Crompton
Finding better solutions.
2001 Annual Report
Crompton Corporation is a global producer and marketer of specialty chemicals
and polymer products and equipment. The company has approximately 7,300
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 113 million shares of common stock are
traded on the New York Stock Exchange under the symbol CK. Up-to-date
information about the company is available at www.cromptoncorp.com. The
interactive version of this report is at www.cromptoncorp.com/ar2001.
Financial Highlights
(In thousands of dollars, except graph and per share data)
<Table>
<Caption>
2001 2000
Net sales $ 2,718,798 $3,038,430
Operating profit (loss) $ (53,600) $ 268,335
Interest expense $ 109,877 $ 120,476
Net earnings (loss) $ (123,944) $ 89,273
Basic earnings (loss) per share $ (1.10) $ .78
Diluted earnings (loss) per share $ (1.10) $ .78
Total assets $ 3,232,188 $3,528,327
Total debt $ 1,422,624 $1,506,823
Stockholders' equity $ 547,541 $ 753,976
</Table>
Operating profit, EBITDA and net earnings before special items (refer to page
37) are as follows:
<Table>
EBITDA before special items $ 320,361 $ 468,015
Operating profit before special items $ 140,799 $ 291,483
Net earnings before special items $ 15,946 $ 104,273
</Table>
(four bar charts)
Sales (in billions)
Net Earnings (before special items)
EBITDA (before special items)
Total Capital Employed
Fellow Shareholders
To say that 2001 was challenging is an understatement. Like many companies,
Crompton faced one of the most difficult years in memory. However, with our
dedicated employees, a focus on innovation and customer service, and leading
positions in many markets, we are poised for success as the overall economy
improves.
<Page>
High energy and raw-material costs early in the year and steadily declining
demand throughout the year negatively impacted us in 2001. After September 11,
we faced even greater uncertainty with sales coming to a near standstill as the
world contemplated the magnitude of the terrorist attacks. Crompton not only
weathered this particularly difficult time, but we continued to move
forward--streamlining our operations, developing new product applications and
improving processes corporate-wide via Six Sigma methodologies.
From $3.04 billion in 2000, which was our first full year as a merged company,
our sales in 2001 declined by nearly 11 percent to $2.72 billion, primarily due
to weak domestic demand throughout the manufacturing sector. Earnings before
special items of $15.9 million, or $.14 per share, were significantly below the
$104.3 million, or $.91 per share in 2000. Including special items, the net loss
was $123.9 million, or $1.10 per share, compared to net earnings of $89.3
million, or $.78 per share, in 2000.
2001 Accomplishments
In spite of the difficult economic climate in 2001, the Crompton team is proud
of a number of significant accomplishments:
o We reduced our debt by $84 million. Reducing debt is one of our primary
goals, and we expect a significant reduction in 2002 as well.
o We took steps to refine our business portfolio. We divested our industrial
colors and nitrile rubber businesses, resulting in cash proceeds of $35
million. We also realigned some of our business units to better realize
synergies and cross-selling opportunities, and already are seeing
successes with our more market-oriented selling approach.
o We embarked on a new $60 million cost-reduction program, closing several
plants and moving production to our most efficient facilities--with no
interruption in service to our customers.
o We implemented Six Sigma throughout our corporation and realized initial
savings of approximately $7 million. Our goal is a $25 million run rate by
the end of 2002.
o We announced our headquarters' consolidation, which will save an
additional $8-10 million per year and enable us to work together as an
even more efficient team.
o We added capacity in West Virginia that will be used for a broad range of
silanes applications.
o We opened a new production facility for organic-based PVC stabilizers and
are working on a next-generation of organic-based PVC stabilizers that we
can offer to markets in addition to PVC pipe. No other company has equaled
our success with this technology.
Leveraging Business Synergies
As part of our ongoing strategic review process, we regularly examine our
businesses, how they work together and how they can best serve our customers.
One of the key drivers for the 1999 merger of Crompton & Knowles and Witco was
the significant overlap in customers. The most compelling aspect of the combined
portfolio as it stands today is the depth and breadth of products, services and
technology Crompton provides to customers in many industries. We are constantly
pursuing new ways to capitalize on our extensive portfolio and our reputation
for superior customer service.
Crompton is a significant force in the plastics industry, with approximately 45
percent of our business attributable to a broad line of additives and extrusion
equipment. We are using that and other market strengths to promote cross-selling
opportunities throughout our business units. Our goal is to use all of our
technical and marketing expertise to provide solutions to specific industries as
no competitor can. We
<Page>
believe this formula of synergy plus solutions will equal greater sales. Our Web
site, at www.cromptoncorp.com, is organized with this market focus.
Stimulating Growth
We have reduced costs, realized efficiencies and restructured. But we know that
growing revenues is also critical. In addition to our cross-selling initiatives,
we continue to focus on innovation as a key to growth -- challenging our 800
research personnel to develop new products, introduce improved versions of
existing product lines, and create solutions and added value for our customers.
Crompton researchers are working on a new technology platform that will enable
us to modify elastomers and polymers to make them compatible with dissimilar
materials. Such functionality will open up new applications and enable us to
offer patentable products and processes that will provide us with sustainable
new revenue.
Our Crop scientists have developed a successful new mite-control product,
bifenazate, which was introduced in 2001 and is being expanded, with great
success, to additional crops and geographic areas in 2002.
We are realizing increased demand for a host of our recently introduced
performance-enhancing fuel and lubricant additives that meet the latest industry
requirements. When industry requirements changed, we were ready because we were
tuned in to the marketplace and our customers.
We invested $137 million in capital projects in 2001 to maintain and expand
capacity, improve efficiency and maintain environmental standards. This included
a silanes expansion of our Termoli, Italy facility that has enabled us to meet
the growing need for energy-efficient tires and will enable us to introduce
next-generation technology later this year.
The Path Forward
While we expect 2002 to be better than 2001, it will be a transition year with
many challenges. We remain focused on our strategic objectives:
1) Accelerating growth through new product introductions, marketing synergies
and selective capital and R&D spending;
2) Decreasing costs through restructuring, Six Sigma and working capital
management;
3) Reducing debt through cash flow from operations and proceeds from
divestitures; and
4) Focusing on the customer to provide value-added solutions with our products,
services and technology.
The fundamentals of our business are strong. As the economy improves, we are
confident that Crompton is well positioned and operationally leveraged to take
full advantage of an increase in demand and to translate that into accelerated
profit improvement. We appreciate the support of our investors and employees and
look forward to keeping you informed of our progress.
Respectfully yours,
(signature)
Vincent A. Calarco
Chairman, President and
Chief Executive Officer
March 12, 2002
Polymer Additives
<Page>
Crompton serves the polymer industry with unrivaled breadth in its Polymer
Additives products and technologies. The company combines a market-based
business organization with a global manufacturing and sales infrastructure to
serve producers, compounders and fabricators of polymers.
There is growing demand for a new line of organic-based stabilizers for PVC, an
innovative alternative to lead-based heat stabilizers. Crompton offers the
industry's most complete line of metal and metal-free vinyl heat stabilizers.
Royaltuf(R) modified EPDM and Polybond(R) coupling agents are key to the
development of new materials such as wood-plastic composites for decking.
New grades of Naugard(R) inhibitors, polymer modifiers, peroxides and
antioxidants are used in olefins and styrenics manufacturing worldwide.
Crompton offers a comprehensive line of more than 100 different rubber chemical
products. Our Flexzone(R) antiozonants and Naugard(R) antioxidants extend the
life of rubber products that are exposed to ozone and oxygen. Our Delac(R)
accelerators improve the rubber vulcanization process.
Our urethane chemicals, including polyester polyols and dispersions, are key to
the manufacture of solid and foam polyurethanes. Oil-based polyurethanes used in
coatings are being replaced with environmentally friendly, water-based products
like Witcobond(R) dispersions for hard, clear coatings used in wood and other
materials.
THE BUSINESS
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: aluminum alkyls, amides, stearates, white oils, heat
stabilizers, plasticizers, lubricants, peroxides, UV absorbers, slip agents, tin
specialties, antioxidants, antistats, polymer modifiers, foaming agents,
polymerization inhibitors, chemical intermediates, curatives, and dispersants.
Rubber chemicals include: antioxidants, antiozonants, accelerators, foaming
agents, and miscellaneous specialty products. Urethane chemicals include
polyester polyols, polyurethane dispersions, microcellular systems, and
silicones.
Markets Served
Products are sold to producers, compounders and fabricators of vinyl, rubber,
styrenics, polyolefins, and fiberglass. Rubber and plastic applications include:
coatings and adhesives, construction, automotive, transportation, tires,
packaging, flooring, synthetic fibers, and wire and cable.
KEY DEVELOPMENTS OF 2001
Opened new production facility for organic-based PVC stabilizers in Lampertheim,
Germany. Crompton is the first company to commercialize this environmentally
sound alternative to lead-based stabilizers. Began production of Witcothane(R)
polyurethane microcellular systems in Sydney, Australia and Gastonia, North
Carolina. Systems are used to make long-wearing, light-weight shoe soles and
industrial parts.
Formed 85% Crompton-owned joint venture in China, Crompton Danyang Chemical,
Ltd., to supply rubber chemical accelerators to the Asian market.
<Page>
Kroy Building Products manufactures quality vinyl fencing and decking products
using Crompton's Mark(R) and Marklube(R) products. Valvoline uses our
polyurethane dispersions in an innovative, new consumer product. For more on
these and other customer stories...www.cromptoncorp.com/ar2001
Polymers
Crompton Polymers is a global leader in castable urethane prepolymers and EPDM
rubber. Global transportation, construction and industrial markets depend on
unique wear and durability characteristics of our polymers.
With over 200 prepolymer products, we are the world's largest supplier of
castable urethanes. The unique abrasion resistance and durability of our
products are the key to product invention in a wide variety of markets.
Applications for Adiprene(R)/Vibrathane(R) cast urethane prepolymers range from
mining equipment and industrial rolls to golf ball covers and skate wheels.
New formulations of Adiprene(R) LFTDI (low-free toluene diisocyanate) and PPDI
(para-phenylene diisocyanate) prepolymers are growing in demand due to their
high performance and environmentally friendly characteristics, and we have
expanded North American and European plant capacity.
As the largest North American producer of EPDM "crackless rubber," we are one of
the most experienced manufacturers in the world. EPDM withstands heat, sunlight
and ozone without deteriorating. Three Louisiana high-volume production lines
produce Royalene(R) EPDM in a variety of forms to meet the most challenging
customer demands.
We produce over 30 different types of EPDM with varied uses in automotive,
construction, wire and cable, and mechanical goods markets. Automotive weather
stripping, hoses and seals, commercial roofing and wire and cable insulation are
major EPDM applications.
THE BUSINESS
The number one world supplier of castable urethane prepolymers. The number one
manufacturer of EPDM in North America.
Key Products
Abrasion- and wear-resistant castable urethane prepolymers. Heat-, sunlight- and
ozone-resistant EPDM rubber.
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 numerous automotive applications as well as
in roofing, hose, wire & cable insulation, and construction.
KEY DEVELOPMENTS OF 2001
Sold interest in ParaTec, nitrile rubber joint venture, to DESC, our Mexican
partner.
Expanded production of Adiprene(R) low-free polyethers and added capacity for
polyesters in Latina, Italy to serve the European market.
<Page>
Introduced new RoyalEdge(R) EPDM that combines the characteristics of multiple
grades of products into one polymer.
