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, 2001
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, 2001
Common Stock - $.01 par value 113,009,782
CROMPTON CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Accompanying Notes
Consolidated Statements of Operations (Unaudited)
- Third quarter and nine months ended 2001 and 2000 2
Consolidated Balance Sheets - September 30, 2001
(Unaudited) and December 31, 2000 3
Consolidated Statements of Cash Flows (Unaudited)
- Nine months ended 2001 and 2000 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
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 2001 and 2000
(In thousands of dollars, except per share data)
Third quarter ended Nine months ended
2001 2000 2001 2000
Net sales $ 651,921 $ 738,456 $ 2,113,889 $ 2,310,360
Cost of products sold 454,608 510,914 1,472,197 1,559,424
Selling, general and
administrative 105,105 95,736 316,810 318,482
Depreciation and
amortization 46,887 45,284 140,604 135,968
Research and
development 20,973 20,609 62,206 66,145
Facility closures,
severance and
related costs (a) 95,936 - 95,936 -
Equity (income)loss 2,342 701 (5,466) (10,833)
Operating profit (loss) (73,930) 65,212 31,602 241,174
Interest expense 27,277 30,944 83,762 88,839
Other expense 1,692 2,803 4,389 5,076
Earnings (loss)
before income taxes (102,899) 31,465 (56,549) 147,259
Income taxes
(benefit) (34,691) 9,905 (18,005) 54,485
Net earnings (loss) $ (68,208) $ 21,560 $ (38,544) $ 92,774
Basic earnings (loss)
per common share $ (.60) $ .19 $ (.34) $ .81
Diluted earnings
(loss) per common
share $ (.60) $ .19 $ (.34) $ .81
Dividends declared
per common share $ .05 $ .05 $ .15 $ .15
(a) Excludes $7,135 included in cost of products sold.
See accompanying notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2001 (Unaudited) and December 31, 2000
(In thousands of dollars)
September 30, December 31,
2001 2000
ASSETS
CURRENT ASSETS
Cash $ 10,810 $ 20,777
Accounts receivable 257,908 323,097
Inventories 536,479 552,386
Other current assets 184,275 180,635
Total current assets 989,472 1,076,895
NON-CURRENT ASSETS
Property, plant and
equipment 1,126,788 1,182,087
Cost in excess of acquired
net assets 919,205 938,792
Other assets 340,270 330,553
$ 3,375,735 $ 3,528,327
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 16,257 $ 27,429
Accounts payable 268,571 234,955
Accrued expenses 288,238 306,680
Income taxes payable 108,746 127,950
Other current liabilities 15,118 18,449
Total current liabilities 696,930 715,463
NON-CURRENT LIABILITIES
Long-term debt 1,455,865 1,479,394
Postretirement health
care liability 205,855 206,469
Other liabilities 339,728 373,025
STOCKHOLDERS' EQUITY
Common stock 1,194 1,194
Additional paid-in capital 1,051,554 1,051,371
Accumulated deficit (189,372) (133,864)
Accumulated other
comprehensive income (112,455) (86,221)
Treasury stock at cost (73,564) (78,504)
Total stockholders' equity 677,357 753,976
$ 3,375,735 $ 3,528,327
See accompanying notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended 2001 and 2000
(In thousands of dollars)
Increase (decrease) in cash 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (38,544) $ 92,774
Adjustments to reconcile net
earnings (loss) to net cash
provided by operations:
Facility closures, severance and
related costs 103,071 -
Depreciation and amortization 140,604 135,968
Equity income (5,466) (10,833)
Changes in assets and liabilities,
net (90,401) (105,349)
Net cash provided by operations 109,264 112,560
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (101,328) (108,136)
Merger related expenditures (4,288) (48,798)
Other investing activities 6,788 (25,303)
Net cash used in investing
activities (98,828) (182,237)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on senior notes - 593,754
Payments on long-term borrowings (22,540) (413,972)
Payments on short-term borrowings (12,173) (46,052)
Sales (repurchases) of accounts
receivable 27,481 (12,928)
Treasury stock acquired - (48,453)
Dividends paid (16,964) (17,114)
Other financing activities 4,319 6,203
Net cash (used in) provided by
financing activities (19,877) 61,438
CASH
Effects of exchange rate changes on
cash (526) (677)
Change in cash (9,967) (8,916)
Cash at beginning of period 20,777 10,543
Cash at end of period $ 10,810 $ 1,627
See accompanying notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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 $22.4 million at September 30,
2001 and $22.1 million at December 31, 2000.
