company to maintain certain financial ratios.
-48-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MATURITIES
At December 31, 1999, the scheduled maturities of long-term debt
during the next five fiscal years are: 2000 - $4 million; 2001 - $2.5 million;
2002 - $2.8 million; 2003 - $233.5 million; and 2004 - $402.4 million.
FINANCIAL INSTRUMENTS
The Company purchases foreign currency forward contracts that are
designated and effective as hedges of recorded transactions (principally foreign
currency trade receivables and payables, as well as intercompany debt), which
otherwise would expose the Company to foreign currency risk. The Company uses
foreign currency swap contracts to reduce its exposure to foreign currency
fluctuations from its net investment (including long-term intercompany loans) in
its international subsidiaries. The Company also enters into interest rate swap
contracts to modify the interest characteristics of its outstanding debt.
Further information is provided in the Market Risk and Risk Management Policies
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
At December 31, 1999, the Company had outstanding foreign currency
forward contracts with aggregate notional amounts of approximately $138 million,
to hedge foreign currency risk on accounts receivable and payable and
intercompany debt. These forward contracts are generally outstanding for one to
six months and are primarily denominated in German marks, Italian lira, Dutch
guilders, Swiss and French francs, Hong Kong dollars, and British pounds.
At December 31, 1999, the Company had outstanding foreign currency
swap contracts with aggregate notional amounts of approximately $170.8 million,
to hedge its foreign net investments. At December 31, 1999 the swap contracts
are primarily in German marks, which expire in March 2003.
At December 31, 1999, the Company had outstanding interest rate swap
contracts with an aggregate notional amount of approximately $66.3 million.
These contracts are used to convert the Company's variable interest rate Dutch
guilder denominated debt to fixed rate debt.
At December 26, 1998 the Company had an interest rate lock contract
("Interest Hedge") for $230 million at a rate of 6.04%. The settlement value of
the Interest Hedge as of December 26, 1998 was approximately $17 million. During
the second quarter of 1999, the Company settled the Interest Hedge. The Interest
Hedge would have expired on September 1, 2000.
All contracts have been entered into with major financial
institutions. The risk associated with these transactions is the cost of
replacing these agreements, at current market rates, in the event of default by
the counterparties. Management believes the risk of incurring such losses is
remote.
The carrying amounts for cash, accounts receivable, accounts payable
and other current liabilities approximate their fair value because of the
short-term maturities of these instruments. The fair value of the note
receivable is estimated by discounting the future cash flows
-49-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
using the interest rates at which similar loans would be made under current
conditions. The fair value of the long-term payable is estimated by discounting
the future cash flows using the Company's incremental borrowing rate. The fair
value of long-term debt is based on quoted market values. For all other
long-term debt which have no quoted market values, the fair value is estimated
by discounting projected future cash flows using the Company's incremental
borrowing rate. The fair value of interest rate swap and foreign currency
forward and swap contracts is the amount at which the contracts could be settled
based on quotes provided by investment banking firms.
The following table presents the carrying amounts and estimated fair
values of material financial instruments used by the Company in the normal
course of its business.
1999
---------------------------
CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE
- -------------------------------------------------------------------------------
Note receivable $ 8,767 $ 8,694
Long-term payable $ 7,427 $ 7,720
Long-term debt $ 1,309,812 $ 1,280,936
Interest rate swap contracts $ 1,389 $ 635
Foreign currency forward and swap contracts $ 16,732 $ 21,607
- -------------------------------------------------------------------------------
---------------------------
1998
---------------------------
Carrying Fair
(IN THOUSANDS) Amount Value
- -------------------------------------------------------------------------------
Long-term debt $ 646,857 $ 685,900
Interest hedge $ -- $ 17,000
- -------------------------------------------------------------------------------
At December 31, 1999, the carrying amount of the note receivable is
included in other current assets, the carrying amounts of the long-term payable
and the interest rate swap contracts are included in other liabilities, and the
carrying amounts of the foreign currency forward and swap contracts are included
in other assets.
INCOME TAXES
The components of earnings (loss) before income taxes and
extraordinary loss, and the provision for income taxes are as follows:
(IN THOUSANDS) 1999 1998 1997
------------------------------------
Pretax Earnings (Loss):
Domestic $ (153,347) $ 207,595 $ 104,886
Foreign 36,918 91,121 43,860
------------------------------------
$ (116,429) $ 298,716 $ 148,746
------------------------------------
Income Taxes:
Domestic
Current $ 27,949 $ 95,386 $ 22,506
Deferred (10,833) (7,381) 16,989
----------------------------------
17,116 88,005 39,495
----------------------------------
-50-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(IN THOUSANDS) 1999 1998 1997
------------------------------------
Foreign
Current 41,254 25,473 15,985
Deferred (15,448) 2,015 1,195
----------------------------------
25,806 27,488 17,180
----------------------------------
Total
Current 69,203 120,859 38,491
Deferred (26,281) (5,366) 18,184
----------------------------------
$ 42,922 $ 115,493 $ 56,675
----------------------------------
The provision (benefit) for income taxes differs from the Federal
statutory rate for the following reasons:
(IN THOUSANDS) 1999 1998 1997
------------------------------------
Provision (benefit) at statutory rate $ (40,750) $ 104,551 $ 52,061
Non-deductible acquired IPR&D 68,250 -- --
Impact of valuation allowance 3,216 3,598 (3,616)
Goodwill amortization 4,016 4,395 1,619
Foreign income tax rate differential 10,766 (5,686) 674
State income taxes, net of federal benefit (2,105) 7,629 5,141
Other, net (471) 1,006 796
----------------------------------
Actual provision for income taxes $ 42,922 $ 115,493 $ 56,675
----------------------------------
Provisions have been made for deferred taxes based on differences
between financial statement and tax bases of assets and liabilities using
currently enacted tax rates and regulations. The components of the net deferred
tax assets and liabilities are as follows:
(IN THOUSANDS) 1999 1998
-----------------------
Deferred tax assets:
Pension and other postretirement $ 118,989 $ 81,398
Accruals for environmental remediation 59,802 28,992
Merger related accruals 17,226 --
Other accruals 129,660 45,860
NOL and credit carryforwards 79,070 15,774
Inventories and other 4,448 17,147
Deferred tax liabilities:
Property, plant and equipment (108,966) (65,771)
Intangibles (23,267) (5,862)
Financial instruments (29,353) --
Other (10,267) (5,769)
-----------------------
Net deferred tax asset before valuation
allowance $ 237,342 $ 111,769
Valuation allowance (53,562) (16,064)
-51-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Net deferred tax asset after valuation allowance $ 183,780 $ 95,705
-----------------------
Net deferred taxes include $127.8 million and $46.9 million in
current assets and $56 million and $48.8 million in long-term assets in 1999 and
1998, respectively.