Polymer Processing Equipment
Polymer Processing Equipment manufactures extruders and extrusion systems for
the global plastics and rubber industry. Customers who buy our polymers and
polymer additives can also depend on our Davis-Standard brand for the most
advanced and productive machinery available to make their end products.
With patented feedscrew technology and advanced computer-based controls, our
integrated systems bring value to rubber and plastic extrusion for a wide range
of packaging, construction and automotive products. Recent advancements include
combining multiple technologies into one line to allow our customers to reduce
manufacturing steps and increase productivity. Our advanced Woodtruder(TM)
combines the latest wood fiber processing with plastics extrusion technology. We
have also introduced new technology for extruding foam such as styrene that will
expand applications for the material.
In addition to single- and twin-screw extrusion systems, Davis-Standard is a
leading producer of industrial blow molding systems used to produce outdoor
furniture and toys, and extrusion coating systems for flexible packaging.
With capital spending at a low point in the world economy, our sales demanded
that we implement a lean manufacturing program to better allocate resources
while awaiting a global economic recovery. We work closely with our customers to
develop economical process solutions.
THE BUSINESS
The number one worldwide producer of plastics and rubber single-screw extruders.
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, and plastics.
KEY DEVELOPMENTS OF 2001
Opened new U.K. facility to expand bimetallic barrel and screw manufacturing
capabilities, complementing European extruder capabilities.
Patent granted for DSB(R)-V barrier screw to improve melting and mixing
efficiency of polymer extruders.
CPI Plastics Group Ltd. relies on Davis-Standard extruders to manufacture its
line of thermoplastic materials for wood replacement in decking, furniture and
other products. For the story of CPI Plastics...www.cromptoncorp.com/ar2001
<Page>
OrganoSilicones
OrganoSilicones pioneered silane and silicone technology and now offers more
than 500 silicone-based products that add higher performance, lower cost and the
ability to add market share to customers, whom we regard as partners, all over
the world. We are the world's leading supplier of organofunctional silanes that
can link organic and inorganic materials, providing outstanding adhesion,
durability, abrasion, and chemical resistance properties to coatings, adhesives
and sealants, rubber products, thermoplastics and fiberglass. Our Silsoft(R),
Silwet(R), Magnasoft(R), CoatOSil(R), and SAG(R) specialty silicones enhance the
performance of personal care, household, textile, crop protection, paint and
coatings, adhesives and many other products. They control foam generated in many
process industries, like food, pharmaceuticals, wastewater treatment, paper, and
other industries.
Our sulfur silanes have been fundamental in the development of the newest
generation of passenger car tires. These new tires have less rolling resistance
due to the use of silica instead of carbon black in the rubber compound. The
result is improved tire life, handling and fuel economy.
Our patented Silquest(R) and CoatOSil(R) silane products are key enablers that
make it possible for water-based, more environmentally friendly coatings,
sealants, adhesives and polymer solutions to equal the durability and adhesive
properties of solvent based materials.
Our proprietary XL-PEarl(R) technology is used in the creation of wire, cable
and pipe that is of better quality and performance, yet easier to manufacture.
In the consumer market, our products ease the way for new developments in
hair-care, skin-care and sun-care products and improve the effectiveness of
polishes and cleaners used in the home and car. Our silicones provide silkiness
to clothing, bedding and toweling and other textile products, while our
antifoams control foam in many industries.
In the creation of polyurethane foam, our Niax(R) and Geolite(R) stabilizers,
catalysts and modifiers improve the performance and safety of automotive
seating, appliances, construction and furnishings uses, among other
applications.
THE BUSINESS
Major supplier of specialty silicones and organofunctional silanes serving a
wide variety of industrial and consumer markets.
Key Products
Silane cross linkers, coupling agents and adhesion promoters. Specialty silicone
surfactants, foam control agents and other specialty silicones. Urethane foam
additives, including surfactants, catalysts and modifiers.
Markets Served
Tire and rubber, coatings, adhesives & sealants thermoplastic and fiberglass
used for automotive, construction, and other industrial applications.
Urethane foam used for automotive, appliances, construction, furnishings and
shoes. Personal and household care, textiles and non-wovens, agriculture. Foam
control across most manufacturing processes.
KEY DEVELOPMENTS OF 2001
Brought on line new silanes production capacity at Termoli, Italy and
Sistersville, West Virginia. Proprietary technology reduces manufacturing waste
by 75 percent.
<Page>
Introduced patent-pending Magnasoft(R) Prime(TM) Textile Softener, an
easy-to-use fabric-finishing additive that will impart superior softness and a
silky "hand" to terry cloth, knits and woven goods.
Introduced two new patent-pending, silicone-based products into the personal
care market: Silsoft(R) A-454 Color Retaining Conditioning Agent for hair color
formulations, shampoos, and conditioners; and Silsoft(R) A-553 Conditioner for
clear shampoo.
Introduced four new products to our line of Niax(R) additives for improvement of
foam for automotive, textile and furnishings, and for achieving anti-static
properties of packaging materials without using florine.
Brazil's Natura cosmetics company uses Crompton's specialty silicones in its
skin-, sun- and hair-care products. For more on how we partner for our
customer's success...www.cromptoncorp.com/ar2001
Crop Protection
Crop Protection products enhance crop quality and increase yields of high-value
crops such as nuts, tobacco, cotton, tree and vine fruits, and ornamental
plants.
Our fungicides, miticides, insecticides, herbicides and growth regulants
benefit from a loyal and expanding global customer base that results from
decades of experience with crops and growing conditions. We expand our presence
in worldwide niche markets by developing new products and obtaining
registrations for new uses and geographies.
A large part of our Crop Protection business is related to seed-treatment
products and application systems that assure germination and healthy seedlings.
Vitavax(R) fungicide is one of the world's best selling seed-treatment products
stimulating growth and controlling disease. Gustafson LLC, our joint venture
with Bayer, is the largest producer of seed-treatment formulations and equipment
in North America. Gustafson benefits from selling active ingredients from both
partners and others in proprietary formulations and delivery systems.
Our Industrial Surfactants increase the effectiveness of crop protection active
ingredients.
These surfactants and dispersants alter the wetting characteristics of
products, increasing their ability to spread over and penetrate leaf surfaces.
This allows farmers to use less active ingredients and lower spray volumes.
Industrial surfactants also have a broad range of uses in oilfield
chemicals for well drilling, production and enhanced oil recovery. These markets
have grown in recent years with expanded energy exploration and production.
THE BUSINESS
<Page>
A world leader in seed-treatment products, with the largest producer of
seed-treatment formulations and equipment in North America, our Gustafson joint
venture with Bayer Corporation.
Key Products
Fungicides, miticides, insecticides, herbicides, growth regulants, seed
treatments, and surfactants.
Markets Served
High-value crops such as fruits, nuts, cotton, turf, and ornamentals. Seed
treatments cross all major crop segments and geographies.
KEY DEVELOPMENTS OF 2001
Acramite(R) was introduced into the U.S. for control of mites on a broad range
of crops. This new method of mite control was developed in Crompton laboratories
and is already being successfully marketed in Japan and Korea.
Latin American sales surged 36 percent from 2000. The company introduced a more
efficient distribution system and expanded its sales force.
Dimilin(R) insecticide sales continued very strong worldwide. Prime markets were
locust control in Russia and Kazakhstan, use on Brazilian soybeans and in the
U.S. forestry market.
Acramite(R), bifenazate miticide, has been introduced into the U.S. after
success in the Far East. For more on the
introduction...www.cromptoncorp.com/ar2001
Other Specialties
Our Petroleum Additives unit offers one of the most comprehensive component
product lines to lubricant additive package formulators and manufacturers of
petroleum products for the transportation, industrial, grease, and fuels
markets.
Our performance components allow both our lubricants and fuels customers to meet
demanding new industry specifications for higher performance and advanced
environmental requirements.
More stringent lubricant specifications are increasing sales of new products
such as friction modifiers, antioxidants, anti-wear compounds, and deposit
control additives, all of which are critical to cleaner, more efficient
lubricant systems.
Our high-performance synthetic fluids are finding new markets with automotive
and industrial lubricants makers. Synton(R) PAO synthetic fluids extend drain
intervals and enhance high-temperature performance in machinery and gearboxes.
<Page>
Our calcium sulfonate premium grease continues to solve tough customer problems
where extreme operating conditions exist, such as steel and paper mills, mines,
and on-board ocean-going ships.
Our Refined Products unit is the world leader in the production and marketing of
high purity hydrocarbons including white oils, petrolatums, and microcrystalline
waxes. The purity of our products is essential in markets such as personal care,
pharmaceutical, polymer manufacturing, and food processing. Our performance
products are also used as cable-filling compounds for telecommunications and as
compressor lubricants for the refrigeration and air conditioning markets.
Our Glycerin and Fatty Acids business is derived from renewable sourced
materials, and provides cost-effective ingredients for such diverse markets as
personal care, pharmaceuticals, paper and packaging, paints and coatings, and
tires.
THE BUSINESS
A leading global supplier of components serving the fuels and lubricants
industry. World's leading supplier of white oils and petrolatums to the personal
care industry.
Key Products
Petroleum and lubricant additives. USP white mineral oils, petrolatums,
microcrystalline waxes, cable-filling compounds. Fatty acids and glycerines.
Markets Served
Petroleum and lubricant additive components for automotive, marine and
metalworking. Personal care, household, and institutional.
KEY DEVELOPMENTS OF 2001
Developed Calcinate(TM) C300 CS, a novel, sulfonate detergent additive for
metalworking fluids that dramatically improves extreme pressure and anti-wear
performance.
Expanded production of Synton(R) Poly Alpha Olefin (PAO) at Elmira, Ontario,
Canada. This is the seventh expansion in eight years. Synton PAO is a
high-performance synthetic lubricant that replaces mineral oil in a wide variety
of automotive and industrial lubricant applications, offering improved
low-temperature properties and thermal stability.
Received registration to sell Naugalube(R) APAN antioxidant in Europe. This
industrial lubricant product is a high-temperature, low-sludging antioxidant. It
has applications in turbine and compressor oils, hydraulic fluids, and greases.
Unilever uses our petrolatum, white oil and wax in a wide variety of its
lotions, creams, soaps and lip-therapy products. For how we help Unilever and
other customers...www.cromptoncorp.com/ar2001
<Page>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
The December 31, 2001 working capital balance of $132.5 million decreased $228.9
million from the December 31, 2000 balance of $361.4 million, and the current
ratio decreased to 1.2 from 1.5 in 2000. The decreases in working capital and
the current ratio were primarily due to the decreases in accounts receivable,
inventories and other current assets. Days sales in receivables decreased to 39
days in 2001, versus 47 days in 2000, primarily due to the impact of accounts
receivable securitization programs and an increased focus on collection efforts.
Inventory turnover decreased to 3.4 in 2001, compared to 3.7 in 2000, primarily
as a result of the sales decline which more than offset the reduction in
inventory.