Accumulated depreciation amounted to $641.6 million at
September 30, 2001 and $562.6 million at December 31,
2000.
Accumulated amortization of cost in excess of acquired
net assets amounted to $93.4 million at September 30,
2001 and $73.8 million at December 31, 2000.
Accumulated amortization of patents, trademarks and
other intangibles included in other assets amounted to
$158.3 million at September 30, 2001 and $148.4 million
at December 31, 2000.
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
2000 Annual Report on Form 10-K.
MERGER ACCRUALS
As a result of the merger of Crompton and Knowles
Corporation and Witco Corporation on September 1, 1999
(the "Merger"), the Company recorded merger related
accruals as a component of goodwill, of which $25.3
million remained at December 31, 2000. During the
first nine months of 2001, these accruals were reduced
by payments of $4.3 million and non-cash charges of
$0.7 million.
Also, as a result of the Merger, the Company recorded
other accruals, of which $7.1 million remained at
December 31, 2000. During the first nine months of 2001,
payments of $1.8 million and non-cash charges of $0.8
million were made against these other accruals.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
As a result of the cost reduction initiative announced in
July 2001, the Company recorded in the third quarter a
pre-tax charge for facility closures, severance and
related costs of $103.1 million (of which $7.1 million is
included in cost of products sold), summarized as follows:
Severance Asset Other
and Write-offs Facility
Related and Closure
Costs (a) Impairments (b) Costs (c) Total
Third quarter
charge $35,710 $43,301 $24,060 $103,071
Cash payments (4,532) - (103) (4,635)
Non-cash charges (6,706) (43,301) (7,135) (57,142)
Balance at
Sept. 30, 2001 $24,472 $ - $16,822 $ 41,294
(a) Includes severance at various sites and pension
curtailments related to closed sites.
(b) Includes primarily asset write-offs and impairments
related to closed sites, and the write-down of an
equity investment relating to the impairment of assets
of an affiliate.
(c) Includes primarily demolition, decontamination and
decommissioning costs and inventory write-offs related
to closed sites.
COMMON STOCK
As of September 30, 2001, there were 119,372,359 common
shares issued and 113,174,323 common shares outstanding
at $.01 par value.
INVENTORIES
Components of inventories are as follows:
(In thousands) September 30, December 31,
2001 2000
Finished goods $ 405,830 $ 421,200
Work in process 29,716 29,610
Raw materials and supplies 100,933 101,576
$ 536,479 $ 552,386
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
2001 2000 2001 2000
Weighted average
common shares
outstanding 113,141 113,599 113,075 113,938
Effect of dilutive
stock options and
other equivalents - 502 - 1,211
Weighted average
common and common
equivalent shares
outstanding 113,141 114,101 113,075 115,149
COMPREHENSIVE INCOME (LOSS)
An analysis of the Company's comprehensive income (loss)
follows:
(In thousands) Third quarter ended Nine months ended
2001 2000 2001 2000
Net earnings (loss) $ (68,208) $ 21,560 $(38,544) $ 92,774
Other comprehensive
income (expense):
Foreign currency
translation
adjustments 19,110 (31,377) (18,937) (43,320)
Other (6,766) 34 (7,297) 105
Comprehensive income
(loss) $ (55,864) $ (9,783) (64,778) $ 49,559
The components of accumulated other comprehensive income
(loss) at September 30, 2001 and December 31, 2000
are as follows:
September 30, December 31,
(In thousands) 2001 2000
Foreign currency translation
adjustments $ (102,770) $ (83,833)
Other (9,685) (2,388)
Accumulated other
comprehensive income (loss) $ (112,455) $ (86,221)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities"
(the "Statements"). In accordance with the transition
provisions of the Statements, the Company recorded in
the first quarter an after-tax gain of $346,000 to recognize
at fair value all derivatives that were designated as fair
value hedging instruments. The pre-tax gain of $567,000 is
included in other expense in the statement of operations.