At December 31, 1999, the Company had an aggregate of $147.8 million
of net operating loss carryforwards (NOL's) ($116.9 million generated
domestically and $30.9 million related to the Company's foreign subsidiaries),
$20.9 million of excess foreign tax credits and $4 million of local foreign tax
credit carryforwards. The Company has concluded that it is uncertain if it will
be able to utilize all of the NOL's or the excess foreign tax credits and the
other local foreign tax credits, thus a valuation allowance has been
established. The valuation allowance includes $28.6 million related to the
NOL's, $4 million for the other local foreign tax credits and $20.9 million
related to excess foreign tax credits for which subsequently recognized tax
benefits will be applied to reduce goodwill.
The Company's NOL's are subject to certain limitations and will
begin to expire in 2005. The Company's excess foreign tax credits begin to
expire in 2000 and the local foreign tax credits will begin to expire in 2000.
A provision has not been made for U.S. taxes which would be payable
if undistributed earnings of the foreign subsidiaries of approximately $246
million at December 31,1999, were distributed to the Company in the form of
dividends, since certain foreign countries limit the extent of repatriation of
earnings, while for others, the Companies intention is to permanently reinvest
such foreign earnings. The determination of the amount of the unrecognized
deferred tax liability related to undistributed earnings is not practicable.
The Company has not recognized a deferred tax liability for the
difference between the book basis and the tax basis of its investment in the
common stock of its subsidiaries (such difference relates primarily to
unremitted earnings of foreign subsidiaries of approximately $247 million)
because the Company does not expect this basis to become subject to tax at the
parent level as it is the Company's intention to permanently reinvest such
foreign earnings.
EARNINGS PER COMMON SHARE
The computation of basic earnings (loss) per common share is based
on the weighted average number of common shares outstanding. Diluted earnings
per share is based on the weighted average number of common and common
equivalent shares outstanding. The computation of diluted loss per share for
fiscal year 1999 equals the basic calculation since common stock equivalents
were antidilutive.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
----------------------------------
Earnings (loss) before extraordinary loss $ (159,351) $ 183,223 $ 92,071
----------------------------------
Net earnings (loss) $ (175,038) $ 161,755 $ 86,829
----------------------------------
BASIC
Weighted average shares outstanding 83,507 73,696 73,373
----------------------------------
Earnings (loss) before extraordinary loss $ (1.91) $ 2.48 $ 1.25
----------------------------------
-52-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
----------------------------------
Net earnings (loss) $ (2.10) $ 2.20 $ 1.18
----------------------------------
DILUTED
Weighted average shares outstanding 83,507 73,696 73,373
Stock options, warrants and other -- 2,004 1,985
equivalents ----------------------------------
Weighted average shares adjusted for 83,507 75,700 75,358
dilution
Earnings (loss) before extraordinary $ (1.91) $ 2.42 $ 1.22
loss ---------------------------------
Net earnings (loss) $ (2.10) $ 2.14 $ 1.15
---------------------------------
CAPITAL STOCK
The Company is authorized to issue 500 million shares of $.01 par
value common stock. Prior to the Merger, Crompton was authorized to issue 250
million shares of $.10 par value common stock. There were 119,071,693 and
77,332,751 shares issued at year-end 1999 and 1998, respectively, of which
2,236,500 and 7,962,736 shares were held in the treasury in 1999 and 1998,
respectively.
In November 1999, the Board of Directors approved a share repurchase
program for 10% of the common shares then outstanding, or approximately 11.9
million shares. As of December 31, 1999, the Company had repurchased 2.2 million
common shares under that program at an average price of $12.16 per share.
In September 1998, the Board of Directors authorized a plan to
repurchase 7.5 million shares of the Company's common shares then outstanding.
In January 1999, the Company announced a share repurchase program for 6.8
million shares, or approximately 10% of the common shares then outstanding. From
September 1998 through the completion of these programs in 1999, the Company
repurchased 9.5 million common shares at an average price of $17.85 per share.
The Company is authorized to issue 250,000 shares of preferred stock
without par value, none of which are outstanding. At the time of the Merger,
Crompton's existing preferred share purchase rights were terminated. On
September 3, 1999, the Company declared a dividend distribution of one Preferred
Share Purchase Right (Rights) on each outstanding share of common stock. These
Rights entitle stockholders to purchase one one-hundredth of a share of a new
series of junior participating preferred stock at an exercise price of $100. The
Rights are only exercisable if a person or group acquires 15% or more of the
Company's common stock or announces a tender offer which, if successful, would
result in ownership of 15% or more of the Company's common stock.
COMPREHENSIVE INCOME
Components of accumulated other comprehensive income are as follows:
(IN THOUSANDS) 1999 1998
-----------------------
Foreign currency translation adjustment $ (59,602) $ (36,618)
Other (1,636) (1,796)
-----------------------
Accumulated other comprehensive income $ (61,238) $ (38,414)
-----------------------
-53-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK INCENTIVE PLANS
The 1988 Long-Term Incentive Plan (1988 Plan), as amended,
authorized the Board to grant stock options, stock appreciation rights,
restricted stock and long-term performance awards covering up to 10 million
shares to the officers and other key employees of the Company over a period of
ten years through October 1998. Non-qualified and incentive stock options were
granted under the 1988 plan at prices not less than 100% of the market value on
the date of the grant. All outstanding options will expire not more than ten
years and one month from the date of grant.