Net cash provided by operations of $185.6 million increased $10.6 million from
net cash provided by operations of $175 million in 2000. The increase was mainly
due to reductions in accounts receivable and inventories more than offsetting
lower earnings. Net cash provided by operations plus proceeds from the sale of
businesses and accounts receivable and the settlement of the interest rate swap
contract were used primarily to reduce borrowings under the Company's revolving
credit facility, finance capital expenditures and make dividend payments. The
Company's debt to total book capital increased to 72% in 2001 from 67% in 2000,
primarily due to lower equity resulting from a loss in 2001 and an increase in
accumulated other comprehensive loss. 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. The Company also has a $400 million five-year senior unsecured credit
facility, which is available through October 2004. In 2001, the Company amended
various covenants relating to its 364-day and five-year credit facilities. The
amendments included the revision of certain financial ratios required to be
maintained for the quarters ended September 2001 through December 2003. The
Company also provided a security interest in certain domestic personal property
not to exceed 10% of consolidated net tangible assets. Borrowings on these
facilities are at various rate options to be determined on the date of
borrowing. Borrowings under these facilities totaled $155 million at December
31, 2001, with a weighted average interest rate of 3.83%.
The Company has access to short-term uncommitted facilities based on current
money market rates. Borrowings under these facilities totaled $25.3 million at
December 31, 2001, with a weighted average interest rate of 3.24%. The Company
also has arrangements with various banks for lines of credit for its
international subsidiaries aggregating $47.4 million, of which $4.9 million was
outstanding at December 31, 2001.
In addition, the Company has available accounts receivable securitization
programs to sell up to $200 million of domestic accounts receivable to agent
banks. At December 31, 2001, $132 million of domestic accounts receivable had
been sold under these agreements. In addition, the Company's European
subsidiaries have two separate agreements to sell up to $115 million of accounts
receivable to agent banks. At December 31, 2001, $105.6 million of international
accounts receivable had been sold under these agreements.
The Company has standby letters of credit and guarantees with various financial
institutions. At December 31, 2001, the Company had $67.4 million of outstanding
letters of credit and guarantees primarily related to its environmental
remediation liabilities and insurance obligations.
<Page>
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 fair market value of the contract on the date of termination. In accordance
with FASB Statement No. 133 and FASB Statement 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. These
proceeds were used to pay down debt.
On July 2, 2001, the Company announced a cost reduction initiative 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 second half of 2001, the Company
recorded a pre-tax charge of $114 million for facility closures, severance and
related costs.
On October 29, 2001, the Company announced that it will relocate its corporate
headquarters from Greenwich, CT 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
$10 to $12 million relating to the move and expects to have pre-tax savings of
$8 to $10 million per year.
On December 1, 2001, the Company sold its industrial colors business for $32
million, which resulted in a pre-tax loss of $17.3 million. On December 20,
2001, the Company sold its equity interest in the ParaTec nitrile rubber
business to its joint venture partner for $3.1 million. The sale resulted in a
pre-tax loss of $1.8 million. The proceeds from these sales were used to pay
down debt.
During the fourth quarter of 2001, as a result of changes in the marketplace,
the Company recorded impairment charges of $66.7 million and $13.7 million
related to its rubber chemicals and trilene businesses, respectively. These
amounts have been charged to operating profit during the fourth quarter with an
offsetting reduction to the long-lived assets of the businesses, primarily
property, plant and equipment.
The Company is continuing work on the divestitures of both its refined products
and industrial specialties businesses. The Company anticipates that the
divestitures will occur in 2002 and that the proceeds from these divestitures
will be used to pay down debt.
Capital expenditures for 2001 amounted to $136.6 million as compared to $154.8
million in 2000. Capital expenditures are expected to approximate $110 million
in 2002, primarily for the Company's replacement needs and improvement of
domestic and foreign facilities.
Accounting Developments
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 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 intangible assets acquired in a
purchase combination must meet in order to be recognized apart from goodwill.
Statement No. 142 requires that the useful lives of all existing intangible
assets be reviewed and adjusted if necessary. It also requires that goodwill and
<Page>
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 Statement No. 141 are
effective immediately, with the exception of the transitional provisions that
relate to business combinations completed prior to June 30, 2001 which are
delayed until the adoption of Statement No. 142. The provisions of Statement No.
142 are required to be adopted effective January 1, 2002.
The Company has reviewed the classification of its intangible assets and
goodwill in accordance with Statement No. 141 and has concluded that no change
in the classification of its intangible assets and goodwill is required. The
Company is in the process of reassessing the useful lives of its intangible
assets and testing its goodwill for impairment in accordance with Statement No.
142. The Company will recognize any impairment loss as a cumulative effect of
change in accounting principle in 2002. At this time it is not practicable to
estimate the impact of adopting the impairment provisions of Statement No. 142
on the earnings and financial position of the Company. The application of the
non-amortization provisions of Statement No. 142 will result in an annual
decrease in goodwill amortization expense of approximately $26 million.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement 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. The provisions of Statement No.
143 are effective for fiscal years beginning after June 15, 2002. The Company
does not expect the adoption of Statement No. 143 to have a material impact on
its earnings or financial position.
Also in August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 supercedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Statement No. 144 retains the fundamental
provisions of Statement 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 Statement No. 144 are effective for fiscal years
beginning after December 15, 2001. The Company does not expect that the impact
of the adoption of Statement No. 144 will differ from the impact of the current
requirements under Statement No. 121.
Critical Accounting Areas
The Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which require the Company to make estimates and assumptions that affect the
amounts and disclosures reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates. The
Company periodically evaluates its estimates related to bad debts, inventory,
deferred taxes, valuation allowances, environmental liabilities, contingencies
and legal reserves, facility closure and merger related reserves and other
accrued expenses and long-term liabilities. The Company's estimates are based on
historical experience and currently available information and utilize the
accounting policies set forth in the Notes to Consolidated Financial Statements.
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,
<Page>
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, 2001, the Company's reserves for
environmental remediation activities totaled $145 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 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 reduce 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 is from changes in the fair
value of its long-term, U.S. dollar fixed rate debt, as well as cash flow risk
associated with its long-term variable rate debt. The Company used an interest
rate swap contract as a fair value hedge to convert $300 million of its $600
million fixed rate Senior Notes into variable rate debt. On March 24, 2001, the
swap contract was terminated and the Company received $21.9 million of cash
proceeds from the settlement of the contract, which represented the fair market
value of the contract on the date of termination. In accordance with FASB
Statement No. 133 and FASB Statement 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. The Company also uses interest rate swap contracts, which expire in
2003, as cash flow hedges to convert its $58 million long-term variable rate
Euro 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 recognized as an adjustment to interest expense. In accordance with
FASB Statement No. 133 and FASB Statement No. 138, the changes in the fair value
of derivatives that are designated as cash flow hedging instruments are
recognized as a component of accumulated other comprehensive loss. In the event
of early extinguishment of the designated debt obligations, any realized or
unrealized gain or loss from the swap would be recognized in earnings 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 debt, 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
<Page>
average interest rates by maturity date. The notional amounts are used to
calculate the contractual cash flows to be exchanged under the respective
contracts.
Interest Rate Sensitivity
(In thousands) 2002 2003 2004 2005 2006
Long-term
debt:
Fixed rate $ 168,504 $ 1,584 $ 601,014 $ 151,094
Average
Interest
rate 7.63% 7.63% 7.80% 7.81% 6.82%
Variable
rate
- swapped $ 57,962
Average
Interest
rate (a) 4.05% 4.05%
Other
variable
rate $ 155,000
Average
Interest
rate (a) 3.72% 3.72% 3.72% 1.75% 1.75%
Interest
rate
swaps:
Total pay
fixed/
receive
variable $ 57,962
Average
pay rate 5.20% 5.20%
Average
receive
rate (a) 4.05% 4.05%
(In thousands) 2007
and Total Fair Value
Thereafter Principal at 12/31/01
Long-term
debt:
Fixed rate $ 270,000 $1,192,196 $1,164,173
Average
Interest
rate 7.19%
Variable
rate
- swapped $ 57,962 $ 57,962
Average
Interest
rate (a)
Other
variable
rate $ 8,500 $ 163,500 $ 163,500
Average
Interest
rate (a) 1.75%
Interest
rate
swaps:
Total pay
fixed/
receive
variable $ 57,962 $ (1,197)
Average
pay rate
Average
receive
rate (a)
(a) Average variable interest rate is based on rates in effect at December 31,
2001.
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 is also exposed to currency risk on
intercompany transactions (including long-term intercompany loans). The Company
manages these transactional currency risks on a consolidated basis, which allows
it to net its trade payable and receivable exposure. The Company purchases
foreign currency forward contracts, primarily denominated in Euros, Canadian
dollars, Swiss francs, British pounds and Singapore dollars, to hedge its
transaction exposure. These contracts are generally settled on a monthly basis.
Realized and unrealized gains and losses on foreign currency forward contracts
are recognized in earnings to offset the impact of valuing recorded foreign
currency trade payables, receivables and intercompany transactions. The Company
has not designated these derivatives as hedges, although it believes these
instruments reduce the Company's exposure to foreign currency risk. These
contracts are short-term in nature and the fair value is not significant at
December 31, 2001.
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 were able to be conducted in either the Euro or the
participating countries' national currencies. However, effective January 1,
2002, the participating countries are required to withdraw their national
currencies as legal tender and complete the conversion to the Euro.
The Company effectively upgraded its information systems and completed its Euro
conversion prior to January 1, 2002. The conversion did not affect the Company's
competitive position, results of operations or consolidated financial position.
<Page>
Forward-Looking Statements
Certain statements made in this Annual Report 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 report was produced and such
information will not necessarily be updated by the Company.
Operating Results - 2001 Compared to 2000
Overview
Consolidated net sales of $2.72 billion in 2001 decreased 11% from $3.04 billion
in 2000. The decrease was primarily the result of the weak domestic economy,
including lower selling prices and an unfavorable foreign currency impact of 1%
each. International sales, including U.S. exports, were 50% of total sales, up
from 46% in 2000. This increase was primarily due to the weak domestic economy.
The net loss for 2001 was $123.9 million, or $1.10 per common share basic and
diluted, as compared to net earnings of $89.3 million, or $0.78 per common share
basic and diluted in 2000. Earnings before after-tax special items (as detailed
on page 37) were $15.9 million, or $0.14 per common share basic and diluted, as
compared to $104.3 million, or $0.91 per common share basic and diluted in 2000.
Gross margin as a percentage of sales decreased to 29.9% in 2001 from 31.6% in
2000. The decrease was primarily due to higher raw material and energy costs,
lower selling prices, unfavorable absorption and foreign currency variances and
the inclusion of inventory charges related to closed sites of $7.5 million in
2001, versus $3.0 million in 2000. Consolidated operating profit before special
items decreased 52% to $140.8 million in 2001 from $291.5 million in 2000.
<Table>
<Caption>
(In thousands) 2001 2000
NET SALES
Polymer Products
Polymer Additives $ 878,603 $ 992,690
Polymers 288,742 335,081
Polymer Processing Equipment 202,653 310,490
Eliminations (13,805) (14,175)
1,356,193 1,624,086
Specialty Products
OrganoSilicones 432,255 484,424
Crop Protection 411,311 413,706
Other 519,039 516,214
1,362,605 1,414,344
Total net sales $ 2,718,798 $ 3,038,430
<Caption>
(In thousands) 2001 2000
OPERATING PROFIT
Polymer Products
Polymer Additives $ 34,274 $ 79,482
Polymers 44,534 71,771
Polymer Processing Equipment (15,647) 24,640
63,161 175,893
Specialty Products
OrganoSilicones 46,135 84,139
Crop Protection 80,804 83,756
Other 28,319 32,449
155,258 200,344
General corporate expense including
amortization (77,620) (84,754)
Total operating profit before special items 140,799 291,483
Special items (a) (194,399) (23,148)
Total operating profit (53,600) 268,335
</Table>
(a) Special items affecting operating profit include the following charges:
<Page>
<Table>
<Caption>
2001 2000
Facility closures,severance and related costs
(includes $7,517 and $2,967 in cost of products
sold in 2001 and 2000, respectively) 114,033 23,148
Asset impairments 80,366 --
Total special items 194,399 23,148
</Table>
Polymer Products
Polymer additives sales of $878.6 million decreased 11% from 2000 primarily due
to lower volume of 8%, with the remainder due equally to lower pricing and
foreign currency translation. Plastic additives sales were down 8% primarily due
to lower pricing and volume resulting from weak economic conditions. Rubber
chemicals sales decreased 21% primarily due to lower volume attributable to the
economic slowdown and negative customer reaction to a third quarter price
increase. Urethane chemicals sales declined 7% primarily as a result of lower
volume of 5% and lower foreign currency translation. Polymer additives operating
profit of $34.3 million declined 57% from 2000 primarily due to lower volume,
lower selling prices, and higher manufacturing costs resulting from increased
raw material and energy costs and reduced plant throughput.