The Company also recorded in the first quarter a loss of
$234,000 as a component of accumulated other comprehensive
income (AOCI) to recognize at fair value all derivatives
that were designated as cash flow hedging instruments.
The Company also has option contracts that effectively
allow it to buy and sell shares of its common stock at
various strike prices. Through June 30, 2001, these
contracts were recorded on the balance sheet at fair
value with changes in market price recorded in earnings.
Effective July 2, 2001, due to anticipated volatility in
the stock price, the Company designated a portion of its
equity option contracts as cash flow hedges of the risk
associated with the unvested, unpaid awards under its
long-term incentive plans. In accordance with SFAS
No. 133, the changes in market value from July 2, 2001
through the balance sheet date, related to the option
contracts designated and effective as hedges, have been
recorded as a component of AOCI. Such amount, which is
subject to changes in the stock price, will be amortized
ratably to earnings over the remaining service periods
of the hedged long-term incentive plans. Based on the
September 30, 2001 market price, the anticipated
reclassification to earnings over the next 12 months
will be approximately $4.8 million.
For the quarter and nine months ended September 30, 2001,
the difference between the change in the market value
of all fair value hedge contracts and the change in the
market value of the hedged items was not significant. For
the quarter and nine months ended September 30, 2001, the
Company recorded a loss of $6,803,000 and $7,067,000,
respectively, as a component of AOCI to recognize the
change in fair value of all derivatives that are
designated as cash flow hedging instruments. These
losses are net of $1.4 million reclassified from AOCI to
earnings in the third quarter related to the portion of
the option contracts designated and effective as cash flow
hedges.
BUSINESS SEGMENT DATA
(In thousands) Third quarter ended Nine months ended
2001 2000 2001 2000
Net Sales
Polymer Products
Polymer
Additives $ 208,735 $ 238,454 $ 679,262 $ 748,952
Polymers 68,117 82,040 227,049 249,355
Polymer Processing
Equipment 40,966 82,464 157,828 231,594
Eliminations (4,113) (2,766) (10,787) (10,195)
313,705 400,192 1,053,352 1,219,706
Specialty Products
OrganoSilicones 107,800 119,044 328,277 367,734
Crop Protection 99,851 91,362 332,026 330,706
Other 130,565 127,858 400,234 392,214
338,216 338,264 1,060,537 1,090,654
Total net sales $ 651,921 $ 738,456 $2,113,889 $2,310,360
Operating Profit
Polymer Products
Polymer
Additives $ 9,057 $ 18,883 $ 31,770 $ 63,176
Polymers 11,110 17,335 38,212 55,907
Polymer
Processing
Equipment (6,719) 7,902 (9,944) 20,090
13,448 44,120 60,038 139,173
Specialty Products
OrganoSilicones 13,736 19,358 38,866 66,664
Crop Protection 13,997 14,328 72,889 74,690
Other 7,138 6,591 21,182 22,149
34,871 40,277 132,937 163,503
General corporate
expense, including
amortization (19,178) (19,185) (58,302) (61,502)
Total operating
profit before
special items 29,141 65,212 134,673 241,174
Facility closures,
severance and
related costs (103,071) - (103,071) -
Total operating
profit(loss) $ (73,930) $ 65,212 $ 31,602 $ 241,174
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER RESULTS
Overview
Consolidated net sales of $651.9 million for the third
quarter of 2001 decreased 12% from the comparable period
in 2000. The decrease was primarily the result of the
weak domestic economy (including 1% lower pricing) and a
1% negative foreign currency impact, primarily the Euro.
Specifically, the Company has been affected by persistent
softness in domestic auto production, the dramatic drop
in industrial production and significant weakness in
capital spending for machinery. International sales,
including U.S. exports, were 50% of total sales, up from
46% in the third quarter of 2000.
The net loss for the third quarter was $68.2 million,
or $0.60 per common share, as compared to net earnings of
$21.6 million, or $0.19 per common share, in the third
quarter of 2000. Net earnings before after-tax special
items were $0.1 million, as compared to $21.6 million,
or $0.19 per common share, in the third quarter of 2000.