The 1993 Stock Option Plan for Non-Employee Directors, as amended in
1996, authorized 200,000 options to be granted to non-employee directors. The
options vest over a two year period and are exercisable over a ten year period
from the date of grant, at a price equal to the fair market value on the date of
grant.
The 1998 Long-Term Incentive Plan (1998 Plan) was approved by the
shareholders of Crompton in 1999. This plan authorizes the Board to grant stock
options, stock appreciation rights, restricted stock and long-term performance
awards to eligible employees and stock options to non-employee directors over a
ten year period. During 1999, non-qualified and incentive stock options were
granted under the 1998 plan at prices not less than 100% of the market value on
the date of grant. All outstanding options will expire not more than ten years
and one month from the date of grant. The 1998 Plan authorizes the Company to
grant shares and options for shares of common stock equal to the sum of (i)
shares available for award under the 1988 Plan and the 1993 Stock Option Plan
for Non-Employee Directors as of October 18, 1998 and (ii) shares awarded under
prior plans of the Company which were forfeited, expired, lapsed, not earned or
tendered to pay the exercise price of options or withholding taxes. In 1999, the
number of common shares reserved for issuance under the 1998 plan was increased
by 2.8 million shares, and pursuant to the Merger, increased by an additional 5
million shares. Under the terms of the Merger, the shareholders also approved
the conversion of all outstanding Witco options into options to purchase the
Company's common stock. These 4.7 million converted options expired 30 days
after the Merger, and are now available for grant under the 1998 Plan.
Under the 1988 Plan, 1,261,000 common shares have been transferred
to an independent trustee to administer restricted stock awards for the
Company's long-term incentive program. At December 31, 1999 deferred
compensation relating to such shares in the amount of $0.7 million is being
amortized over an estimated service period of six to fifteen years. In 1996, the
Company granted long-term incentive awards from the 1988 Plan in the amount of
824,250 shares which were earned at the end of 1998 based upon the achievement
of certain financial criteria. The shares earned in 1998 vest ratably at 25% per
year with the final installment at retirement. Compensation expense related to
such shares is accrued over a six year period.
In 1999, the Company granted long-term incentive awards in the
amount of 1,207,500 shares to be earned at the end of 2001 if certain financial
criteria were met. At the time of the Merger, these awards were cancelled, and
upon cancellation, cash payments were made to award recipients.
-54-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In October 1999, the Company granted long-term incentive awards in
the amount of 2,175,000 shares of restricted stock from the 1998 Plan. These
shares will vest over a three year period ending on January 1, 2003 or 2004,
depending on when and if certain financial goals are achieved. The compensation
expense relating to these shares is being accrued ratably over a three year
period.
In January 2000, the Company granted long-term incentive awards from
the 1998 Plan in the amount of 2,745,750 shares, to be earned at the end of
2002, if certain financial criteria are met. The shares covered by this grant
vest ratably over a three year period, upon achievement of the financial
criteria, and the compensation expense relating to these shares will be accrued
over a six year period.
Effective in 1996, the Company adopted the provisions of FASB
Statement No. 123 "Accounting and Disclosure of Stock-Based Compensation." As
permitted, the Company elected to continue its present method of accounting for
stock-based compensation. Accordingly, compensation expense has not been
recognized for stock based compensation plans other than restricted stock awards
under the Company's long-term incentive programs. Had compensation cost for the
Company's stock option and long-term incentive awards been determined under the
fair value method, net earnings (loss) (in thousands) would have been
$(182,747), $158,641, and $84,660 for the years 1999, 1998 and 1997,
respectively. Net earnings (loss) per common share (basic) would have been
$(2.19), $2.15, and $1.15 and net earnings (loss) per common share (diluted)
would have been $(2.19), $2.06, and $1.11 for the years 1999, 1998 and 1997,
respectively. The average fair value per share of options granted was $3.42 in
1999, $5.46 in 1998, and $10.53 in 1997. The fair value of options granted was
estimated using the Black-Scholes option pricing model with the following
assumptions for 1999, 1998 and 1997, respectively: dividend yield 2.1%, .35%,
and .19%, expected volatility 33%, 31%, and 28%, risk-free interest rate 6.3%,
4.6%, and 6.1%, and expected life 8 years, 6 years, and 6 years.
Changes during 1999, 1998 and 1997 in shares under option are
summarized as follows:
Price Per Share
---------------------------
Range Average Shares
-------------------------------------------
Outstanding at 12/28/96 $ 2.47-23.75 $ 12.47 6,271,975
Granted 19.31-26.41 26.39 613,251
Exercised 2.47-19.31 6.69 (667,733)
Lapsed 9.31-19.31 14.62 (86,917)
Outstanding at 12/27/97 3.13-26.41 14.46 6,130,576
Granted 14.34 14.34 1,077,112
Exercised 3.13-19.31 9.74 (966,664)
Lapsed 13.00-26.41 19.06 (34,543)
Outstanding at 12/26/98 3.13-26.41 15.15 6,206,481
Granted 8.34-17.13 9.36 4,320,500
Exercised 5.22-16.88 8.38 (177,865)
Lapsed 8.34-26.41 16.24 (115,870)
Outstanding at 12/31/99 $ 3.13-26.41 $ 12.81 10,233,246
-55-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Price Per Share
---------------------------
Range Average Shares
-------------------------------------------
Exercisable at 12/27/97 $ 3.13-23.75 $ 12.32 3,866,992
Exercisable at 12/26/98 $ 3.13-26.41 $ 14.16 3,650,289
Exercisable at 12/31/99 $ 3.13-26.41 $ 15.15 4,461,652
Shares available for grant at year-end 1999 and 1998 were 8,697,610
and 2,552,948, respectively.