Polymers sales of $288.7 million were down 14% from 2000 primarily due to lower
volume. EPDM sales declined 16% primarily as a result of weakness in the
automotive and commercial roofing markets. Urethane sales decreased 11%
primarily due to lower volume resulting from U.S. industrial production being
down for five consecutive quarters. Polymers operating profit of $44.5 million
declined 38% from 2000 primarily due to lower unit volume and higher
manufacturing costs resulting from reduced plant throughput.
Polymer processing equipment sales of $202.7 million were down 35% from 2000
primarily due to a steep decline in domestic capital spending. The depressed
level of sales resulted in an operating loss of $15.6 million, worse than 2000
by $40.3 million. The equipment order backlog totaled $83 million at the end of
2001, down $22 million from the end of 2000.
Specialty Products
OrganoSilicones sales of $432.3 million declined 11% from 2000 primarily due to
lower volume of 8% resulting from the sluggish US economy, and lower pricing and
foreign currency translation of 2% and 1%, respectively. Operating profit of
$46.1 million was down 45% from 2000 primarily due to lower sales volume, lower
selling prices, an unfavorable product mix and higher manufacturing costs
resulting from reduced plant throughput.
<Page>
Crop protection sales of $411.3 million declined 1% from 2000 primarily due to
lower foreign currency translation. An increase in actives sales of 3% was more
than offset by a decline in surfactant sales of 5%. Operating profit of $80.8
million decreased 4% from 2000 primarily due to an unfavorable surfactants sales
mix, partially offset by the increase in higher margin actives sales and a
pension curtailment gain.
Other sales of $519 million were 1% above 2000 primarily as a result of higher
pricing of 2%, partially offset by lower volume. Petroleum additives sales were
up 9% primarily due to volume growth resulting from a domestic motor oil
reformulation. Refined products sales rose 2% primarily due to a partial
recovery of increased raw material and energy costs through higher pricing.
Sales for the industrial colors business, which was sold effective December 1,
2001, and the glycerine/ fatty acids business were down 19% and 12%,
respectively, primarily due to lower volume. Operating profit of $28.3 million
declined 13% from 2000 primarily due to higher raw material and energy costs,
partially offset by improved pricing.
Other
Selling, general and administrative expenses of $421.6 million increased less
than 1% versus 2000. Depreciation and amortization increased 2% due to a higher
fixed asset base. Research and development costs decreased 3% primarily due to a
reduction in spending on less critical projects. Equity income decreased 19% as
a result of losses from the Company's Paratec nitrile rubber joint venture and
lower earnings from the Company's Gustafson seed treatment joint venture.
Facility closures, severance and related costs were $106.5 million in 2001 as
compared to $20.2 million in 2000. The 2001 costs were the result of the
Company's cost savings initiative announced in July and include primarily
severance for various sites and asset charges and impairments, demolition and
decommissioning costs and pension curtailments related to closed sites. An
additional $7.5 million of related inventory charges are included in cost of
products sold. The 2000 costs include primarily the write-off of long-lived
assets, decommissioning costs and severance related to the closure of the
Company's manufacturing facility in Freeport, Grand Bahama Island. An additional
$3.0 million of related inventory charges are included in cost of products sold.
Asset impairments of $80.4 million include $66.7 million related to the rubber
chemical business and $13.7 million related to the trilene business. The trilene
business represents $3.4 million of net sales which are included in the Other
reporting segment. These charges were the result of changes in the marketplace,
which caused the carrying amount of the long-lived assets of these businesses to
be impaired.
Interest expense decreased 9% mainly due to lower interest rates on the
Company's borrowings and a decrease in debt.
Other expense of $25.1 million increased $19.6 million from 2000. The increase
is mainly due to losses in 2001 of $17.3 million on the sale of the industrial
colors business and $1.8 million on the sale of the Company's interest in its
ParaTec nitrile rubber joint venture. The effective tax rate, excluding the
impact of special items, was 36% in 2001 compared to the 2000 rate of 37%. The
reduction in the effective tax rate in 2001 was primarily due to the beneficial
impact of state tax audit settlements.
Operating Results - 2000 Compared to 1999
Overview
Consolidated net sales increased 45% to $3.04 billion in 2000 from $2.09 billion
in 1999. After adjusting 1999 net sales to exclude $150.5 million from the
divestiture of the textile colors business and to include $1,148.7 million from
Witco operations for the first eight months of 1999, net sales decreased 2%. The
decrease was mainly due to lower foreign currency translation, primarily the
Euro. International sales,
<Page>
including U.S. exports, were 46% of total sales, down from 47% on a comparable
basis in 1999. This decrease was also due to lower foreign currency translation,
primarily the Euro.
Net earnings for 2000 were $89.3 million, or $0.78 per common share basic and
diluted, as compared to a net loss of $175 million, or $2.10 per common share
basic and diluted in 1999. Earnings before after-tax special items (as detailed
on page 37) were $104.3 million, or $0.91 per common share basic and diluted, as
compared to $95 million, or $1.14 per common share basic and diluted, in 1999.
Gross margin as a percentage of sales decreased to 31.6% in 2000 from 34.9% in
1999. The decrease was primarily due to higher raw material and energy costs,
lower foreign currency translation and the impact of including an additional
eight months of Witco operations in 2000. Consolidated operating profit before
special items increased $65.6 million to $291.5 million in 2000 from $225.9
million in 1999. After adjusting 1999 to exclude $6.8 million from the
divestiture of the textile colors business, and to include $62.4 million from
Witco operations for the first eight months of 1999, operating profit increased
4% from an adjusted $281.6 million in 1999.
<Table>
<Caption>
(In thousands) 2000 1999
Witco Operations
As As Eight Months Textile Colors As
Reported Reported Ended August 31 (a) Business Adjusted
NET SALES
Polymer Products
Polymer Additives $ 992,690 $ 620,188 $ 430,440 $ -- $1,050,628
Polymers 335,081 316,300 -- -- 316,300
Polymer Processing Equipment 310,490 300,016 -- -- 300,016
Eliminations (14,175) (3,469) -- -- (3,469)
1,624,086 1,233,035 430,440 -- 1,663,475
Specialty Products
OrganoSilicones 484,424 158,925 306,630 -- 465,555
Crop Protection 413,706 294,798 116,438 -- 411,236
Other 516,214 405,600 295,164 (150,527) 550,237
1,414,344 859,323 718,232 (150,527) 1,427,028
Total net sales $ 3,038,430 $ 2,092,358 $ 1,148,672 $ (150,527) $3,090,503
OPERATING PROFIT
Polymer Products
Polymer Additives $ 79,482 $ 67,880 $ 34,164 $ -- $ 102,044
Polymers 71,771 82,951 -- -- 82,951
Polymer Processing Equipment 24,640 19,981 -- -- 19,981
175,893 170,812 34,164 -- 204,976
Specialty Products
OrganoSilicones 84,139 16,784 40,055 -- 56,839
Crop Protection 83,756 69,194 13,411 -- 82,605
Other 32,449 25,144 10,264 (6,756) 28,652
200,344 111,122 63,730 (6,756) 168,096
General corporate expense
including amortization (84,754) (56,033) (35,467) -- (91,500)
Total operating profit
before special items 291,483 225,901 $ 62,427 $ (6,756) $ 281,572
Special items (b) (23,148) (224,518)
Total operating profit $ 268,335 $ 1,383
</Table>
<Page>
(a) Excludes the oleochemicals and derivatives business sold on August 31,
1999.
(b) Special items affecting operating profit include the following charges:
<Table>
<Caption>
2000 1999
Facility closure costs (includes $2,967 in cost of products sold) $23,148 $ --
Write-off of in-process research and development -- 195,000
Merger related costs -- 29,518
Total special items $23,148 $224,518
</Table>
Polymer Products
Polymer additives sales of $992.7 million decreased 6% from an adjusted $1.05
billion in 1999 primarily as a result of lower foreign currency translation of
4% and lower pricing of 2%. Plastic additives sales were down 6% primarily due
to lower foreign currency translation. Rubber chemicals sales decreased 1%, as
the 4% impact of lower pricing and foreign currency translation more than offset
volume growth of 3%. Urethane chemicals sales were down 10% primarily due to
lower foreign currency translation of 4% and lower volume due to rationalization
of lower margin business. Polymer additives operating profit of $79.5 million
declined 22% from an adjusted $102 million in 1999 primarily due to adverse
foreign currency impact, higher energy costs and lower selling prices.
Polymers sales of $335.1 million were 6% above 1999 primarily due to volume
growth, as higher selling prices of 2% offset lower foreign currency
translation. EPDM sales were up 3% primarily due to higher pricing. Urethanes
sales rose 10% primarily due to volume growth, partially offset by lower foreign
currency translation of 2%. Polymers operating profit of $71.8 million was down
13% from 1999 primarily as a result of lower nitrile rubber joint venture income
and increased raw material and energy costs, which more than offset the impact
of higher unit sales and improved pricing.
Polymer processing equipment sales of $310.5 million increased 4% from 1999
primarily due to volume growth of 7%, partially offset by lower foreign currency
translation of 3%. Operating profit of $24.6 million rose 23% from 1999
primarily as a result of higher sales volume. The equipment order backlog
totaled $105 million at the end of 2000 compared to $113 million at the end of
1999.
Specialty Products
OrganoSilicones sales of $484.4 million rose 4% from an adjusted $465.6 million
in 1999 primarily due to volume growth of 8%, partially offset by lower foreign
currency translation of 3% and lower pricing of 1%. The most prominent growth
was in the sulfur silanes market attributable to increased industry demand and a
greater market share. Operating profit of $84.1 million was up 48% from an
adjusted $56.8 million in 1999 primarily due to increased sales volume and lower
operating costs.
Crop protection sales of $413.7 million were 1% above an adjusted $411.2 million
in 1999 primarily due to higher volume. An increase in surfactants demand was
partially offset by actives market weakness mainly attributable to adverse
weather conditions and lower insect infestation. Operating profit of $83.8
million was 1% ahead of an adjusted $82.6 million in 1999 primarily due to
higher sales volume and increased joint venture earnings.
Other sales of $516.2 million decreased 6% from an adjusted $550.2 million in
1999 primarily due to a decline in volume of 8% and lower foreign
<Page>
currency translation of 1%, partially offset by higher pricing of 3%. Petroleum
additives sales declined 6% primarily due to lower volume mainly attributable to
the closure of the Gretna, Louisiana plant. Refined products sales were down 4%
primarily due to lower volume offset in part by a partial recovery of increased
raw material costs through higher pricing. Glycerine/fatty acids and industrial
colors sales declined 13% and 5%, respectively, primarily due to lower volume
and lower pricing. Operating profit of $32.4 million was up 13% from an adjusted
$28.7 million in 1999 primarily as a result of reduced operating costs including
the closure of the Gretna facility.