The decrease before special items was primarily due to
the impact of lower unit volume and pricing.
Gross margin as a percentage of sales was 30.3% for the
third quarter of 2001 as compared to 30.8% for the third
quarter of 2000. The decrease was primarily due to the
inclusion of facility closure costs of $7.1 million in 2001.
Consolidated operating loss was $73.9 million as compared
to operating profit of $65.2 million for the third quarter
of 2000. Consolidated operating profit, excluding the
$103.1 million special charge for facility closures,
severance and related costs in 2001, decreased 55.3%
versus the third quarter of 2000.
Polymer Products
Polymer additives sales of $208.7 million were down from
the prior year by 12%, of which 10% was due to a
decline in unit volume, 1% to lower prices and 1% to
foreign currency translation. Plastic additives sales
declined 8% due mainly to continued weak economic
conditions resulting in lower unit volume and lower
pricing. Rubber chemicals sales decreased 28% due mainly
to a weak automotive market and lower unit sales
resulting from a recently announced price increase.
In light of this, the Company is reassessing its pricing
strategy to maintain its competitiveness in the marketplace.
Urethane chemicals sales declined 2% due primarily to
lower unit volume. Operating profit of $9.1 million was
52% lower than the third quarter of 2000 due mainly to
lower unit volume and lower selling prices.
Polymer sales of $68.1 million declined 17% from the
third quarter of 2000 due mainly to lower domestic unit
volume and a 3% reduction in selling prices. EPDM sales
were down 18% due primarily to lower unit volume and
lower pricing resulting from continued weakness in
domestic automotive and roofing markets. Urethane polymer
sales declined 16% due primarily to a decline in industrial
production. Operating profit of $11.1 million was down 36%
from the third quarter of 2000 due primarily to lower unit
volume and lower selling prices, partially offset by lower
EPDM raw material costs.
Polymer processing equipment sales of $41.0 million were
50% lower than the prior year due primarily to lower
unit volume resulting from severe cutbacks in domestic
capital spending. The lower sales resulted in an
operating loss of $6.7 million, which was $14.6 million
worse than the third quarter of 2000. Backlog at the end
of September was $97 million, down $8 million from the
end of 2000.
Specialty Products
OrganoSilicones sales of $107.8 million were down 9%
from the third quarter of 2000 due to a 5% decline in unit
volume mainly attributable to continued weakness in the
domestic economy, with the remainder due equally to lower
prices and unfavorable foreign currency translation.
Operating profit of $13.7 million was 29% lower than
the prior year due mainly to lower unit volume, lower
selling prices and an unfavorable product mix.
Crop protection sales of $99.9 million were up 9% from
the third quarter of 2000 due to improved unit volume
and a 1% increase in selling prices. Higher international
unit volume was responsible for a 20% increase in actives
sales which more than offset a 6% decline in surfactants
sales. Operating profit of $14.0 million was down 2% from
the prior year due primarily to lower joint venture equity
income, an unfavorable product mix in surfactants and
certain non-recurring income in 2000.
Other sales of $130.6 million were up 2% from the third
quarter of 2000 mainly as a result of higher petroleum
additives sales. Petroleum additives sales rose 15%
mainly due to greater demand attributable to a domestic
motor oil reformulation. Refined products sales declined
1% due primarily to a reduction in unit volume. Industrial
colors and glycerine/fatty acids sales were down 5% and 11%,
respectively, due to lower unit volume and lower selling
prices. Operating profit of $7.1 million increased 8% from
the third quarter of 2000 due mainly to an increase in unit
volume and improved sales mix.
Other
Selling, general and administrative expenses of $105.1 million
increased 10% versus the third quarter of 2000. This increase
was primarily due to the reversal of performance based
compensation costs of $4.8 million in the third quarter of
2000, certain non-recurring income in Crop Protection in 2000
and normal salary and inflationary increases in 2001.
