SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-30270 CROMPTON CORPORATION (Exact name of registrant as specified in its charter) Delaware 52-2183153 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One American Lane, Greenwich, Connecticut 06831-2559 (Address of principal executive offices) (Zip Code) (203) 552-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares of common stock outstanding is as follows: Class Outstanding at October 31, 2000 Common Stock - $.01 par value 112,671,636 CROMPTON CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements and Accompanying Notes Consolidated Statements of Operations (Unaudited) - Third quarter and nine months ended 2000 and 1999 2 Consolidated Balance Sheets - September 30, 2000 (Unaudited) and December 31, 1999 3 Consolidated Statements of Cash Flows (Unaudited) - Nine months ended 2000 and 1999 4 Notes to Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure of Market Risk 16 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 CROMPTON CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) Third quarter and nine months ended 2000 and 1999 (In thousands of dollars, except per share data) Third quarter ended Nine months ended 2000 1999 2000 1999 Net sales $ 738,456 $ 500,429 $ 2,310,360 $1,305,895 Cost of products sold 510,914 329,630 1,559,424 825,507 Selling, general and administrative 95,736 79,588 318,482 200,244 Depreciation and amortization 45,284 30,459 135,968 67,962 Research and development 20,609 16,374 66,145 38,960 Acquired in-process research & development - 195,000 - 195,000 Equity (income) loss 701 164 (10,833) (9,270) Operating profit (loss) 65,212 (150,786) 241,174 (12,508) Interest expense 30,944 17,611 88,839 43,718 Other expense (income) (a) 2,803 2,465 5,076 (37,790) Earnings (loss) before income taxes and extraordinary loss 31,465 (170,862) 147,259 (18,436) Income taxes 9,905 9,058 54,485 64,312 Earnings (loss) before extraordinary loss 21,560 (179,920) 92,774 (82,748) Extraordinary loss on early extinguishment of debt - (208) - (1,293) Net earnings (loss) $ 21,560 $(180,128) $ 92,774 $ (84,041) Basic earnings per common share: Earnings (loss) before extraordinary loss $ .19 $ (2.21) $ .81 $ (1.15) Extraordinary loss - - - (.02) Net earnings (loss) $ .19 $ (2.21) $ .81 $ (1.17) Diluted earnings per common share: Earnings (loss) before extraordinary loss $ . 19 $ (2.21) $ .81 $ (1.15) Extraordinary loss - - - (.02) Net earnings (loss) $ .19 $ (2.21) $ .81 $ (1.17) Dividends declared per common share $ .05 $ - $ .15 $ .05 (a) The nine months ended 1999 includes a gain of $42,060 ($26,813 after-tax) from the sale of the specialty ingredients business. See accompanying notes to consolidated financial statements. CROMPTON CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 (Unaudited) and December 31, 1999 (In thousands of dollars) September 30, December 31, 2000 1999 ASSETS CURRENT ASSETS Cash $ 1,627 $ 10,543 Accounts receivable 406,112 411,536 Inventories 551,978 523,363 Other current assets 138,178 174,311 Total current assets 1,097,895 1,119,753 NON-CURRENT ASSETS Property, plant and equipment 1,185,887 1,262,345 Cost in excess of acquired net assets 941,117 969,625 Other assets 350,503 374,895 $ 3,575,402 $ 3,726,618 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 36,193 $ 81,162 Accounts payable 241,982 330,591 Accrued expenses 316,639 422,252 Income taxes payable 99,398 121,366 Other current liabilities 26,254 22,599 Total current liabilities 720,466 977,970 NON-CURRENT LIABILITIES Long-term debt 1,483,355 1,309,812 Postretirement health care liability 210,111 216,797 Other liabilities 412,111 462,127 STOCKHOLDERS' EQUITY Common stock 1,194 1,191 Additional paid-in capital 1,051,630 1,047,518 Accumulated deficit (124,714) (200,374) Accumulated other comprehensive income (104,453) (61,238) Treasury stock at cost (74,298) (27,185) Total stockholders' equity 749,359 759,912 $ 3,575,402 $ 3,726,618 See accompanying notes to consolidated financial statements. CROMPTON CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine months ended 2000 and 1999 (In thousands of dollars) Increase (decrease) in cash 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ 92,774 $ (84,041) Adjustments to reconcile net earnings (loss) to net cash provided by operations: Acquired in-process research and development - 195,000 Gain on sale of specialty ingredients - (42,060) Extraordinary loss on early debt extinguishment - 1,293 Depreciation and amortization 135,968 67,962 Equity income (10,833) (9,270) Changes in assets and liabilities, net (105,349) (100,304) Net cash provided by operations 112,560 28,580 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of specialty ingredients - 103,000 Capital expenditures (108,136) (65,436) Acquired cash of Witco Corporation - 236,658 Merger related expenditures (48,798) - Other investing activities (25,303) (19,309) Net cash (used in) provided by investing activities (182,237) 254,913 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds on senior notes 593,754 - Payments on long-term borrowings (413,972) (122,758) Payments on short-term borrowings (46,052) (3,031) Repurchases of accounts receivable (12,928) - Treasury stock acquired (48,453) (74,596) Dividends paid (17,114) (3,272) Other financing activities 6,203 (4,478) Net cash provided by (used in) financing activities 61,438 (208,135) CASH Effects of exchange rate changes on cash (677) 931 Change in cash (8,916) 76,289 Cash at the beginning of period 10,543 12,104 Cash at the end of period $ 1,627 $ 88,393 See accompanying notes to consolidated financial statements. CROMPTON CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) MERGER OF EQUALS 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 equals of Crompton and Witco (the "Merger"). The terms of the Merger provided that (a) Crompton merge with and into Crompton Corporation, formerly known as 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 $830 million. This is being amortized on a straight-line basis over forty years. As a result of the Merger, the Company recorded merger related accruals as a component of goodwill, of which $110.7 million remained at December 31, 1999. During the first nine months of 2000, these accruals were reduced by payments of $48.8 million and non-cash charges of $19.0 million. The payments related primarily to severance and related accruals. Also, as a result of the Merger, the Company recorded other accruals of which $20 million remained at December 31, 1999. During the first nine months of 2000, payments of $5.3 million were made against these other accruals. PRO FORMA FINANCIAL INFORMATION The following pro forma unaudited results of operations for the third quarter and nine months ended 1999 assumes the Merger had been consummated as of January 1, 1999, and excludes the write-off of acquired in-process research and development of $195 million. (In thousands of dollars, except per share data) 1999 Third quarter Nine months Net sales $ 826,774 $ 2,635,188 Net earnings $ 14,216 $ 127,919 Net earnings per common share: Basic $ 0.12 $ 1.07 Net earnings per common share: Diluted $ 0.12 $ 1.06 Weighted average shares outstanding: Basic 118,940 119,677 Weighted average shares outstanding: Diluted 120,661 121,133 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 Statement of Financial Accounting Standards (SFAS) No. 2 "Accounting for Research and Development Costs" as clarified by Financial Accounting Standards Board (FASB) Interpretation No. 4, amounts assigned to purchased IPR&D that meet the above 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 recorded in the third quarter of 1999 as part of the allocation of the purchase price related to the acquisition of Witco. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The information in the foregoing consolidated financial statements is unaudited, but reflects all of the adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented. Included in accounts receivable are allowances for doubtful accounts of $24.7 million at September 30, 2000 and $23.4 million at December 31, 1999. Accumulated depreciation amounted to $502.9 million at September 30, 2000 and $448.3 million at December 31, 1999. Accumulated amortization of cost in excess of acquired net assets amounted to $67.2 million at September 30, 2000 and $49.4 million at December 31, 1999. Accumulated amortization of patents, trademarks and other intangibles included in other assets amounted to $144.6 million at September 30, 2000 and $135.5 million at December 31, 1999. It is suggested that the interim consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company's 1999 Annual Report on Form 10-K. 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. COMMON STOCK As of September 30, 2000, there were 119,372,359 common shares issued and 113,369,554 common shares outstanding at $.01 par value. INVENTORIES Components of inventories are as follows: (In thousands) September 30, December 31, 2000 1999 Finished goods $ 408,817 $ 410,513 Work in process 34,040 27,394 Raw materials and supplies 109,121 85,456 $ 551,978 $ 523,363 EARNINGS PER COMMON SHARE The computation of basic earnings per common share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per common share is based on the weighted average number of common and common equivalent shares outstanding. The following is a reconciliation of the shares used in the computations: (In thousands) Third quarter ended Nine months ended 2000 1999 2000 1999 Weighted average common shares outstanding 113,599 81,619 113,938 71,788 Effect of dilutive stock options and other equivalents 502 - 1,211 - Weighted average common and common equivalent shares outstanding 114,101 81,619 115,149 71,788 COMPREHENSIVE INCOME (LOSS) An analysis of the Company's comprehensive income (loss) follows: (In thousands) Third quarter ended Nine months ended 2000 1999 2000 1999 Net earnings (loss) $ 21,560 $(180,128) $ 92,774 $ (84,041) Other comprehensive income (expense) Foreign currency translation adjustments (31,377) (522) (43,320) (12,688) Other 34 - 105 - Comprehensive income (loss) $ (9,783) $(180,650) $ 49,559 $ (96,729) The components of accumulated other comprehensive income (loss) at September 30, 2000 and December 31, 1999 are as follows: September 30, December 31, (In thousands) 2000 1999 Foreign currency translation adjustments $(102,922) $ (59,602) Other (1,531) (1,636) Accumulated other comprehensive income (loss) $(104,453) $ (61,238) BUSINESS SEGMENT DATA (In thousands) Third quarter ended Nine months ended 2000 1999 2000 1999 Net Sales Polymer Products Polymer Additives $ 238,454 $ 152,813 $ 748,952 $ 351,984 Polymers 82,040 72,467 249,355 230,613 Polymer Processing Equipment 82,464 61,485 231,594 231,724 Eliminations (2,766) (981) (10,195) (981) 400,192 285,784 1,219,706 813,340 Specialty Products OrganoSilicones 119,044 38,331 367,734 38,331 Crop Protection 91,362 73,992 330,706 221,050 Other 127,858 102,322 392,214 233,174 338,264 214,645 1,090,654 492,555 Total Net Sales $ 738,456 $ 500,429 $2,310,360 $1,305,895 (In thousands) Third quarter ended Nine months ended 2000 1999 2000 1999 Operating Profit Polymer Products Polymer Additives $ 18,883 $ 17,166 $ 63,176 $ 42,729 Polymers 17,335 15,990 55,907 61,879 Polymer Processing Equipment 7,902 1,998 20,090 18,899 44,120 35,154 139,173 123,507 Specialty Products OrganoSilicones 19,358 4,267 66,664 4,267 Crop Protection 14,328 14,671 74,690 68,953 Other 6,591 4,219 22,149 19,495 40,277 23,157 163,503 92,715 General corporate expense, including amortization (19,185) (14,097) (61,502) (33,730) Acquired in-process research and development - (195,000) - (195,000) Total Operating Profit (Loss) $ 65,212 $ (150,786) $ 241,174 $ (12,508) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER RESULTS Overview Consolidated net sales of $738.5 million for the third quarter of 2000 increased $238.0 million from the comparable period in 1999. After adjusting 1999 net sales to exclude $36.1 million from the divestiture of the textile colors business, and to include $281.3 million from Witco continuing operations for July and August of 1999, net sales decreased 1%. This decrease was primarily the result of continued negative foreign currency impact, mainly the Euro. International sales, including U.S. exports, were 46% of total sales, up from 42% in the third quarter of 1999. After adjusting third quarter 1999 international sales to include Witco sales for July and August, international sales, including U.S. exports, were unchanged at 46%. Net earnings for the third quarter were $21.6 million, or $0.19 per common share diluted, as compared to a net loss of $180.1 million, or $2.21 per common share diluted, in the third quarter of 1999. Net earnings before after-tax special items were $21.6 million, or $0.19 per common share diluted, as compared to $15.1 million, or $0.18 per common share diluted in the third quarter of 1999. Gross margin as a percentage of sales was 30.8% for the third quarter of 2000 as compared to 34.1% for the third quarter of 1999. The decrease was primarily due to the impact of including Witco operations for the entire quarter of 2000, an increase in raw material and energy costs and an unfavorable foreign currency impact. Consolidated operating profit, excluding the $195 million charge for acquired IPR&D in 1999, increased 47% versus the third quarter of 1999. After adjusting 1999 operating profit to exclude $0.5 million from the divestiture of the textile colors business and to include $6.5 million from Witco continuing operations for July and August of 1999, operating profit before special items increased 30%. This increase was primarily due to increased unit volume and lower operating costs, partially offset by higher raw material and energy costs and an unfavorable foreign currency impact. Third quarter ended (In thousands) Witco Continuing 1999 Operations Textile 1999 As Months of Colors As 2000 Reported July & August Business Adjusted Net Sales Polymer Products Polymer Additives $ 238,454 $ 152,813 $ 108,212 $ - $ 261,025 Polymers 82,040 72,467 - - 72,467 Polymer Processing Equipment 82,464 61,485 - - 61,485 Eliminations (2,766) (981) - - (981) 400,192 285,784 108,212 - 393,996 Specialty Products OrganoSilicones 119,044 38,331 76,393 - 114,724 Crop Protection 91,362 73,992 25,366 - 99,358 Other 127,858 102,322 71,326 (36,081) 137,567 338,264 214,645 173,085 (36,081) 351,649 Total Net Sales $ 738,456 $ 500,429 $ 281,297 $(36,081) $ 745,645 Third quarter ended (In thousands) Witco Continuing 1999 Operations Textile 1999 As Months of Colors As 2000 Reported July & August Business Adjusted Operating Profit Polymer Products Polymer Additives $ 18,883 $ 