Other
Selling, general and administrative expenses of $417.6 million increased 26%
versus 1999 mainly due to the inclusion of an additional eight months of Witco
operations in 2000. Depreciation and amortization (up 56%), research and
development costs (up 24%) and interest expense (up 73%) also increased
primarily as a result of the inclusion of an additional eight months of Witco
operations in 2000.
Facility closure, severance and related costs of $20.2 million include primarily
the write-off of long-lived assets, decommissioning costs and severance costs
related to the closure of the Company's manufacturing facility in Freeport,
Grand Bahama Island. An additional $3.0 million of related closure costs is
included in cost of products sold.
Other expense of $5.5 million decreased $42.5 million from 1999. The decrease is
mainly due to two special items in 1999, including the loss on the sale of the
textile colors business of $83.3 million, partially offset by the gain on the
sale of the specialty ingredients business of $42.1 million. The effective tax
rate, excluding the impact of special items, was 37% in 2000 compared to 1999
rates of 36.4% (as reported) and 39.2% (reflecting the merger of Crompton and
Knowles Corporation and Witco Corporation as if it had occurred at the beginning
of 1999).
<Page>
Consolidated Statements of Operations
Fiscal years ended 2001, 2000 and 1999
<Table>
<Caption>
(In thousands of dollars, except per share data) 2001 2000 1999
NET SALES $ 2,718,798 $ 3,038,430 $ 2,092,358
Costs and Expenses
Cost of products sold 1,905,336 2,077,088 1,361,373
Selling, general and administrative 421,554 417,643 331,050
Depreciation and amortization 185,570 182,017 116,648
Research and development 82,334 84,571 67,954
Equity income (9,278) (11,405) (10,568)
Facility closures, severance and related costs 106,516 20,181 --
Impairment of long-lived assets 80,366 -- --
Acquired in-process research and development -- -- 195,000
Merger and related costs -- -- 29,518
OPERATING PROFIT (LOSS) (53,600) 268,335 1,383
Interest expense 109,877 120,476 69,833
Other expense 25,129 5,485 47,979
EARNINGS (LOSS)
Earnings (loss) before income taxes and extraordinary loss (188,606) 142,374 (116,429)
Income taxes (benefit) (64,662) 53,101 42,922
Earnings (loss) before extraordinary loss (123,944) 89,273 (159,351)
Extraordinary loss on early extinguishment of debt -- -- (15,687)
Net earnings (loss) (123,944) $ 89,273 (175,038)
BASIC EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before extraordinary loss $ (1.10) $ .78 (1.91)
Extraordinary loss -- -- (.19)
Net earnings (loss) $ (1.10) $ .78 (2.10)
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before extraordinary loss $ (1.10) $ .78 (1.91)
Extraordinary loss -- -- (.19)
Net earnings (loss) $ (1.10)
$ .78 (2.10)
</Table>
See accompanying notes to consolidated financial statements.
<Page>
Consolidated Balance Sheets
Fiscal years ended 2001 and 2000
<Table>
<Caption>
(In thousands of dollars, except per share data) 2001 2000
ASSETS
Current Assets
Cash $ 21,506 $ 20,777
Accounts receivable 188,133 323,097
Inventories 491,693 552,386
Other current assets 113,742 180,635
Total current assets 815,074 1,076,895
Non-Current Assets
Property, plant and equipment 1,021,983 1,182,087
Cost in excess of acquired net assets 897,404 938,792
Other assets 497,727 330,553
$ 3,232,188 3,528,327
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 29,791 $ 27,429
Accounts payable 234,985 234,955
Accrued expenses 285,329 306,680
Income taxes payable 111,905 127,950
Other current liabilities 20,608 18,449
Total current liabilities 682,618 715,463
Non-Current Liabilities
Long-term debt 1,392,833 1,479,394
Post-retirement health care liability 199,583 206,469
Other liabilities 409,613 373,025
STOCKHOLDERS' EQUITY
Common stock, $.01 par value - issued 119,187,077
and 119,372,359 shares in 2001 and 2000, respectively 1,192 1,194
Additional paid-in capital 1,051,257 1,051,371
Accumulated deficit (280,350) (133,864)
Accumulated other comprehensive loss (151,839) (86,221)
Treasury stock at cost (72,719) (78,504)
Total stockholders' equity 547,541 753,976
$ 3,232,188 $ 3,528,327
</Table>
See accompanying notes to consolidated financial statements.
<Page>
Consolidated Statements of Cash Flows
Fiscal years ended 2001, 2000 and 1999
<Table>
<Caption>
Increase (decrease) in cash (In thousands of dollars) 2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (123,944) $ 89,273 $ (175,038)
Adjustments to reconcile net earnings
(loss) to net cash provided by operations:
Facility closures, severance and related costs 114,033 23,148 --
Impairment of long-lived assets 80,366 -- --
Loss on sale of businesses 19,121 -- 41,273
Acquired in-process research and development -- -- 195,000
Merger and related costs -- -- 29,518
Extraordinary loss on early extinguishment of debt -- -- 15,687
Depreciation and amortization 185,570 182,017 116,648
Equity income (9,278) (11,405) (10,568)
Deferred taxes (84,820) 19,068 (26,281)
Changes in assets and liabilities:
Accounts receivable 93,053 25,359 4,539
Inventories 22,771 (41,546) (25,475)
Other current assets (10,736) (24,171) 25,422
Other assets (5,591) 30,361 7,333
Accounts payable and accrued expenses (44,898) (85,574) (73,963)
Income taxes payable (12,770) 6,969 (10,776)
Other current liabilities 2,567 (3,790) 4,983
Post-retirement health care liability (6,614) (10,858) (2,342)
Other liabilities (36,019) (22,914) (24,624)
Other 2,838 (892) (2,712)
Net cash provided by operations 185,649 175,045 88,624
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (136,642) (154,814) (131,782)
Merger related expenditures (5,855) (66,740) (17,420)
Proceeds from sale of businesses 35,061 -- 178,322
Acquired cash of Witco Corporation -- -- 236,658
Other investing activities 6,788 (25,303) (15,521)
Net cash (used in) provided by investing activities (100,648) (246,857) 250,257
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on long-term notes -- 593,754 --
Payments on long-term notes -- (4,075) (356,449)
(Payments) proceeds on long-term bank borrowings (103,905) (420,000) 93,720
Proceeds (payments) on short-term borrowings 67 (54,799) 61,267
Proceeds from settlement of interest rate swap contract 21,870 -- --
Premium paid on early extinguishment of debt -- -- (20,431)
Proceeds from sale of accounts receivable 19,358 35,560 --
Treasury stock acquired -- (54,003) (101,781)
Dividends paid (22,542) (22,763) (9,351)
Other financing activities 1,555 8,959 (6,222)
Net cash (used in) provided by financing activities (83,597) 82,633 (339,247)
CASH
Effect of exchange rates on cash (675) (587) (1,195)
Change in cash 729 10,234 (1,561)
Cash at beginning of period 20,777 10,543 12,104
Cash at end of period $ 21,506 $ 20,777 $ 10,543
</Table>
See accompanying notes to consolidated financial statements.
<Page>
Consolidated Statements of Stockholders' Equity
Fiscal years ended 2001, 2000 and 1999
<Table>
<Caption>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Treasury
Stock Capital Deficit Loss Stock Total
BALANCE, DECEMBER 26, 1998 $ 7,733 $ 238,615 $ (15,985) $ (38,414) $ (125,246) $ 66,703
Comprehensive loss:
Net loss (175,038) (175,038)
Equity adjustment for translation
of foreign currencies (22,984) (22,984)
Other 160 160
Total comprehensive loss (197,862)
Cash dividends ($.10 per share) (9,351) (9,351)
Stock options and other issuances
(17,030 common shares
and 243,017 treasury shares) 3,703 2,132 5,835
Treasury stock acquired
(6,366,900 shares) (101,781) (101,781)
Change in par value (5,893) 5,893 --
Cancellation of treasury stock
(11,850,119 shares) (1,185) (196,525) 197,710 --
Merger with Witco (53,572,031 shares) 536 995,832 996,368
BALANCE, DECEMBER 31, 1999 1,191 1,047,518 (200,374) (61,238) (27,185) 759,912
Comprehensive income:
Net earnings 89,273 89,273
Equity adjustment for translation
of foreign currencies (24,231) (24,231)
Other (752) (752)
Total comprehensive income 64,290
Cash dividends ($.20 per share) (22,763) (22,763)
Stock options and other issuances
(300,666 common shares and
218,815 treasury shares) 3 3,853 2,684 6,540
Treasury stock acquired (4,579,500 shares) (54,003) (54,003)
BALANCE, DECEMBER 31, 2000 1,194 1,051,371 (133,864) (86,221) (78,504) 753,976
Comprehensive loss:
Net loss (123,944) (123,944)
Equity adjustment for translation
of foreign currencies (22,038) (22,038)
Minimum pension liability adjustment (37,576) (37,576)
Other (6,004) (6,004)
Total comprehensive loss (189,562)
Cash dividends ($.20 per share) (22,542) (22,542)
Stock options and other issuances
(467,351 treasury shares) (116) 5,785 5,669
Merger share adjustment (185,282 shares) (2) 2 --
BALANCE, DECEMBER 31, 2001 1,192 1,051,257 (280,350) (151,839) (72,719) 547,541
</Table>
<Page>
Notes to Consolidated Financial Statements
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of all
majority-owned subsidiaries. Other affiliates in which Crompton Corporation (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.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which require the Company to make estimates and assumptions that affect the
amounts and disclosures reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Accounting Developments
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 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 intangible assets acquired in a
purchase combination must meet in order to be recognized apart from goodwill.
Statement No. 142 requires that the useful lives of all existing intangible
assets be reviewed and adjusted if necessary. It also 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 Statement No. 141 are
effective immediately, with the exception of the transitional provisions that
relate to business combinations completed prior to June 30, 2001 which are
delayed until the adoption of Statement No. 142. The provisions of Statement No.
142 are required to be adopted effective January 1, 2002.
The Company has reviewed the classification of its intangible assets and
goodwill in accordance with Statement No. 141 and has concluded that no change
in the classification of its intangible assets and goodwill is required. The
Company is in the process of reassessing the useful lives of its intangible
assets and testing its goodwill for impairment in accordance with Statement No.
142. The Company will recognize any impairment loss as a cumulative effect of
change in accounting principle in 2002. At this time it is not practicable to
estimate the impact of adopting the impairment provisions of Statement No. 142
on the earnings and financial position of the Company. The application of the
non-amortization provisions of Statement No. 142 will result in an annual
decrease in goodwill amortization expense of approximately $26 million.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement 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. The provisions of Statement No.
143 are effective for fiscal years beginning after June 15, 2002. The Company
does not expect the adoption of Statement No. 143 to have a material impact on
its earnings or financial position.
Also in August 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Statement No. 144 supercedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Statement No. 144 retains the fundamental
provisions of Statement 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 Statement No. 144 are effective for fiscal years
beginning after December 15, 2001. The Company does not expect that the impact
of the adoption of Statement No. 144 will differ from the impact of the current
requirements under Statement No. 121.