The following table summarizes information concerning currently
outstanding and exercisable options:
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at end of Contractual Exercise at end of Exercise
Prices 1999 Life Price 1999 Price
- --------------------------------------------------------------------------------
$ 3.13-5.22 225,139 2.5 $ 4.93 225,139 $ 4.93
$ 8.34-9.31 3,896,532 9.6 $ 8.37 115,032 $ 9.30
$11.75-13.57 1,232,356 3.8 $12.20 1,232,356 $12.20
$14.34-17.13 3,799,856 6.5 $15.15 1,955,637 $15.07
$18.31-26.41 1,079,363 5.2 $22.94 933,488 $22.39
---------------------------------------------------------------
10,233,246 7.1 $12.81 4,461,652 $15.15
The Company has an Employee Stock Ownership Plan that is offered to
eligible employees of the Company and certain of its subsidiaries. The Company
makes contributions equivalent to a stated percentage of employee contributions.
The Company's contributions were $4.2 million in 1999 and $2 million in 1998 and
1997.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has several defined benefit and defined contribution
pension plans covering substantially all of its domestic employees and certain
international employees. Benefits are primarily based on the employees' years of
service and compensation during employment. The Company's funding policy for the
defined benefit plans is based on contributions at the minimal annual amounts
required by law plus such amounts as the Company may deem appropriate.
Contributions for the defined contribution plans are determined as a percentage
of each covered employees' salary. Plan assets consist of publicly traded
securities and investments in commingled funds administered by independent
investment advisors.
Employees of international locations are covered by various pension
benefit arrangements, some of which are considered to be defined benefit plans
for financial reporting purposes. Assets of the plans are comprised primarily of
insurance contracts and equity securities. Benefits under these plans are
primarily based upon levels of compensation. Funding policies are based on legal
requirements, tax considerations and local practices.
The Company also provides health and life insurance benefits for
certain retired and active employees and their beneficiaries and covered
dependents for substantially all of its
-56-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
domestic employees and certain international employees. These plans are
generally not pre-funded and are paid by the Company as incurred.
CHANGE IN BENEFIT OBLIGATION:
Pension Plans Post-Retirement Plans
-----------------------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
Benefit obligation at beginning $251,798 $ 244,364 $ 151,440 $ 154,829
of year
Service cost 7,791 7,635 1,272 1,256
Interest cost 28,345 16,044 10,820 9,958
Plan participants' contributions 328 122 301 91
Plan amendments -- -- -- (238)
Actuarial gains (39,936) (2,649) (26,271) (5,374)
Foreign currency exchange rate (6,150) (1,724) 258 (432)
changes
Acquisitions 547,377 -- 78,395 --
Benefits paid (25,051) (13,520) (12,960) (8,650)
Curtailments (14,183) 1,526 341 --
- ----------------------------------------------------------------------------------------
Benefit obligation at end of $750,319 $251,798 $203,596 $151,440
year
- ----------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Pension Plans Post-Retirement Plans
-----------------------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
Fair value of plan assets at $203,247 $197,229 $ 40,953 $ 40,002
beginning of year
Actual return on plan assets 64,573 17,004 4,966 3,271
Foreign currency exchange rate (3,012) (1,949) -- --
changes
Employer contributions 10,296 4,361 10,251 6,239
Plan participants' contributions 328 122 301 91
Acquisitions 471,590 - -- --
Benefits paid (25,051) (13,520) (12,960) (8,650)
- -----------------------------------------------------------------------------------------
Fair value of plan assets at $721,971 $203,247 $ 43,511 $ 40,953
end of year
- -----------------------------------------------------------------------------------------
FUNDED STATUS:
Pension Plans Post-Retirement Plans
-----------------------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
Funded status $ (28,348) $(48,551) $(160,085) $(110,487)
Unrecognized transition asset 3,499 1,257 -- --
Unrecognized actuarial (gain) loss (78,994) 4,017 (32,298) (2,379)
Unrecognized prior service cost 6,377 (2,339) (24,414) (29,861)
- -----------------------------------------------------------------------------------------
Net amount recognized $ (97,466) $(45,616) $(216,797) $(142,727)
- -----------------------------------------------------------------------------------------
The amounts recognized in the consolidated balance sheets consist of the
following:
Pension Plans Post-Retirement Plans
-----------------------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------
Prepaid benefit costs $ 48,030 $ 1,597 $ -- $ --
Accrued benefit liabilities (148,478) (51,603) (216,797) (142,727)
Intangible asset 2,048 3,437 -- --
Accumulated other comprehensive 934 953 -- --
income
- -----------------------------------------------------------------------------------------
Net amount recognized $ (97,466) $(45,616) $(216,797) $(142,727)
- -----------------------------------------------------------------------------------------
-57-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
COMPONENTS OF NET PERIODIC BENEFIT COST (CREDIT):
Pension Plans Post-Retirement Plans
---------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Service cost $ 7,791 $ 7,635 $ 6,599 $ 1,272 $ 1,256 $1,174
Interest cost 28,345 16,044 15,171 10,820 9,958 10,298
Expected return on plan (31,045) (15,610) (14,328) (3,175) (3,271) (910)
assets
Amortization of prior 1,166 410 577 (5,561) (6,196) (6,148)
service cost
Amortization of unrecognized
transition obligation (asset) 36 58 (131) -- -- --
Recognized actuarial 5,883 74 136 (1,269) (1,367) (671)
(gains) losses
Curtailment (gain) loss (14,449) 2,570 -- 196 -- --
recognized
- -----------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (2,273) $ 11,181 $ 8,024 $ 2,283 $ 380 $ 3,743
(credit)
- -----------------------------------------------------------------------------------------------------
The assumed health care cost trend rate ranged from 7% - 8.8% and is
assumed to decrease gradually to a range of 4% - 6.1% in 2020 and remain level
thereafter.
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
One-Percentage One-Percentage
Point Point
(IN THOUSANDS) Increase Decrease
- --------------------------------------------------------------------------------
Effect on the aggregate of the service
and interest cost components of net
periodic post-retirement health care
benefit cost for 1999 $ 1,041 $ (927)
Effects on accumulated post-retirement
benefit obligation for health care
benefits as of December 31, 1999 $17,804 $(15,822)
- --------------------------------------------------------------------------------
For plans with benefit obligations in excess of plan assets, the
aggregate benefit obligation was $292.2 million in 1999 and $229.2 million in
1998, and the aggregate fair value of plan assets was $188.2 million in 1999 and
$178.6 million in 1998.