17,166 $ 8,605 $ - $ 25,771 Polymers 17,335 15,990 - - 15,990 Polymer Processing Equipment 7,902 1,998 - - 1,998 44,120 35,154 8,605 - 43,759 Specialty Products OrganoSilicones 19,358 4,267 6,706 - 10,973 Crop Protection 14,328 14,671 619 - 15,290 Other 6,591 4,219 625 (473) 4,371 40,277 23,157 7,950 (473) 30,634 General corporate expense, including amortization (19,185) (14,097) (10,019) - (24,116) Total operating profit before special items 65,212 44,214 6,536 (473) 50,277 Acquired in-process research and development - (195,000) - - (195,000) Total Operating Profit (Loss) $ 65,212 $(150,786) $ 6,536 $ (473) $(144,723) Polymer Products Polymer additives sales of $238.5 million declined 9% from third quarter 1999 adjusted sales of $261.0 million, of which 3% was due to lower foreign currency translation. Plastic additives sales decreased 10% mainly as a result of lower unit volume and unfavorable foreign currency translation of 4%. Rubber chemicals sales were up 1% with higher unit volume and pricing more than offsetting lower foreign currency translation of 2%. Urethane chemicals sales declined 18% as a result of lower unit volume (due primarily to the rationalization of lower margin business) and lower foreign currency translation of 5%. Operating profit of $18.9 million was down 27% from an adjusted $25.8 million in the third quarter of 1999 primarily due to higher raw material and energy costs and lower sales volume. Polymers sales of $82.0 million were up 13% from the third quarter of 1999. EPDM sales rose 14% primarily due to higher unit volume and a partial recovery of higher raw material and energy costs through increased pricing. Urethane sales increased 12% due primarily to greater industry demand, particularly in the recreation market. Operating profit of $17.3 million was 8% above the third quarter of 1999 primarily due to increased sales, partially offset by higher raw material and energy costs. Polymer processing equipment sales of $82.5 million rose 34% from the third quarter of 1999 due primarily to greater unit volume. Operating profit of $7.9 million increased approximately threefold from the prior year due primarily to higher sales. Backlog at the end of September was $113 million, unchanged from the end of 1999. Specialty Products OrganoSilicones sales of $119.0 million increased 4% from an adjusted $114.7 million in the third quarter of 1999. The increase was due to greater unit volume attributable to industry wide growth and increased market share, partially offset by lower foreign currency translation of 3%. Operating profit of $19.4 million was up 76% from an adjusted $11.0 million in the third quarter of 1999 mainly due to higher sales and lower operating costs. Crop protection sales of $91.4 million declined 8% from adjusted third quarter 1999 sales of $99.4 million, of which 2% was due to lower foreign currency translation. Actives and surfactants sales were both down primarily as a result of lower unit volume and unfavorable foreign currency translation. Operating profit of $14.3 million was 6% below an adjusted $15.3 million in the third quarter of 1999 due primarily to the decline in sales, offset in part by lower operating costs. Other sales of $127.9 million declined 7% from adjusted third quarter 1999 sales of $137.6 million. Petroleum additives sales decreased 12% due to lower unit volume primarily attributable to the rationalization of lower margin business associated with the shutdown of the Gretna plant. Refined products sales were down 2% as lower unit volume more than offset higher selling prices (which partially offset increased raw material costs). Industrial Colors and Glycerine/fatty acids sales declined 7% and 11%, respectively, mainly due to lower unit volume. Operating profit of $6.6 million was 51% higher than adjusted 1999 operating profit of $4.4 million primarily as a result of reduced operating costs. Other Selling, general and administrative expenses of $95.7 million increased $16.1 million, or 20%, versus the third quarter of 1999 primarily as a result of the inclusion of a full quarter of Witco operations. This increase was partially offset by a $4.8 million credit attributable to the reversal of performance based compensation costs recorded in prior quarters. Depreciation and amortization (up 49%) and research and development costs (up 26%) also increased primarily as a result of the inclusion of a full quarter of Witco operations. Interest expense of $30.9 million increased 76% primarily as a result of the inclusion of a full quarter of Witco operations. The effective tax rate of 31.5% decreased from 37.5%, excluding the impact of acquired IPR&D in 1999, primarily due to an effective tax rate adjustment in the third quarter of 2000 that reduced the effective tax rate for the nine months of 2000 to 37%. YEAR-TO-DATE RESULTS Overview Consolidated net sales of $2,310.4 million for the first