Depreciation and amortization increased 4% as a result of a
higher fixed asset base. Research and development costs
increased less than 2%. Interest expense of $27.3 million
decreased 12% mainly due to lower interest rates on the
Company's borrowings and a decrease in the debt balance
outstanding. The effective tax rate, excluding the impact
of special items, was 36% as compared to 31.5% in the
comparable quarter of 2000. This increase was primarily due
to a tax adjustment recorded in the third quarter of 2000 to
properly reduce the effective tax rate for the first nine
months of 2000 to 37%.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales of $2.1 billion for the first nine
months of 2001 decreased 9% from the comparable period
in 2000. The decrease was primarily the result of the
weak domestic economy and a 2% negative foreign currency
impact, primarily the Euro. International sales, including
U.S. exports, were 49% of total sales, up from 46% for the
first nine months of 2000.
The net loss for the first nine months of 2001 was $38.5
million, or $0.34 per common share, as compared to net
earnings of $92.8 million, or $0.81 per common share, for
the first nine months of 2000. Net earnings before
after-tax special items were $29.8 million, or $0.26 per
common share, as compared to $92.8 million, or $0.81 per
common share, for the first nine months of 2000. The
decrease before special items was primarily due to the
impact of lower sales, higher raw material and energy
costs and unfavorable foreign currency impact, offset in
part by lower manufacturing costs, the reversal of certain
environmental remediation reserves no longer deemed
necessary and a pension curtailment gain.
Gross margin as a percentage of sales was 30.4% for the
first nine months of 2001 as compared to 32.5% for the
first nine months of 2000. The decrease was primarily
due to higher raw material and energy costs, and the
inclusion of facility closure costs ($7.1 million), offset
in part by the reversal of certain environmental
remediation reserves no longer deemed necessary and a
pension curtailment gain. Consolidated operating profit
was $31.6 million as compared to operating profit of
$241.2 million for the first nine months of 2000.
Consolidated operating profit, excluding the $103.1
million special charge for facility closures, severance
and related costs, decreased 44.2% versus the first
nine months of 2000.
Polymer Products
Polymer additives sales of $679.3 million were 9% lower
than the first nine months of 2000, of which 5% was due
to a decline in unit volume, with the balance due equally
to lower prices and unfavorable foreign currency translation.
Plastic additives sales were down 8% due to lower unit volume
and lower pricing attributable to continued weakness in the
domestic economy, and unfavorable foreign currency translation.
Rubber chemicals sales declined 15% due mainly to continued
automotive market weakness and lower unit sales resulting from
the recently announced price increases. In light of this, the
Company is reassessing its pricing strategy to maintain its
competitiveness in the marketplace. Urethane chemicals sales
were down 6% due to lower unit volume and unfavorable foreign
currency translation. Operating profit of $31.8 million
was down 50% from the first nine months of 2000 due mainly
to lower unit volume, lower selling prices, and higher raw
material and energy costs.
Polymer sales of $227.0 million were 9% lower than the first
nine months of 2000 due to lower unit volume and unfavorable
foreign currency translation of 1%. EPDM sales declined 10%
due mainly to continued weak demand in the domestic automotive
and roofing markets. Urethane polymer sales decreased 8% due
primarily to lower industrial production. Operating profit of
$38.2 million declined 32% from the first nine months of 2000
due mainly to lower unit volume, and higher raw material
and energy costs.
Polymer processing equipment sales of $157.8 million were down
32% from the prior year due mainly to a dramatic reduction in
domestic capital equipment spending. The $9.9 million operating
loss was $30.0 million worse than the first nine months of 2000
primarily as a result of lower sales.
Specialty Products
OrganoSilicones sales of $328.3 million were 11% lower than the
first nine months of 2000 due to a 7% reduction in unit volume
mainly attributable to the weak domestic economy. The remainder
was due equally to lower selling prices and lower foreign currency
translation. Operating profit of $38.9 million declined 42% from
the prior year due primarily to lower unit volume, lower selling
prices and an unfavorable product mix.
Crop protection sales of $332.0 million were up less than 1% from
the prior year as increases in unit volume and selling prices of
1% each were almost entirely offset by unfavorable foreign currency
translation. Actives sales rose 5% due primarily to a growth in unit
volume, while reduced demand was mainly responsible for a 5% decline
in surfactants sales. Operating profit of $72.9 million was 2% lower
than the first nine months of 2000 due primarily to an unfavorable
surfactants product mix and lower joint venture equity income, offset
in part by higher margin actives sales and a pension curtailment gain.