The weighted-average discount rate used to calculate the projected
benefit obligation ranged from 5.75% - 7.75% in 1999 and 5.75% - 7% in 1998. The
expected long-term rate of return on plan assets ranged from 7% - 9% in 1999 and
7.75% - 9% in 1998. The assumed rate of compensation increase ranged from 2.5% -
4.5% in 1999 and 2% - 4% in 1998.
The Company's net cost of pension plans, including defined
contribution plans, was $11.2 million, $19 million, and $15 million in 1999,
1998, and 1997, respectively.
CONTINGENCIES
The Company is involved in claims, litigation, administrative
proceedings and investigations of various types in various jurisdictions. A
number of such matters involve claims for a material amount of damages and
relate to or allege environmental liabilities, including clean-up costs
associated with hazardous waste disposal sites, natural resource damages,
property damage and personal injury. The Company and some of its subsidiaries
have been identified by federal, state or local governmental agencies, and by
other potentially responsible parties (each a "PRP") under the Comprehensive
Environmental Response, Compensation and Liability
-58-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Act of 1980, as amended, or comparable state statutes, as a PRP with respect to
costs associated with waste disposal sites at various locations in the United
States. In addition, the Company is involved with environmental remediation and
compliance activities at some of its current and former sites in the United
States and abroad.
Each quarter, the Company evaluates and reviews estimates for future
remediation and other costs to determine appropriate environmental reserve
amounts. For each site, a determination is made of the specific measures that
are believed to be required to remediate the site, the estimated total cost to
carry out the remediation plan, the portion of the total remediation costs to be
borne by the Company and the anticipated time frame over which payments toward
the remediation plan will occur. The total amount accrued for such environmental
liabilities at December 31, 1999 was $198 million. The Company estimates its
potential environmental liability to range from $181 million to $222 million at
December 31, 1999. It is reasonably possible that the Company's estimates for
environmental remediation liabilities may change in the future should additional
sites be identified, further remediation measures be required or undertaken, the
interpretation of current laws and regulations be modified or additional
environmental laws and regulations be enacted.
On May 21, 1997, the United States District Court, Eastern District
of Arkansas, entered an order finding that Uniroyal Chemical Co./Cie. (a
wholly-owned subsidiary of the Company) is jointly and severally liable to the
United States and Hercules Incorporated and Uniroyal Chemical Co./Cie. are
liable to each other in contribution with respect to the remediation of the
Vertac Chemical Corporation site in Jacksonville, Arkansas. On October 23, 1998,
the Court entered an order granting the United State's motion for summary
judgment against Uniroyal Chemical Co./Cie and Hercules for removal and
remediation costs of $102.9 million at the Vertac site. On February 3, 2000,
after trial on the allocation of these costs, the Court entered an order finding
Uniroyal Chemical Co./Cie liable to the United States for approximately $2.3
million and liable to Hercules in contribution for approximately $700,000 of
these costs. Uniroyal Chemical Co./Cie and Hercules have each appealed to the
United States Court of Appeals for the Eighth Circuit.
The Company is a defendant in two similar actions arising out of the
Company's involvement in the polybutylene resin manufacturing business in the
1970's. The following cases are currently pending in California state courts:
Alameda County Water District v. Mobil Oil Corporation, et al., filed in April
1996, and Marin Municipal Water District v. Shell Oil Company, et al., filed in
May 1996, both pending in Superior Court for the County of San Mateo. The
actions generally allege that the Company and several other defendants
negligently misrepresented the performance of polybutylene pipe and fittings
installed in water distribution systems. Other allegations include breach of the
California Unfair Practices Act, and breach of warranty, fraud and strict
liability. It is possible that the Company may be named as a defendant in future
actions arising out of its past involvement in the polybutylene resin
manufacturing business.
The Company intends to assert all meritorious legal defenses and all
other equitable factors which are available to it with respect to the above
matters. The Company believes that the resolution of these matters will not have
a material adverse effect on its consolidated financial position. While the
Company believes it is unlikely, the resolution of these matters could
-59-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
have a material adverse effect on its consolidated results of operations in any
given year if a significant number of these matters are resolved unfavorably.
BUSINESS SEGMENT DATA
Effective in 1998, the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
established revised standards for reporting information about operating
segments. Pursuant to Statement No. 131 and the Merger, the Company redefined
its reporting segments into two major business categories, "Polymer Products"
and "Specialty Products." Polymer Products includes reporting segments of
Polymer Additives (plastic additives, rubber chemicals and urethane chemicals),
Polymers (EPDM, urethanes and nitrile rubber) and Polymer Processing Equipment
(specialty processing equipment and controls). Specialty Products includes
reporting segments of OrganoSilicones (silanes and specialty silicones), Crop
Protection (actives, seed treatment and surfactants) and Other (petroleum
additives, refined products, colors and glycerine/fatty acids).
The accounting policies of the operating segments are the same as
those described in the summary of accounting policies. The Company evaluates a
segment's performance based on several factors, of which a primary financial
measure is operating profit. In computing operating profit, the following items
have not been deducted: amortization, interest expense, other income and income
taxes. Corporate assets are principally cash, intangible assets and other assets
maintained for general corporate purposes. Prior to 1999, inter-segment sales
were not significant. A summary of business data for the Company's reportable
segments for the years 1999, 1998 and 1997 follows.