nine months of 2000 increased $1,004.5 million from the comparable period in 1999. After adjusting 1999 net sales to exclude $116 million from the divestiture of the textile colors business, and to include $1,148.7 million from Witco continuing operations for the first eight months of 1999, net sales decreased 1%. This decrease was primarily the result of negative foreign currency impact, mainly the Euro. International sales, including U.S. exports, were 46% of total sales, up from 43% in the first nine months of 1999. After adjusting international sales for the first nine months of 1999 to include Witco sales for the first eight months of 1999, international sales, including U.S. exports, decreased 1% in 2000. Net earnings for the first nine months were $92.8 million, or $0.81 per common share diluted, as compared to a net loss of $84.0 million, or $1.17 per common share diluted, in the first nine months of 1999. Net earnings before after-tax special items were $92.8 million, or $0.81 per common share diluted, as compared to $85.4 million, or $1.19 per common share diluted, in the first nine months of 1999. Gross margin as a percentage of sales was 32.5% for the first nine months of 2000 as compared to 36.8% for the first nine months of 1999. The decrease was primarily due to the impact of including Witco operations for the entire nine months of 2000, the increase in raw material and energy costs and an unfavorable foreign currency impact. Consolidated operating profit, excluding the $195 million charge for acquired IPR&D in 1999, increased 32.2% versus the first nine months of 1999. After adjusting 1999 operating profit to exclude $7.9 million from the divestiture of the textile colors business and to include $62.4 million from Witco continuing operations for the first eight months of 1999, operating profit before special items increased less than 2%. Nine months ended (In thousands) Witco Continuing Operations 1999 (January Textile 1999 As through Colors As 2000 Reported August) Business Adjusted Polymer Products Polymer Additives $ 748,952 $ 351,984 $ 430,440 $ - $ 782,424 Polymers 249,355 230,613 - - 230,613 Polymer Processing Equipment 231,594 231,724 - - 231,724 Eliminations (10,195) (981) - - (981) 1,219,706 813,340 430,440 - 1,243,780 Specialty Products OrganoSilicones 367,734 38,331 306,630 - 344,961 Crop Protection 330,706 221,050 116,438 - 337,488 Other 392,214 233,174 295,164 (115,983) 412,355 1,090,654 492,555 718,232 (115,983) 1,094,804 Total Net Sales $2,310,360 $1,305,895 $1,148,672 $ (115,983) $2,338,584 Operating Profit Polymer Products Polymer Additives $ 63,176 $ 42,729 $ 34,164 $ - $ 76,893 Polymers 55,907 61,879 - - 61,879 Polymer Processing Equipment 20,090 18,899 - - 18,899 139,173 123,507 34,164 - 157,671 Specialty Products OrganoSilicones 66,664 4,267 40,055 - 44,322 Crop Protection 74,690 68,953 13,411 - 82,364 Other 22,149 19,495 10,264 (7,898) 21,861 163,503 92,715 63,730 (7,898) 148,547 General corporate expense, including amortization (61,502) (33,730) (35,467) - (69,197) Total operating profit before special items 241,174 182,492 62,427 (7,898) 237,021 Acquired in-process research and development - (195,000) - - (195,000) Total Operating Profit (Loss) $ 241,174 $ (12,508) $ 62,427 $ (7,898) $ 42,021 Polymer Products Polymer additives sales of $749.0 million were down 4% from an adjusted $782.4 million for the first nine months of 1999, of which 3% was due to an unfavorable foreign currency translation. Plastic additives sales declined 5% primarily due to a lower foreign currency translation of 4%. Rubber chemicals sales were down 2% due to lower pricing and a 1% negative foreign currency translation, partially offset by higher unit volume. Urethane chemicals sales decreased 7% mainly as a result of a 3% adverse foreign currency translation and lower unit volume (due primarily to the rationalization of lower margin business). Operating profit of $63.2 million declined 18% from an adjusted $76.9 million for the first nine months of 1999 primarily due to lower rubber chemicals selling prices and higher raw material and energy costs. Polymer sales of $249.4 million rose 8% from $230.6 million for the first nine months of 1999. EPDM sales increased 6% mainly as a result of higher unit volume and a partial recovery of increased raw material and energy costs through higher pricing. Urethane sales rose 11% mainly due to an industry wide increase in demand, particularly in the recreation market. Operating profit of $55.9 million was 10% lower than the prior year mainly due to higher raw material and energy costs, partially offset by the impact of increased sales. Polymer processing equipment sales of $231.6 million were relatively unchanged from $231.7 million for the first nine months of 1999. An increase in unit volume was offset by a 3% unfavorable foreign currency translation. Operating profit of $20.1 million increased 