Other sales of $400.2 million were up 2% over the first nine months
of 2000 due to a 3% increase in prices, partially offset by unfavorable
foreign currency translation. Petroleum additives sales were up
10% due primarily to higher unit volume resulting from a domestic
motor oil reformulation. Refined products sales rose 4% due mainly
to the recovery of increased raw material and energy costs through
higher selling prices. Industrial colors and glycerine/fatty
acids sales declined 10% and 12%, respectively, due to lower unit
volume and lower selling prices. Operating profit of $21.2
million was 4% lower than the prior year as higher raw material
and energy costs more than offset improved pricing.
Other
Selling, general and administrative expenses of $316.8 million
decreased 1% versus the first nine months of 2000 primarily as
a result of cost savings initiatives and lower foreign currency
translation. Depreciation and amortization increased 3% as a
result of a higher fixed asset base. Research and development
costs decreased 6% primarily as a result of cost savings
initiatives. Interest expense of $83.8 million decreased 6%
mainly due to lower interest rates on the Company's borrowings
and a decrease in the debt balance outstanding. The effective
tax rate, excluding the impact of special items, was 36% as
compared to 37% for the first nine months of 2000. This
decrease was primarily a result of a change in earnings mix
to jurisdictions with more favorable tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The September 30, 2001 working capital balance of $292.5 million
decreased $68.9 million from the year-end 2000 balance of
$361.4 million, and the current ratio decreased to 1.4 from 1.5.
The decreases in working capital and the current ratio were
primarily due to a decrease in accounts receivable and an increase
in accounts payable. Days sales in receivables decreased to 40
days for the first nine months of 2001, versus 48 days for the
first nine months of 2000, primarily due to the impact of accounts
receivable securitization programs and an increased focus on
collection efforts. Inventory turnover decreased to 3.5 from 3.7
for the same period of 2000 primarily as a result of an
accelerating sales decline which more than offset the reduction
in inventory.
Net cash provided by operations of $109.3 million decreased $3.3
million from the net cash provided by operations of $112.6 million
during the first nine months of 2000. The decrease was primarily
the result of lower earnings, partially offset by improvements in
accounts receivable, inventory and accounts payable. Net cash
provided by operations and the reduction in cash, together with
proceeds from the sales of accounts receivable and the equity
interest in Yorkshire Group PLC, were used primarily to reduce
borrowings under the Company's revolving credit agreements,
finance capital expenditures and make dividend payments. The
Company's debt to total capital ratio increased slightly to 68%
from 67% at year-end 2000. The Company's future liquidity needs
are expected to be financed from operations.
In September 2001, the Company renewed $125 million of its $192
million 364-day senior unsecured revolving credit facility, which
is available through September 2002. In addition, the Company
amended certain financial covenants relating to its 364-day
facility and its $400 million five-year senior unsecured credit
facility, which is available through October 2004. Borrowings on
these facilities are at various rate options to be determined
on the date of borrowing. Borrowings under these agreements
amounted to $215 million at September 30, 2001 and carried a
weighted average interest rate of 4.22%.
In addition, the Company has an accounts receivable securitization
program to sell up to $200 million of domestic accounts receivable
to agent banks. As of September 30, 2001, $171 million of domestic
accounts receivable had been sold under these programs. In
addition, the Company's European subsidiaries have three separate
agreements to sell accounts receivable to agent banks. The first
agreement allows for the sale of up to $32 million of accounts
receivable, of which $5 million had been sold as of September 30,
2001. The second agreement allows for the sale of up to $21 million
of accounts receivable, of which $13 million had been sold as of
September 30, 2001. The third agreement allows for the sale of up
to 100% of eligible accounts receivable, of which $57 million had
been sold as of September 30, 2001.
On March 24, 2001, the Company terminated the $300 million variable
interest rate swap contract related to its 8.5% Senior Notes. The
Company received $21.9 million of cash proceeds from the settlement
of the contract, which represented the market value of the contract
on the date of termination. These proceeds were used to pay down
debt. In accordance with SFAS No. 133 and SFAS No. 138, as they
relate to fair-value hedge accounting, the $21.9 million has been
recorded as an increase to the carrying amount of the Senior Notes
and will be amortized to earnings over the life of the notes.