INFORMATION BY BUSINESS SEGMENT
(IN THOUSANDS) 1999 1998 1997
--------------------------------------------------
SALES
Polymer Products
Polymer
Additives $ 620,188 $ 391,964 $ 417,204
Polymers 316,300 342,527 342,154
Polymer
Processing
Equipment 300,016 344,480 311,673
Eliminations (3,469) -- --
--------------------------------------------------
1,233,035 1,078,971 1,071,031
--------------------------------------------------
Specialty Products
OrganoSilicones 158,925 -- --
Crop Protection 294,798 348,000 370,091
Other 405,600 369,148 410,058
--------------------------------------------------
859,323 717,148 780,149
--------------------------------------------------
$ 2,092,358 $ 1,796,119 $ 1,851,180
--------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
--------------------------------------------------
OPERATING PROFIT
Polymer Products
Polymer
Additives $ 67,880 $ 49,215 $ 71,184
Polymers 82,951 79,892 57,824
-60-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(IN THOUSANDS) 1999 1998 1997
--------------------------------------------------
Polymer
Processing
Equipment 19,981 46,653 36,983
--------------------------------------------------
170,812 175,760 165,991
--------------------------------------------------
Specialty Products
OrganoSilicones 16,784 -- --
Crop Protection 69,194 84,882 83,478
Other 25,144 35,760 40,104
--------------------------------------------------
111,122 120,642 123,582
__________________________________________________
General
corporate
expenses (56,033) (36,544) (37,295)
Special items (224,518) (41,560) (28,000)
--------------------------------------------------
$ 1,383 $ 218,298 $ 224,278
--------------------------------------------------
DEPRECIATION AND AMORTIZATION
Polymer Products
Polymer
Additives $ 30,054 $18,043 $19,786
Polymers 13,957 14,008 14,453
Polymer
Processing
Equipment 2,951 3,481 3,111
--------------------------------------------------
46,962 35,532 37,350
--------------------------------------------------
Specialty Products
OrganoSilicones 6,929 -- --
Crop Protection 9,414 8,616 8,252
Other 19,615 15,779 13,635
--------------------------------------------------
35,958 24,395 21,887
__________________________________________________
Corporate 33,728 20,609 20,619
--------------------------------------------------
$ 116,648 $80,536 $79,856
--------------------------------------------------
SEGMENT ASSETS
Polymer Products
Polymer
Additives $ 788,062 $340,621 $381,389
Polymers 226,678 192,172 225,838
Polymer
Processing
Equipment 128,679 132,911 156,961
--------------------------------------------------
1,143,419 665,704 764,188
--------------------------------------------------
Specialty Products
OrganoSilicones 384,392 -- --
Crop Protection 316,733 181,036 213,915
Other 438,699 318,073 327,658
--------------------------------------------------
1,139,824 499,109 541,573
__________________________________________________
Corporate 1,443,375 244,080 243,059
--------------------------------------------------
$ 3,726,618 $1,408,893 $1,548,820
--------------------------------------------------
-61-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(IN THOUSANDS) 1999 1998 1997
--------------------------------------------------
CAPITAL EXPENDITURES
Polymer Products
Polymer
Additives $ 49,005 $20,408 $18,833
Polymers 23,938 15,937 8,708
Polymer
Processing
Equipment 3,204 4,733 2,676
--------------------------------------------------
76,147 41,078 30,217
--------------------------------------------------
Specialty Products
OrganoSilicones 8,586 -- --
Crop Protection 17,458 10,234 8,696
Other 21,333 14,888 11,140
--------------------------------------------------
47,377 25,122 19,836
--------------------------------------------------
Corporate 8,258 428 123
--------------------------------------------------
$ 131,782 $66,628 $50,176
--------------------------------------------------
EQUITY METHOD INVESTMENTS
Polymer Products
Polymer
Additives $33,051 $31,090 $20,900
Polymers 7,551 -- --
Polymer
Processing
Equipment -- -- --
--------------------------------------------------
40,602 31,090 20,900
--------------------------------------------------
Specialty Products
OrganoSilicones 52 -- --
Crop Protection 22,262 11,909 --
Other 11,194 -- --
--------------------------------------------------
33,508 11,909 --
--------------------------------------------------
$74,110 $42,999 $20,900
--------------------------------------------------
GEOGRAPHIC INFORMATION
Sales are attributed based on location of customer.
(IN THOUSANDS) 1999 1998 1997
--------------------------------------------------
SALES
United States $1,140,401 $1,077,190 $1,125,121
Canada 108,041 106,230 107,386
Latin America 132,674 133,870 116,734
Europe/Africa 505,597 359,760 348,294
Asia/Pacific 205,645 119,069 153,645
--------------------------------------------------
$2,092,358 $1,796,119 $1,851,180
--------------------------------------------------
-62-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
United States $ 938,555 $360,241 $374,395
Canada 47,869 22,158 21,040
Latin America 15,021 7,213 6,016
Europe/Africa 233,836 71,168 62,180
Asia/Pacific 27,064 12,623 11,261
--------------------------------------------------
$1,262,345 $473,403 $474,892
--------------------------------------------------
SUMMARIZED UNAUDITED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999
----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------------------------------------------------
Net sales $ 396,292 $409,174 $500,429 $786,463
Gross profit 148,997 160,592 170,799 250,597
Earnings (loss)
before
extraordinary loss 59,203 37,969 (179,920) (76,603)
Net earnings (loss) 59,203 36,884 (180,128) (90,997)
Earnings (loss) before
extraordinary loss
per common share
Basic .87 .58 (2.21) (.64)
Diluted .86 .57 (2.21) (.64)
Net earnings (loss)
per common share:
Basic .87 .56 (2.21) (.77)
Diluted .86 .55 (2.21) (.77)
Common dividends
per share - .05 - .05
Market price
per common share:
High 21 3/8 20 15/16 20 7/16 14 15/16
Low 15 5/16 14 15/16 13 7/8 7 1/8
The sum of earnings per common share for the four quarters do not
equal the total earnings per common share for 1999 due to changes in the average
number of shares outstanding.
1999
----------------------------------------------------
First Second Third Fourth
----------------------------------------------------
Net sales $477,219 $474,337 $442,768 $401,795
Gross profit 174,754 182,246 163,168 129,751
Earnings before
extraordinary loss 31,943 39,795 30,592 80,893
Net earnings 29,992 25,952 24,918 80,893
Earnings before
extraordinary loss
per common share
Basic .43 .53 .41 1.13
Diluted .42 .52 .40 1.11
Net earnings
per common share:
Basic .40 .35 .34 1.13
Diluted .39 .34 .33 1.11
Common dividends
per share - .05 - -
Market price
per common share:
High 31 1/16 32 13/16 26 7/8 21 9/16
Low 25 7/16 23 13 3/8 13 1/4
-63-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The sum of earnings per common share for the four quarters do not
equal the total earnings per common share for 1998 due to changes in the average
number of shares outstanding.