Revenue Recognition
<Page>
The Company has reviewed its revenue recognition policies and has concluded that
its policies and practices are in compliance with the guidelines of Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Inventory Valuation
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated
depreciation. Depreciation expense ($146.7 million in 2001, $142.7 million in
2000 and $89.2 million in 1999) is generally computed on the straight-line
method using the following ranges of asset lives: buildings and improvements: 10
to 40 years, machinery, equipment and fixtures: 3 to 25 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.
Intangible Assets
Prior to the January 1, 2002 adoption of FASB Statement No. 142, the excess cost
over the fair value of net assets of businesses acquired (goodwill) was being
amortized on a straight-line basis over 20 to 40 years. Accumulated amortization
was $97.1 million and $73.8 million in 2001 and 2000, respectively.
Patents, unpatented technology, trademarks and other intangibles (net) of
$145.4 million in 2001 and $148.8 million in 2000, 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 $160.9 million
and $148.4 million in 2001 and 2000, respectively.
Long-Lived Assets
The Company evaluates the recoverability of the carrying value of long-lived
assets of each of its businesses by assessing whether the projected undiscounted
cash flows of each of its businesses is sufficient to recover the existing
unamortized cost of its long-lived assets. If the undiscounted projected cash
flows are not sufficient, the Company calculates the impairment amount by
discounting the projected cash flows using its internal hurdle rate. The amount
of the impaired assets is written-off against earnings in the period in which
the impairment is determined.
Financial and Derivative Instruments
Financial and derivative instruments are presented in the accompanying
consolidated financial statements at either cost or fair value as required by
accounting principles generally accepted in the United States of America.
Further information is provided in the Financial Instruments and Derivative
Instruments and Hedging Activities Notes to Consolidated Financial Statements.
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 loss.
Research and Development
Research and development costs are expensed as incurred.
<Page>
Statements of Cash Flows
Cash includes bank term deposits with original maturities of three months or
less. Cash payments during the fiscal years ended 2001, 2000 and 1999 included
interest payments of $119.3 million, $110.7 million and $79.4 million and income
tax payments of $31.3 million, $33.8 million and $67 million, respectively.
Other Disclosures
Included in accounts receivable are allowances for doubtful accounts in the
amount of $16.9 million in 2001 and $22.1 million in 2000.
Included in accrued expenses are accruals for facility closures, severance
and related costs of $41.6 million in 2001 and $4.4 million in 2000,
environmental liabilities of $18 million in 2001 and $29.9 million in 2000 and
merger related accruals of $7.8 million in 2001 and $19.9 million in 2000.
Included in other liabilities are environmental liabilities in the amount
of $127 million in 2001 and $134.6 million in 2000, merger related accruals of
$12.5 million in 2001 and 2000 and pension liabilities of $179.6 million in 2001
and $125.5 million in 2000.
Included in selling, general and administrative expenses are shipping and
handling costs of $87.9 million in 2001 and $88.5 million in 2000.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
In July 2001, the Company announced a cost reduction initiative 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. In order to accomplish this, the Company will close seven of
its manufacturing facilities and will reduce its workforce by approximately 700
positions by the end of 2002.
As a result of this initiative, during the second half of 2001 the Company
recorded a pre-tax charge for facility closures, severance and related costs of
$114 million (of which $7.5 million is included in cost of products sold),
summarized as follows:
<Table>
<Caption>
Severance Asset Other
and Write-offs Facility
Related and Closure
(In thousands) Costs (a) Impairments (b) Costs (c) Total
2001 charge $ 45,466 $ 41,847 $ 26,720 $114,033
Cash payments (8,526) -- (2,022) (10,548)
Non-cash charges (6,706) (41,847) (13,866) (62,419)
Balance at
December 31, 2001 $ 30,234 $ -- $ 10,832 $ 41,066
</Table>
(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 charges related to closed sites.
<Page>
In December 2000, the Company closed its manufacturing facility in Freeport,
Grand Bahama Island. In connection with the facility closure, the Company
incurred a pre-tax charge of $23.1 million (of which $3.0 million is included in
cost of products sold) summarized as follows:
<Table>
<Caption>
Write-Off Facility Severance
of Closure and and
Long-Lived Maintenance Other
(In thousands) Assets Costs Costs Total
December 2000 charge $ 15,498 $ 6,210 $ 1,440 $ 23,148
Realized (15,498) (3,213) -- (18,711)
Balance at
December 31, 2000 -- 2,997 1,440 4,437
Cash payments -- (2,513) (1,440) (3,953)
Balance at
December 31, 2001 -- 484 -- 484
</Table>
Asset impairments
During the fourth quarter of 2001, as a result of changes in the marketplace,
the Company evaluated the recoverability of the long-lived assets of its rubber
chemicals and trilene businesses. The rubber chemicals business has experienced
industry-wide overcapacity, customer consolidation and low cost regional
competition, which have led to deteriorating pricing and marginally profitable
long-term prospects. For the trilene business (which represents $3.4 million of
net sales included in the Other reporting segment) the issue has been a lack of
demand with little prospect for improvement. Based on the projected cash flows,
the Company determined that the carrying values of the long-lived assets of
these businesses were impaired and recorded impairment charges of $66.7 million
and $13.7 million related to the rubber chemicals and trilene businesses,
respectively. These amounts have been charged to operating profit in the fourth
quarter of 2001 with an offsetting reduction to the long-lived assets of the
businesses, primarily property, plant and equipment.
DIVESTITURES AND JOINT VENTURES
In December 2001, the Company sold its industrial colors business for $32
million, which resulted in a pre-tax loss of $17.3 million (included in other
expense).
Also in December 2001, the Company sold its equity interest in the ParaTec
nitrile rubber business to its joint venture partner for $3.1 million. The sale
resulted in a pre-tax loss of $1.8 million (included in other expense).
In March 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).
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 (included in other expense).
In January 1999, the Company sold its specialty ingredients business for
$103 million, which resulted in a pre-tax gain of $42.1 million in the first
quarter of 1999 (included in other expense).
MERGER
On September 1, 1999, the shareholders of Crompton and Knowles Corporation
(C&K) and Witco Corporation (Witco) approved a tax-free stock-for-stock merger
of C&K and Witco (the "Merger"). The terms of the Merger provided that (a) C&K
merge with and into CK Witco Corporation (the former name of 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 C&K'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
$823 million with an estimated useful life of 40 years.
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,
<Page>
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 recorded
in the third quarter of 1999 as part of the allocation of the purchase price
related to the Merger.
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
acquired IPR&D projects as of the date of the Merger and the values assigned:
<Table>
<Caption>
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
</Table>
(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
were estimated based on the latest available information. Additionally, the
completion date reflected management's best estimate of the time that the
Company would 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 changes 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 assume the Merger had been consummated as of January 1, 1999, and
exclude the write-off of acquired in-process research and development of $195
million:
<Page>
<Table>
<Caption>
(In thousands, except per share data) 1999
Net sales $3,421,651
Earnings before extraordinary loss (a) $ 52,611
Net earnings (a) $ 36,924
Net earnings before extraordinary loss
per basic and diluted common share $ 0.44
Net earnings per basic and diluted common share $ 0.31
Weighted average basic shares outstanding 119,489
Weighted average diluted shares outstanding 120,846
</Table>
(a) The pro forma net earnings before extraordinary loss and net earnings
include the following after-tax special items:
<Table>
<Caption>
(In thousands) 1999
Restructuring charges - net $ 1,954
Loss on sale of businesses and investment - net 38,731
Merger and related costs 20,608
Loss from special items $61,293
</Table>
MERGER ACCRUALS
As a result of the Merger, the Company recorded $176.1 million of merger related
accruals in 1999 as a component of cost in excess of acquired net assets
(goodwill), summarized as follows:
<Table>
<Caption>
Severance Other
and Merger Merger
Related Related Related
(In thousands) Costs Fees Costs Total
September 1, 1999
accrual $ 128,261 $ 41,619 $ 6,174 $ 176,054
Cash payments (53,961) (10,400) (967) (65,328)
Balance at
December 31, 1999 74,300 31,219 5,207 110,726
Cash payments (37,583) (25,325) (3,832) (66,740)
Purchase accounting
adjustments (19,039) (5,894) 6,231 (18,702)
Balance at
December 31, 2000 17,678 -- 7,606 25,284
Cash payments (3,019) -- (2,836) (5,855)
Non-cash charges (983) -- (862) (1,845)
Balance at
December 31, 2001 $ 13,676 $ -- $ 3,908 $ 17,584
</Table>
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:
<Page>
<Table>
<Caption>
Severance Facility Other
and Closure and Merger
Related Maintenance Related
(In thousands) Costs Costs Costs Total
Fourth quarter
1999 charge $ 18,959 $ 8,988 $ 1,571 $ 29,518
Cash payments (8,942) (125) (406) (9,473)
Balance at
December 31, 1999 10,017 8,863 1,165 20,045
Cash payments (8,521) (3,317) (1,142) (12,980)
Reclassifications (149) (750) 899 --
Balance at
December 31, 2000 1,347 4,796 922 7,065
Cash payments (297) (1,187) (613) (2,097)
Non-cash charges (684) (1,758) 126 (2,316)
Balance at
December 31, 2001 $ 366 $ 1,851 $ 435 $ 2,652
</Table>
ACCOUNTS RECEIVABLE PROGRAM
The Company has an agreement that allows for the sale of up to $200 million of
domestic accounts receivable to agent banks. At December 31, 2001, $132 million
had been sold at an average cost of approximately 4.26% and at December 31,
2000, $176.3 million had been sold at an average cost of approximately 6.64%.
At December 31, 2001, the Company's European subsidiaries had two separate
agreements to sell up to $115 million of accounts receivable to agent banks. At
December 31, 2001, $105.6 million of international accounts receivable had been
sold at an average Euro cost of approximately 4.87%. At December 31, 2000, $42
million of international accounts receivable had been sold at an average Euro
cost of approximately 4.97%.
<Table>
<Caption>
INVENTORIES
(In thousands) 2001 2000
Finished goods 377,463 421,200
Work in process 22,110 29,610
Raw materials and supplies 92,120 101,576
491,693 552,386
</Table>
PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
(In thousands) 2001 2000
Land and improvements $ 52,609 $ 51,079
Buildings and improvements 184,224 187,733
Machinery, equipment and fixtures 1,396,111 1,371,199
Construction in progress 96,727 134,665
1,729,671 1,744,676
Less accumulated depreciation 707,688 562,589
$ 1,021,983 $ 1,182,087
</Table>
LEASES
At December 31, 2001, minimum rental commitments under non-cancelable operating
leases amounted to $28.3 million (2002), $25.5 million (2003), $21.3 million
(2004), $19.3 million (2005), $19.6 million (2006) and $118.1 million (2007 and
thereafter).
<Page>
Rental expenses under operating leases were $33.7 million (2001), $34.5
million (2000) and $20.9 million (1999).
Future minimum lease payments under capital leases at December 31, 2001
were not significant.
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.