On March 28, 2001, the Company sold its equity interest in Yorkshire
Group PLC for $7 million. The sale resulted in a pre-tax loss of
$1.5 million (included in other expense). These proceeds were used
to pay down debt.
On July 2, 2001, the Company announced a restructuring program that
is expected to lower annual operating costs by approximately $60
million by the end of 2002. The savings will be realized through
a program of facility consolidation and workforce reduction, together
with improvements in procurement and working capital control.
During the third quarter, the Company recorded a pre-tax charge
of $103.1 million ($68.3 million after-tax) for facility closures,
severance and other related costs. Additional related charges
(estimated at under $10 million) are expected to be recorded in
the fourth quarter as events trigger recognition under generally
accepted accounting principles.
On October 29, 2001, the Company announced that it will relocate
its corporate headquarters from Greenwich to Middlebury, CT by the
end of 2002. The Company plans to move personnel during the second
half of 2002 and to sublease the Greenwich facility. The Company
estimates pre-tax charges of approximately $20 million relating to
the move (approximately 50% non-cash), and expects to have
pre-tax savings of $8 to $10 million per year.
The Company is continuing work on the divestitures of both its
Refined Products and Industrial Specialties businesses. The
Company anticipates that the divestitures will take additional
time due to unfavorable market conditions. The proceeds from
these divestitures will be used to pay down debt.
Capital expenditures for the first nine months of 2001 amounted
to $101.3 million as compared to $108.1 million during the same
period of 2000. The decrease is primarily due to a reduction
in spending along with the completion of the Greentyre project
in Italy. Capital expenditures are expected to approximate $140
million in 2001, primarily related to the Company's replacement
needs and expansion and improvement of domestic and foreign
facilities.
ACCOUNTING DEVELOPMENTS
Effective January 1, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities." For further details, see the
Derivative Instruments and Hedging Activities footnote included
in the Notes to Consolidated Financial Statements (Unaudited)
section of this Form 10-Q.
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting. It also
specifies criteria that must be met in order for intangible assets
acquired in a purchase combination to be recognized apart from
goodwill. SFAS No. 142 requires that goodwill and intangible
assets with indefinite lives no longer be amortized, but rather be
tested for impairment at least annually. Other intangible assets
will continue to be amortized over their useful lives. The
provisions of SFAS No. 141 are effective immediately, with the
exception of transitional provisions related to business
combinations initiated prior to June 30, 2001, which are delayed
until the adoption of SFAS No. 142. The provisions of SFAS
No. 142 are required to be adopted effective January 1, 2002.
The Company will apply the transitional provisions of SFAS
No. 141 and the provisions of SFAS No. 142 beginning in the first
quarter of 2002. The Company will evaluate its existing intangible
assets and goodwill and make any necessary reclassifications in
order to conform with the new criteria in SFAS No. 141. In
accordance with SFAS No. 142, the Company will reassess the useful
lives of its intangible assets and will test its goodwill and
intangible assets for impairment and recognize any impairment
loss as a cumulative effect of change in accounting principle in
2002. The Company expects that the application of the
non-amortization provisions of SFAS No. 142 will result in an
annual decrease in goodwill amortization expense of approximately
$26 million. At this time it is not practicable to estimate the
impact of adopting the impairment provisions of SFAS No. 142 on
the earnings and financial position of the Company.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires companies
to record a liability for asset retirement obligations
associated with the retirement of long-lived assets. Such
liabilities should be recorded at fair value in the period in
which a legal obligation is created, which typically would be
upon acquisition or completion of construction. The provisions
of SFAS No. 143 are effective for fiscal years beginning after
June 15, 2002. The Company is in the process of reviewing the
provisions of SFAS No. 143 and has not yet determined what the
effect will be on its earnings and financial position.