6% over the first nine months of 1999 mainly due to an increase in unit sales volume. Specialty Products OrganoSilicones sales of $367.7 million increased 7% from adjusted sales of $345.0 million for the first nine months of 1999. The growth was primarily due to an increase in industry demand and a greater market share, partially offset by a 2% lower foreign currency translation. Operating profit of $66.7 million was up 50% from an adjusted $44.3 million for the first nine months of 1999 primarily due to higher unit sales volume and lower costs. Crop protection sales of $330.7 million were 2% behind an adjusted $337.5 million for the first nine months of 1999. The decline was mainly due to an adverse foreign currency translation of 1% and an unfavorable product mix. Operating profit of $74.7 million declined 9% from an adjusted $82.4 million for the first nine months of 1999 mainly due to higher raw material costs and an unfavorable product sales mix. Other sales of $392.2 million decreased 5% from an adjusted $412.4 million for the first nine months of 1999. Petroleum additives sales were down 7% due to lower unit volume mainly associated with the closure of the Gretna plant. Refined products sales declined 3% of which 2% was attributable to lower foreign currency translation. Industrial Colors and Glycerin/fatty acids sales decreased 4% and 6% respectively, due to lower selling prices and reduced unit volume. Operating profit of $22.1 million was up 1% from an adjusted $21.9 million for the first nine months of 1999 mainly due to reduced operating costs, partially offset by higher raw material and energy costs and lower sales. Other Selling, general and administrative expenses of $318.5 million increased 59% versus the first nine months of 1999 primarily as a result of the inclusion of an additional eight months of Witco operations. Depreciation and amortization (up 100%) and research and development costs (up 70%) also increased primarily as a result of the inclusion of an additional eight months of Witco operations. Interest expense of $88.8 million increased 103% primarily as a result of the inclusion of Witco operations. Other expense of $5.1 million increased 19% from 1999, after excluding the gain of $42.1 million from the divestiture of the specialty ingredients business, primarily due to the inclusion of an additional eight months of Witco operations. The effective tax rate of 37.0% increased slightly from 36.4%, excluding the impact of acquired IPR&D in 1999, for the first nine months of 1999. LIQUIDITY AND CAPITAL RESOURCES The September 30, 2000 working capital balance of $377.4 million increased $235.6 million from the year-end 1999 balance of $141.8 million, and the current ratio increased to 1.52 from 1.14. The increases in working capital and the current ratio were primarily due to the decrease in total current liabilities, including accrued expenses, accounts payable and short-term borrowings. Days sales in receivables increased to 48 days for the first nine months of 2000, versus 44 days for the first nine months of 1999, mainly due to the inclusion of an additional eight months of Witco operations. Inventory turnover increased to 3.7, compared to 3.1 for the same period of 1999, primarily the result of including an additional eight months of Witco operations. Net cash provided by operations of $112.6 million increased $84.0 million from the net cash provided by operations of $28.6 million in the first nine months of 1999, mainly due to a $48.2 million income tax payment in 1999 related to the 1998 Gustafson gain, and the inclusion of an additional eight months of Witco operations in 2000. Cash provided by operations and the proceeds from the issuance of the 8.5% Senior Notes were used primarily to reduce borrowings under the Company's revolving credit agreements, finance capital expenditures, pay merger costs, repurchase common shares, make dividend payments and repurchase accounts receivable under the Company's accounts receivable programs. The Company's debt to total capital ratio increased to 67% from 65% at year-end 1999. The Company's future liquidity needs are expected to be financed from operations. On March 7, 2000, the Company issued $600 million of Senior Notes due 2005 with a coupon rate of 8.5%. Effective March 24, 2000, the Company swapped $300 million of this amount into a variable interest rate contract (three month LIBOR plus fixed spread of 1.2225%) that expires on March 15, 2005. The rate on the swap contract was 7.9% at September 30, 2000. On June 9, 2000, the Company exchanged the $600 million Senior Notes, which were not registered with the Securities and Exchange Commission for public trading, for identical securities that are registered. On March 10, 2000, the Company amended the amount of its $1 billion senior unsecured revolving credit facility to $600 million. Of this amount, $200 million is available