-64-
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and have
been audited by KPMG LLP, Independent Certified Public Accountants, whose report
is presented herein.
Management of the Company assumes responsibility for the accuracy
and reliability of the financial statements. In discharging such responsibility,
management has established certain standards which are subject to continuous
review and are monitored through the Company's financial management and internal
audit group.
The Board of Directors pursues its oversight role for the financial
statements through its Audit Committee which consists of outside directors. The
Audit Committee meets on a regular basis with representatives of management, the
internal audit group and KPMG LLP.
-65-
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CK WITCO CORPORATION
We have audited the accompanying consolidated balance sheets of CK
Witco Corporation and subsidiaries (the Company) as of December 31, 1999 and
December 26, 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of December 31, 1999 and December 26, 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
(KPMG signature)
Stamford, Connecticut
January 31, 2000, except for the private placement information described in the
note captioned "Credit Facilities" as to which the date is March 7, 2000
-66-
FIVE YEAR SELECTED FINANCIAL DATA
(In millions of dollars, except per share data) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales $ 2,092.4 1,796.1 1,851.2 1,804.0 1,744.8
Cost of products sold $ 1,361.4 1,146.2 1,196.0 1,170.6 1,126.2
Selling, general and administrative $ 331.1 264.7 269.4 279.8 270.3
Depreciation and amortization $ 116.6 80.5 79.9 82.6 80.1
Research and development $ 68.0 52.8 53.6 52.4 50.1
Equity income $ (10.6) -- -- -- --
Acquired in-process research and $ 195.0 -- -- -- --
development
Merger and related costs $ 29.5 -- -- 85.0 --
Facility closure costs $ -- 33.6 -- -- --
Severance and other costs $ -- -- 13.0 -- --
Special environmental charge $ -- -- 15.0 30.0 --
Operating profit $ 1.4 218.3 224.3 103.6 218.1
Interest expense $ 69.8 78.5 103.3 114.2 122.4
Other expense (income) $ 48.0 (158.9) (27.8) (1.3) (2.7)
Earnings (loss) before income taxes $ (116.4) 298.7 148.8 (9.3) 98.4
and extraordinary loss
Provision (benefit) for income $ 42.9 115.4 56.7 12.7 (41.5)
taxes
Earnings (loss) before $ (159.3) 183.3 92.1 (22.0) 139.9
extraordinary loss
Extraordinary loss $ (15.7) (21.5) (5.3) (.5) (8.3)
Net earnings (loss) $ (175.0) 161.8 86.8 (22.5) 131.6
Special items, net of tax (included above):
Acquired in-process research and $ (195.0) -- -- -- --
development
Merger and related costs $ (20.6) -- -- (68.1) --
Textile colors loss $ (65.5) -- -- -- --
Specialty ingredients gain $ 26.8 -- -- -- --
Seed treatment gain $ -- 92.1 -- -- --
Facility closure costs $ -- (21.1) -- -- --
Severance and other costs $ -- -- (7.8) -- --
Special environmental charge $ -- -- (9.0) (18.5) --
Postretirement settlement gain $ -- -- 16.8 -- --
Early extinguishment of debt $ (15.7) (21.5) (5.3) (.5) (8.3)
Change in deferred tax valuation $ -- -- -- -- 78.9
allowance
Other $ -- (5.0) -- -- 4.4
Total special items, net of tax $ (270.0) 44.5 (5.3) (87.1) 75.0
PER SHARE STATISTICS
Basic
Earnings (loss) before $ (1.91) 2.48 1.25 (.31) 2.13
extraordinary loss
Net earnings (loss) $ (2.10) 2.20 1.18 (.31) 2.01
Diluted
Earnings (loss) before $ (1.91) 2.42 1.22 (.31) 2.11
extraordinary loss
Net earnings (loss) $ (2.10) 2.14 1.15 (.31) 1.99
Dividends $ .10 .05 .05 .27 .52
Book value $ 8.82 .32 (.27) (1.32) (.83)
Common stock trading range: High 21 3/8 32 13/16 27 3/8 20 1/8 20
Low 7 1/8 13 1/4 17 7/8 13 12
Average shares outstanding 83,507 73,696 73,373 72,026 65,572
(thousands) - Basic
Average shares outstanding 83,507 75,700 75,358 72,026 66,269
(thousands) - Diluted
FINANCIAL POSITION
Current assets $ 1,119.8 597.8 715.0 742.2 697.0
Non-current assets $ 2,606.8 811.1 833.8 915.0 958.8
Total assets $ 3,726.6 1,408.9 1,548.8 1,657.2 1,655.8
Current liabilities $ 978.0 394.4 363.1 357.5 420.6
Long-term debt $ 1,309.8 646.9 896.3 1,055.0 974.2
Other liabilities $ 678.9 300.9 309.5 341.1 320.2
Stockholders' equity (deficit) $ 759.9 66.7 (20.1) (96.4) (59.2)
Current ratio 1.1 1.5 2.0 2.1 1.7
Total capital $ 2,150.9 730.9 878.0 967.9 1,020.1
Total debt-to-capital % 64.7 90.9 102.3 110.0 105.8
PROBABILITY STATISTICS (BEFORE
SPECIAL ITEMS)
% Operating profit on sales 10.8 14.5 13.6 12.1 12.2
% Earnings on sales 4.5 6.5 5.0 3.6 3.2
% Earnings on average total capital 11.4 18.6 16.5 12.8 14.2
OTHER STATISTICS
EBITDA before special items $ 342.5 340.4 332.1 301.2 305.5
Capital spending $ 131.8 66.6 50.2 39.2 87.7
-67-
FIVE YEAR SELECTED FINANCIAL DATA
(In millions of dollars, except per share data) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Depreciation $ 89.2 59.4 58.7 59.2 57.4
Number of employees 8,612 5,536 5,583 5,725 5,641
-68-
RESPONSIBLE CARE(R) STATEMENT
[PHOTO]
After an extensive collaboration with federal and state regulators,
local stakeholders and national environmental groups, our Sistersville, West
Virginia facility became the first chemical plant in the U.S. to initiate an
approved project under the EPA's Project XL.