<Table>
<Caption>
INDEBTEDNESS
Long-Term Debt
(In thousands) 2001 2000
Domestic credit facilities $ 155,000 $ 260,000
8.50% Senior Notes due 2005, net of
unamortized discount of $3,956 in
2001 and $5,205 in 2000, with an
effective interest rate of 8.71% 596,044 594,795
6.60% Notes due 2003, net of unamortized
discount of $2,215 in 2001 and $3,986
in 2000, with an effective interest
rate of 7.67% 162,785 161,014
6.125% Notes due 2006, net of
unamortized discount of $9,733 in 2001
and $12,117 in 2000, with an effective
interest rate of 7.71% 140,267 137,883
6.875% Debentures due 2026, net of
unamortized discount of $25,374 in
2001 and $26,428 in 2000, with an
effective interest rate of 7.58% 124,626 123,572
7.75% Debentures due 2023, net of
unamortized discount of $1,551 in
2001 and $1,624 in 2000, with an
effective interest rate of 7.82% 108,449 108,376
EURIBOR based Bank Loans due 2003 57,962 61,758
Other 47,700 31,996
$1,392,833 $1,479,394
</Table>
The Company's long-term debt instruments are recorded at face value, net of
unamortized discounts. Such discounts will be amortized to interest expense over
the life of the related debt instrument.
<Page>
On March 7, 2000, the Company issued $600 million of Senior Notes due 2005
with a coupon rate of 8.5% and $25 million of floating rate Notes due 2001.
Effective March 24, 2000, the Company swapped $300 million of its 8.5% Senior
Notes into variable interest rate debt (three month LIBOR plus fixed spread of
1.22%). On March 24, 2001, the Company terminated the $300 million variable
interest rate swap contract and received $21.9 million of cash proceeds from the
settlement of the contract, which represented the fair market value of the
contract on the date of termination. In accordance with FASB Statement No. 133
and FASB Statement 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. The
unamortized balance at December 31, 2001 was $17.5 million.
At December 31, 2001, the Company had outstanding interest rate swap
contracts to convert its variable interest rate Euro denominated debt to fixed
rate debt. The weighted average variable interest rate on the Euro denominated
debt was 4.05% at December 31, 2001. The aggregate notional amount of these swap
contracts was $58 million at December 31, 2001. The weighted average fixed
interest rate on these swap contracts was 5.2% at December 31, 2001.
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 its
9% Senior Notes and $149.5 million of its 10.5% Senior Notes at a purchase price
of 102% and 110%, respectively, plus accrued and unpaid interest. Also during
1999, the Company repurchased in the open market $22.9 million of its 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.
Credit Facilities
At December 31, 2000, the Company had a $192 million 364-day senior unsecured
revolving credit facility available through October 2001 and a $400 million
five-year senior unsecured credit facility available through October 2004. On
September 24, 2001, the Company renewed $125 million of its $192 million
facility which is available through September 2002. Borrowings on these
facilities are at various rate options 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 (at December 31, 2001 these rates
were .15% and .20%, respectively). At December 31, 2001, there were no
outstanding borrowings under the 364-day credit facility. At December 31, 2001,
borrowings under the five-year credit facility were $155 million with a weighted
average interest rate of 3.83%. At December 31, 2000, borrowings under the
364-day and five-year credit facilities were $60 million and $200 million,
respectively. At December 31, 2000, the Company classified the 364-day credit
facility as long-term based on its ability and intent to refinance on a
long-term basis.
The Company also has access to short-term uncommitted facilities based on
current money market rates. At December 31, 2001, the Company had $25.3 million
outstanding under these short-term uncommitted facilities with a weighted
average interest rate of 3.24%. At December 31, 2000, the Company had no
outstanding borrowings under these short-term uncommitted facilities. The
Company also has arrangements with various banks for lines of credit for its
international subsidiaries aggregating $47.4 million in 2001 and $48.8 million
in 2000, of which $4.9 million and $5 million were outstanding at December 31,
2001 and 2000, respectively.
Debt Covenants
The Company's various debt agreements contain covenants which limit the ability
to create or assume mortgages or engage in mergers, consolidations, and certain
sales or leases of assets. In addition, the credit
<Page>
agreements require the Company to maintain certain financial ratios. In 2001,
the Company amended various covenants relating to its 364-day and five-year
credit facilities. The amendments included the revision of certain financial
ratios required to be maintained for the quarters ended September 2001 through
December 2003. The Company also provided a security interest in certain domestic
personal property not to exceed 10% of consolidated net tangible assets. At
December 31, 2001, the Company was in compliance with all of its debt covenants.
Maturities
At December 31, 2001, the scheduled maturities of long-term debt during the next
five fiscal years are: 2002 - $0 million; 2003 - $227.3 million; 2004 - $157.5
million; 2005 - $602 million; and 2006 - $152.1 million.
INCOME TAXES
The components of earnings (loss) before income taxes and extraordinary loss,
and the provision for income taxes are as follows:
<Table>
<Caption>
(In thousands) 2001 2000 1999
Pretax Earnings (Loss):
Domestic $ (256,541) $ 8,259 $ (153,347)
Foreign 67,935 134,115 36,918
$ (188,606) $ 142,374 $ (116,429)
Income Taxes (Benefit):
Domestic
Current $ 562 $ 4,169 $ 27,949
Deferred (93,765) 9,372 (10,833)
(93,203) 13,541 17,116
Foreign
Current 19,596 29,864 41,254
Deferred 8,945 9,696 (15,448)
28,541 39,560 25,806
Total
Current 20,158 34,033 69,203
Deferred (84,820) 19,068 (26,281)
$ (64,662) $ 53,101 $ 42,922
</Table>
The provision (benefit) for income taxes differs from the Federal statutory rate
for the following reasons:
<Table>
<Caption>
(In thousands) 2001 2000 1999
Provision (benefit)
at statutory rate $ (66,012) $ 49,831 $ (40,750)
Goodwill
amortization 9,074 8,512 4,016
Foreign income tax
rate differential 4,764 (7,380) 10,766
State income taxes,
net of federal benefit (8,005) 3,984 (2,105)
State tax audit settlements (5,806) --
Non-deductible
acquired IPR&D -- -- 68,250
Impact of valuation
allowance 1,792 -- 3,216
Other, net (469) (1,846) (471)
Actual provision (benefit)
for income taxes $ (64,662) $ 53,101 $ 42,922
</Table>
<Page>
Provisions have been made for deferred taxes based on differences between the
financial statement and the tax basis of assets and liabilities using currently
enacted tax rates and regulations. The components of the net deferred tax assets
and liabilities are as follows:
<Table>
<Caption>
(In thousands) 2001 2000
Deferred tax assets:
Pension and other
post-retirement liabilities $ 134,762 $ 118,184
Accruals for environmental
remediation 43,529 51,873
Merger related accruals 2,881 9,493
Intercompany royalty 20,685 24,592
Other accruals 84,248 85,795
NOL and credit carryforwards 112,915 53,991
Inventories and other 16,516 29,925
Deferred tax liabilities:
Property, plant and equipment (48,792) (110,892)
Intangibles (16,589) (22,883)
Financial instruments (15,300) (17,185)
Other (14,610) (9,332)
Net deferred tax asset before
valuation allowance 320,245 213,561
Valuation allowance (15,062) (16,668)
Net deferred tax asset
after valuation allowance $ 305,183 $ 196,893
</Table>
Net deferred taxes of $74.1 million and $126.5 million are included in other
current assets and $231.1 million and $70.4 million are included in other assets
in 2001 and 2000, respectively. The Company believes that it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize its deferred tax assets.
At December 31, 2000, the Company had an aggregate of $143 million of net
operating loss carryforwards (NOL's) ($106 million generated domestically and
$37 million related to the Company's foreign subsidiaries). The valuation
allowance at December 31, 2000 includes $12.7 million related to the NOL's ($7.9
million for which subsequently recognized tax benefits will be applied to reduce
goodwill) and $4 million related to other foreign deferred tax assets.
At December 31, 2001, the Company had an aggregate of $303.2 million of NOL's
($265.9 million generated domestically, inclusive of a capital loss carryforward
of $5.9 million, and $37.3 million related to the Company's foreign
subsidiaries) and $1.3 million of excess foreign tax credits. The Company's
NOL's are subject to certain limitations and will begin
<Page>
to expire in 2005. The valuation allowance at December 31, 2001 includes $11.2
million related to the NOL's ($4.6 million for which subsequently recognized tax
benefits will be applied to reduce goodwill) and $3.9 million related to other
foreign deferred tax assets.
A provision has not been made for U.S. taxes which would be payable if
undistributed earnings of the foreign subsidiaries of approximately $391 million
at December 31, 2001 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 Company's intention is to permanently reinvest such
foreign earnings. A determination of the amount of the unrecognized deferred tax
liability related to undistributed earnings is not practicable.
In addition, 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 $247
million of unremitted earnings earned by Witco's foreign subsidiaries prior to
the Merger on September 1, 1999. The Company does not expect this difference in
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 (loss)
per share is based on the weighted average number of common and common share
equivalents outstanding. The computation of diluted loss per share for fiscal
years 2001 and 1999 equals the basic calculation since common stock equivalents
(2,443 in 2001 and 1,118 in 1999) were antidilutive.
<Table>
<Caption>
(In thousands, except per share data)
2001 2000 1999
Earnings (loss) before
extraordinary loss $ (123,944) $ 89,273 $ (159,351)
Net earnings (loss) $ (123,944) $ 89,273 $ (175,038)
Basic
Weighted average
shares outstanding 113,061 113,644 83,507
Earnings (loss) before
extraordinary loss $ (1.10) $ .78 $ (1.91)
Net earnings (loss) $ (1.10) $ .78 $ (2.10)
Diluted
Weighted average
shares outstanding 113,061 113,644 83,507
Stock options,
warrants and other
equivalents -- 1,521 --
Weighted average
shares adjusted
for dilution 113,061 115,165 83,507
Earnings (loss) before
extraordinary loss $ (1.10) $ .78 $ (1.91)
Net earnings (loss) $ (1.10) $ .78 $ (2.10)
</Table>
<Page>
CAPITAL STOCK
The Company is authorized to issue 500 million shares of $.01 par value common
stock. There were 119,187,077 and 119,372,359 shares issued at year-end 2001 and
2000, respectively, of which 6,129,834 and 6,597,185 shares were held as
treasury stock in 2001 and 2000, 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, 2001, the Company had repurchased 6.8 million
common shares under that program at an average price of $11.91 per share.
The Company is authorized to issue 250,000 shares of preferred stock
without par value, none of which are outstanding. 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 LOSS
Components of accumulated other comprehensive loss are as follows:
<Table>
<Caption>
(In thousands) 2001 2000
Foreign currency
translation adjustment $ (105,871) $ (83,833)
Minimum pension liability
adjustment (39,403) (1,827)
Other (6,565) (561)
Accumulated other
comprehensive loss $ (151,839) $ (86,221)
</Table>
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 C&K 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 fair market value of the underlying common
shares 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 of the underlying
common shares on the date of grant.
The 1998 Long-Term Incentive Plan (1998 Plan) was approved by the
shareholders of C&K 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 non-qualified stock options to non-employee
directors over a ten year period. During 2001, 2000 and 1999, non-qualified and
incentive stock options were granted under the 1998 Plan at prices not less than
100% of the fair market value of the underlying common shares
<Page>
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)
the 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) the shares
awarded under prior plans of C&K 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 became 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 C&K's long-term
incentive program. At December 31, 2001, deferred compensation relating to such
shares in the amount of $0.4 million is being amortized over an estimated
service period of six to fifteen years.
In 1996, C&K 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 payable at retirement.
Compensation expense related to such shares is accrued over a six year period.
In October 1999, C&K granted long-term incentive awards in the amount of
2,175,000 shares of restricted stock from the 1998 Plan. In connection with the
Merger, vesting requirements relating to 300,000 shares of restricted stock were
waived. The remaining 1,875,000 shares were earned as of December 31, 2000 based
upon the achievement of certain financial criteria and will vest over a three
year period ending on January 1, 2003. The compensation expense relating to
these shares is being accrued over a three year period.