Also in August 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 related to the recognition and measurement of the
impairment of long-lived assets to be held and used and the
measurement of long-lived assets to be disposed of, but excludes
goodwill from its scope and provides additional guidance on
the accounting for long-lived assets held for sale. The provisions
of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001. The Company does not expect that the impact
of the implementation of SFAS No. 144 will materially differ from
the impact of the existing requirements under SFAS No. 121.
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 (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.
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, 2001, the Company's reserves for environmental remediation
activities totaled $142 million. It is 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 the Company's
consolidated results of operations 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 December 31, 2001, transactions may be
conducted in either the Euro or the participating countries
national currency. However, by January 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, including, but
not limited to, general economic conditions, energy and raw
material prices and availability, production capacity, changes
in interest rates and foreign currency exchange rates, changes
in technology, market demand and customer requirements,
expected restructuring activities and cost reductions, the
enactment of more stringent environmental laws and regulations,
and other risks and uncertainties detailed in the Company's
filings with the Securities and Exchange Commission. These
statements are based on currently available information and
the Company's actual results may differ significantly from the
results discussed. Forward-looking information is intended to
reflect opinions as of the date this Form 10-Q was issued and
such information will not necessarily be updated by the Company.
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, 2000.
The fair market value of long-term debt is subject to interest
rate risk. The Company's long-term debt amounted to $1,456 million
at September 30, 2001. The fair market value of such debt was
$1,482 million which has been determined primarily based on quoted
market prices.
On March 24, 2001, the Company terminated the $300 million variable
interest rate swap contract related to its 8.5% Senior Notes. The
Company received $21.9 million of cash proceeds from the settlement
of the contract, which represented the market value of the contract
on the date of termination. In accordance with SFAS No. 133 and
SFAS No. 138, as they relate to fair-value hedge accounting, the
$21.9 million has been recorded as an increase to the carrying amount
of the Senior Notes and will be amortized to earnings over the life
of the notes.
Effective July 2, 2001, due to anticipated volatility in the stock
price, the Company designated a portion of its equity option contracts
as cash flow hedges of the risk associated with the unvested, unpaid
awards under its long-term incentive plans. In accordance with SFAS
No. 133, the changes in market value from July 2, 2001 through the
balance sheet date, related to the option contracts designated and
effective as hedges, have been recorded as a component of AOCI. Such
amount, which is subject to changes in the stock price, will be
amortized ratably to earnings over the remaining service periods
of the hedged long-term incentive plans. Based on the September
30, 2001 market price, the anticipated reclassification to earnings
over the next 12 months will be approximately $4.8 million.
There have been no other significant changes in market risk since
December 31, 2000.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
(i) Reference is made to Item 3 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, to Part II, Item
1(i) of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001, and to Part II, Item 1(i) of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
for information relating to the Vertac Chemical Corporation site in
Jacksonville, Arkansas. On September 4, 2001, the Registrant filed
a Petition for a Writ of Certiorari with the United States Supreme
Court relating to a finding of arranger liability against Uniroyal
by the United States Court of Appeals for the Eighth Circuit
("Court"). On October 9, 2001, the trial court commenced hearings
pursuant to the April 10, 2001, remand by the Court.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
4.1 $125,000,000 Amended and Restated 364-Day
Credit Agreement dated as of September 24, 2001,
among the Registrant, certain subsidiaries of the
Registrant, various banks, The Chase Manhattan Bank,
as Syndication Agent, Citibank, N.A., as
Administrative Agent, Bank of America, N.A.,
as Documentation Agent and J.P. Morgan Securities
Inc., as Lead Arranger and Sole Bookrunner.
4.2 First Amendment dated as of September 24, 2001 to
the Five-Year Credit Agreement dated as of
October 28, 1999, among the Registrant,
certain subsidiaries of the Registrant,
various banks, The Chase Manhattan Bank, as
Syndication Agent, Citibank, N.A., as
Administrative Agent, Bank of America, N.A.
and Deutsche Bank Alex Brown Inc., as
Co-Documentation Agents, and J.P. Morgan Securities
Inc., as Lead Arranger and Sole Bookrunner.
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
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, 2001 Peter Barna
Senior Vice President
and Chief Financial
Officer
/s/Barry J. Shainman
Date: November 13, 2001 Barry J. Shainman
Secretary