Project XL encourages companies to undertake innovative and often
cost-saving approaches in lieu of restrictive federal environmental regulations.
Under the Sistersville program, we installed efficient vent emission controls
that reduce our emissions by about 200,000 pounds a year. Under the deferred
federal regulatory requirements, controls on the plant's wastewater treatment
facility would have reduced our emissions by 130,000 pounds annually. The cost
to the Sistersville plant was $700,000, versus $5 million that the federal
regulations would have required. Also as part of the project, we have recycled
over one million pounds of methanol for beneficial reuse.
Sistersville has an active Pollution Prevention Council, made up of
a broad cross-section of employees, that has implemented projects to
substantially reduce waste while saving the company $1 million annually.
All of CK Witco is dedicated to the Responsible Care principles of
the Chemical Manufacturers Association that call for "continuous progress toward
the vision of no accidents, injuries or harm to the environment."
[LOGO]
[PHOTO CAPTION]: ABOVE: WILD TURKEYS AND OTHER WILDLIFE ARE
TESTIMONIALS TO THE ENVIRONMENTAL PROTECTION PROGRAM AT SISTERSVILLE. HERE
TURKEYS FEED ABOVE A CAPPED LANDFILL AT THE FACILITY.
-69-
CORPORATE MANAGEMENT
[PHOTO]
[PHOTO CAPTION]: STANDING (LEFT TO RIGHT): JAMES J. CONWAY, WILLIAM
A. STEPHENSON, ALFRED F. INGULLI, VINCENT A. CALARCO, ROBERT W. ACKLEY, JOSEPH
B. EISENBERG, WALTER K. RUCK, AND MARY GUM. SEATED (LEFT TO RIGHT): JOHN T.
FERGUSON II, CHARLES J. MARSDEN, MARVIN H. HAPPEL, AND PETER BARNA.
VINCENT A. CALARCO Organization and
Chairman, President and Administration
Chief Executive Officer
CHARLES J. MARSDEN
ROBERT W. ACKLEY Senior Vice President
Executive Vice President Strategy and Development
Polymer Processing
Equipment WALTER K. RUCK
Senior Vice President
JAMES J. CONWAY Operations
Executive Vice President
Performance Chemicals and OTHER CORPORATE
Elastomers OFFICERS
JOSEPH B. EISENBERG BRIAN J. DICK
Executive Vice President Vice President, Finance
Polymer Additives
JOHN R. JEPSEN
MARY GUM Vice President, Treasurer
Executive Vice President
OrganoSilicones MICHAEL F. VAGNINI
Corporate Controller
ALFRED F. INGULLI
Executive Vice President GERALD H. FICKENSCHER
Crop Protection Regional Vice President
Europe, Africa & the Middle
WILLIAM A. STEPHENSON East
Executive Vice President
Urethanes and Petroleum EDWARD L. HAGEN
Additives Regional Vice President
Asia-Pacific
PETER BARNA
Senior Vice President and MICHEL J. DUCHESNE
Chief Financial Officer Regional Vice President
Latin America
JOHN T. FERGUSON II
Senior Vice President
general Counsel and
Secretary
MARVIN H. HAPPEL
Senior Vice President
-70-
BOARD OF DIRECTORS CORPORATE DATA
JAMES A. BITONTI (3) CORPORATE HEADQUARTERS
Chief Executive Officer
DSS/BITCO International One American Lane
Greenwich, CT 06831
SIMEON BRINBERG (1,4) (203) 552-2000
Senior Vice President www.ckwitco.com
BRT Realty Trust
AUDITORS
VINCENT A. CALARCO KPMG LLP
Chairman of the Board Stamford Square
President 3001 Summer Street
and Chief Executive Officer Stamford, CT 06905
ROBERT A. FOX (1,4)
President and
Chief Executive Officer TRANSFER AGENT AND REGISTRAR
Foster Farms
ChaseMellon Shareholder Services L.L.C.
Roger L. Headrick (2,3) 85 Challenger Road
Managing General Partner Ridgefield Park, NJ 07660
HMCH Ventures (800) 288-9541
www.chasemellon.com
Leo I. Higdon, Jr. (2)
President ANNUAL MEETING
Babson College
The annual meeting of stockholders will
be held at 11:15 a.m. on Tuesday, April
25, 2000, at the Sheraton Stamford Hotel,
HARRY G. HOHN (2,3) 2701 Summer Street, Stamford, CT 06905
Retired Chairman and
Chief Executive Officer
New York Life Insurance Company FORM 10-K
NICHOLAS PAPPAS, PH.D. (4) A copy of the Company's report on Form
Vice Chairman of the Board 10-K for 1999, as filed with the
BioTraces, Inc. Securities and Exchange Commission, may
Retired Executive Vice President be obtained free of charge by writing to
E.I. du Pont de Nemours and Company the Secretary of the Corporation, Benson
Road, Middlebury, CT 06749
INVESTOR RELATIONS
C.A. PICCOLO (1,4)
President and William A. Kuser
Chief Executive Officer CK Witco Corporation
HealthPic Consultants, Inc. One American Lane
Greenwich, CT 06831
Bruce F. Wesson (1) (203) 552-2000
President bill-kuser@ckwitco.com
Galen Associates
General Partner PUBLIC RELATIONS
Galen Partners, L.P.
Robert P. Harwood
PATRICIA K. WOOLF, PH.D. (1,4) CK Witco Corporation
Private Investor and Lecturer Benson Road
Department of Molecular Biology Middlebury, CT 06749
Princeton University (203) 573-2000
robert-harwood@ckwitco.com
1 Member of Audit Committee (C) 2000 CK Witco Corporation. All
2 Member of Finance and Pension Committee rights reserved.
3 Member of Organization, Compensation (R) and TM indicate registered and
and Governance Committee unregistered trade and service
4 Member of Safety, Health and marks.
Environment Committee
CK WITCO CORPORATION
ONE AMERICAN LANE, GREENWICH, CT 06831
WWW.CKWITCO.COM