through October 2000 and $400 million through October 2004. On October 26, 2000, the Company renewed $192 million of its $200 million facility, which will be available through October 2001. Borrowings on these facilities are at various rate options to be determined on the date of borrowing. Borrowings under these agreements amounted to $265 million at September 30, 2000 and carried a weighted average interest rate of 7.4%. In addition, the Company has available accounts receivable securitization programs to sell up to $182 million of domestic accounts receivable to agent banks. As of September 30, 2000, $151.8 million of domestic accounts receivable had been sold under these programs. On April 19, 2000, the Company announced that it was exploring strategic alternatives, including the possible sale, for its Refined Products business. On May 22, 2000, the Company announced that it was in preliminary discussions with a select group of strategic buyers for the sale of its Industrial Specialties business. The Company has made progress with respect to both divestitures, albeit at a slower pace than originally anticipated. The Company expects the divestitures to be completed early in 2001, with the proceeds used to pay down debt and to repurchase common shares. 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. During the first nine months of 2000, the Company repurchased 3.9 million common shares, and from November 1999 to date, has repurchased 6.8 million shares at an average price of $11.91 per share. Capital expenditures for the first nine months of 2000 amounted to $108.1 million as compared to $65.4 million during the same period of 1999. The increase is primarily due to the inclusion of an additional eight months of Witco operations. Capital expenditures are expected to approximate $160 million in 2000, primarily related to the Company's replacement needs and expansion and improvement of domestic and foreign facilities. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 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 SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which amends some of the provisions of SFAS 133. While the impact of these pronouncements is dependent on the fair value of our derivatives and related financial instruments on the date of adoption, it is not expected to have a material impact on the earnings and financial position of the Company. The Company will adopt the provisions of SFAS 133 and SFAS 138 on January 1, 2001. 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, 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 (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. The Company continually 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 September 30, 2000, the Company's reserves for environmental remediation activities totaled $176.5 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 or liquidity. While the Company believes it is unlikely, the resolution of these environmental matters could have a material adverse effect on the Company's consolidated results of operations or cash flows in any given year if a significant number of these matters are resolved unfavorably. 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. FORWARD-LOOKING STATEMENTS Certain statements made in this Form 10-Q 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 assurances that the actual results will not differ materially from those suggested in such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK Refer to the Market Risk & Risk Management Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K for the year ended December 31, 1999. The fair market value of long-term debt is subject to interest rate risk. The Company's long-term debt amounted to $1,483.4 million at September 30, 2000. The fair market value of such debt was $1,495.4 million, and with respect to notes, has been determined based on quoted market prices. On March 7, 2000, the Company issued $600 million of Senior Notes due 2005 with a coupon rate of 8.5%. Effective March 24, 2000, the Company swapped $300 million of this amount into a variable interest rate contract (three month LIBOR plus fixed spread of 1.2225%) that expires on March 15, 2005. The rate on the swap contract was 7.9% at September 30, 2000. There have been no other significant changes in market risk since December 31, 1999. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description 27* Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter for which this report is filed. * Copies of these Exhibits are annexed to this report on Form 10-Q provided to the Securities and Exchange Commission. CROMPTON CORPORATION Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CROMPTON CORPORATION (Registrant) /s/ Peter Barna Date: November 13, 2000 Peter Barna Senior Vice President and Chief Financial Officer /s/ Barry J. Shainman Date: November 13, 2000 Barry J. Shainman Secretary