In January 2000, the Company granted long-term incentive awards under the
1998 Plan for a maximum of 2,707,250 shares to be earned at the end of 2002 if
certain financial criteria were met. In January 2001, the January 2000 awards
were cancelled and awards were made for a maximum of 2,343,367 shares to be
earned if certain vesting and financial criteria were met at the end of 2002. In
January 2002, the Company agreed in principle to grant long-term incentive
awards under the 1998 Plan. The awards will be earned if certain financial
criteria are met for 2002 through 2004. In conjunction with this award, the
performance-based awards granted in January 2001 will be cancelled.
In October 2001, the Board of Directors approved the 2001 Employee Stock
Option Plan (2001 Plan). The 2001 Plan authorizes the Board to grant up to 1
million non-qualified stock options to key non-officer employees. Options under
the 2001 plan will be granted at prices not less than 100% of the fair market
value of the underlying common shares on the date of grant and will expire not
more than 10 years and one month from the date of grant. During 2001, options
for 671,500 shares were granted.
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 historical method of accounting for
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." 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 $(132,160), $84,858 and $(183,860) for the years 2001, 2000 and
1999, respectively. Net
<Page>
earnings (loss) per common share (basic) would have been $(1.17), $0.75 and
$(2.20) and net earnings (loss) per common share (diluted) would have been
$(1.17), $0.74 and $(2.20) for the years 2001, 2000 and 1999, respectively. The
average fair value per share of options granted was $3.97 in 2001, $4.35 in
2000, and $4.35 in 1999. The fair value of options granted was estimated using
the Black-Scholes option pricing model with the following assumptions for 2001,
2000 and 1999, respectively: dividend yield 2.0%, 1.9%, and 2.1%, expected
volatility 52%, 54%, and 50%, risk-free interest rate 5.0%, 5.8%, and 6.3%, and
expected life 8 years, 8 years, and 8 years.
Changes during 2001, 2000 and 1999 in shares under option are summarized
as follows:
<Table>
<Caption>
Price Per Share
Range Average Shares
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
Granted 8.16-8.34 8.16 2,168,500
Exercised 5.22-13.00 8.10 (45,357)
Lapsed 8.16-26.41 12.61 (585,067)
Outstanding at 12/31/00 3.13-26.41 11.98 11,771,322
Granted 7.92-10.81 7.93 1,760,866
Exercised 3.13-8.34 5.20 (111,759)
Lapsed 8.16-26.41 15.75 (346,142)
Outstanding at 12/31/01 $ 5.22-26.41 $ 11.39 13,074,287
Exercisable at 12/31/99 $ 3.13-26.41 $ 15.15 4,461,652
Exercisable at 12/31/00 $ 3.13-26.41 $ 14.15 6,718,519
Exercisable at 12/31/01 $ 5.22-26.41 $ 12.78 9,073,974
</Table>
Shares available for grant at year-end 2001 and 2000 were 5,102,946 and
4,357,732, respectively.
The following table summarizes information concerning currently outstanding and
exercisable options:
<Table>
<Caption>
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at end of Contractual Exercise at end of Exercise
Prices 2001 Life Price 2001 Price
$ 5.22-8.34 7,637,726 8.1 $ 8.14 3,736,379 $ 8.19
$10.81-13.57 1,001,773 2.4 $ 12.25 996,773 $ 12.26
$14.34-17.13 3,613,693 4.5 $ 15.15 3,519,727 $ 15.17
$18.63-26.41 821,095 4.1 $ 24.05 821,095 $ 24.05
13,074,287 6.4 $ 11.39 9,073,974 $ 12.78
</Table>
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
<Page>
employee contributions. The Company's contributions were $3.6 million in 2001,
$3.3 million in 2000 and $4.2 million in 1999.
Effective June 1, 2001, the Company established an Employee Stock Purchase Plan.
This plan permits eligible employees to annually elect to have up to 10% of
their compensation withheld for the purchase of shares of the Company's common
stock at 85% of the average of the high and low sale prices on the date of
purchase. As of December 31, 2001, 91,075 shares were purchased under this plan.
PENSION AND OTHER POST-RETIREMENT 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 under the defined benefit plans 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 the 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 these 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 domestic employees and certain international employees.
These plans are generally not pre-funded and are paid by the Company as
incurred, except for certain inactive government related plans.
Change in projected benefit obligation:
<Table>
<Caption>
Pension Plans Post-Retirement Plans
(In thousands) 2001 2000 2001 2000
Projected benefit
obligation at
beginning of year $ 804,774 $ 750,319 $ 212,411 $ 203,596
Service cost 12,755 14,950 1,539 1,864
Interest cost 54,206 54,879 15,148 15,567
Plan participants'
contributions 806 1,038 741 906
Plan amendments 1,095 -- 2,353 4,009
Actuarial losses 18,364 25,316 450 4,539
Foreign currency
exchange rate changes (8,920) (8,501) (292) (119)
Acquisitions
(divestitures) (708) 14,210 -- --
Benefits paid (53,812) (49,394) (16,411) (17,699)
Curtailments (10,950) (336) 572 (1,317)
Settlements (14,886) (518) -- --
Special termination
benefits 2,030 2,811 -- 1,065
Projected benefit obligation
at end of year 804,754 804,774 216,511 212,411
</Table>
<Page>
Change in plan assets:
<Table>
<Caption>
Pension Plans Post-Retirement Plans
(In thousands) 2001 2000 2001 2000
Fair value of plan
assets at beginning
of year $ 717,672 $ 721,971 $ 39,776 $ 43,511
Actual return on
plan assets (31,253) 29,570 (2,401) (1,037)
Foreign currency
exchange rate
changes (5,714) (6,510) -- --
Employer contributions 19,704 11,470 12,875 14,095
Plan participants'
contributions 806 1,038 741 906
Acquisitions
(divestitures) (708) 10,002 -- --
Benefits paid (53,812) (49,394) (16,411) (17,699)
Settlements (26,676) (475) -- --
Fair value of plan
assets at end of year $ 620,019 $ 717,672 $ 34,580 $ 39,776
</Table>
Funded status:
<Table>
<Caption>
Pension Plans Post-Retirement Plans
(In thousands) 2001 2000 2001 2000
Funded status $ (184,735) $ (87,102) $ (181,931) $ (172,635)
Unrecognized
transition asset 1,961 1,558 -- --
Unrecognized
actuarial (gain) loss 90,155 (24,571) (10,197) (18,305)
Unrecognized prior
service cost 3,757 7,865 (7,455) (15,529)
Net amount recognized $ (88,862) $(102,250) $ (199,583) $ (206,469)
</Table>
The amounts recognized in the consolidated balance sheets consist of the
following:
<Table>
<Caption>
Pension Plans Post-Retirement Plans
(In thousands) 2001 2000 2001 2000
Prepaid benefit
costs $ 21,226 $ 15,004 $ -- $ --
Accrued benefit
liabilities (179,584) (125,503) (199,583) (206,469)
Intangible asset 4,697 5,263 -- --
Accumulated other
comprehensive loss 64,799 2,986 -- --
Net amount recognized $ (88,862) $ (102,250) $ (199,583) $ (206,469)
</Table>
<Page>
Components of net periodic benefit cost (credit):
<Table>
<Caption>
Pension Plans Post-Retirement Plans
(In thousands) 2001 2000 1999 2001 2000 1999
Service
cost $ 12,755 $ 14,950 $ 7,791 $ 1,539 $ 1,864 $ 1,272
Interest
cost 54,206 54,879 28,345 15,148 15,567 10,820
Expected
return on
plan assets (62,235) (59,941) (31,045) (3,668) (3,795) (3,175)
Amortization
of prior
service cost 1,392 1,491 1,166 (4,176) (4,877) (5,561)
Amortization of
unrecognized
transition
obligation 187 59 36 -- -- --
Recognized
actuarial
(gains) losses (236) (335) 5,883 (1,447) (1,363) (1,269)
Curtailment
(gain) loss
recognized (6,056) (336) (14,449) (1,055) -- 196
Settlement
(gain) loss
recognized 7,968 (61) -- -- -- --
Net periodic
benefit
cost (credit) $ 7,981 $ 10,706 $ (2,273) $ 6,341 $ 7,396 $ 2,283
</Table>
The assumed health care cost trend rate ranged from 9% - 10.5% and is assumed to
decrease gradually to 5% in 2011 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:
<Table>
<Caption>
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 2001 $ 1,347 $ (1,318)
Effect on accumulated post-retirement
benefit obligation for health care
benefits as of December 31, 2001 $15,854 $(15,884)
</Table>
For pension plans with accumulated benefit obligations in excess of plan assets,
the aggregate accumulated benefit obligation was $696.5 million in 2001 and
$320.9 million in 2000, and the aggregate fair value of plan assets was $547.6
million in 2001 and $204 million in 2000.
The weighted-average discount rate used to calculate the projected benefit
obligation ranged from 5.8% - 7.0% in 2001 and 6.0% - 7.75% in 2000. The
expected long-term rate of return on plan assets ranged from 6.8% - 9.5% in 2001
and 6.25% - 9.5% in 2000. The assumed rate of compensation increase ranged from
3% - 4.25% in 2001 and 2000.
<Page>
The Company's net cost of pension plans, including defined contribution plans,
was $23.2 million, $28.9 million, and $11.2 million in 2001, 2000 and 1999,
respectively.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and FASB
Statement 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 all of its derivatives on the
balance sheet at their fair value on January 1, 2001. As a result of the
implementation of the Statements, in the first quarter the Company recorded a
gain of $567,000 ($346,000 after-tax), which is included in other expense, to
recognize at fair value all derivatives that are designated as fair value
hedging instruments. The Company also recorded in the first quarter a loss of
$234,000 as a component of accumulated other comprehensive loss (AOCL) to
recognize at fair value all derivatives that are designated as cash flow hedging
instruments.
The Company's activities expose its earnings, cash flows and financial position
to a variety of market risks, including the effects of changes in foreign
currency exchange rates and interest rates. The Company maintains a foreign
currency risk-management strategy that uses derivative instruments to mitigate
risk against foreign currency movements. The Company uses foreign currency
forward exchange contracts and swaps to hedge these risks. The Company also
maintains an interest-rate risk-management strategy that uses derivative
instruments to manage interest rate volatility. The Company's specific goals are
(1) to manage interest-rate sensitivity and (2) to lower (where possible) the
cost of its borrowed funds. Based upon the designation of the derivative as a
fair value, cash flow or foreign currency hedge, and its effectiveness as a
hedge if so designated, the change in fair value of the derivative and any
related hedged asset or liability is recorded in current period earnings or as a
component of AOCL. The Company does not enter into derivative instruments for
speculative purposes.
The Company used an interest rate swap contract as a fair value hedge to convert
$300 million of its fixed rate Senior Notes into variable rate debt. On March
24, 2001, the swap contract was terminated and the Company received cash
proceeds of $21.9 million in settlement of the contract, which represented the
market value of the contract on the date of termination. In accordance with the
Statements, 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.
The Company uses interest rate swap contracts, which expire in 2003, as cash
flow hedges to convert its $58 million Euro denominated variable rate 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 recognized as an
adjustment to interest expense. In the event of early extinguishment of the
designated debt obligations, any realized or unrealized gain or loss from the
swap would be recognized in earnings coincident with the extinguishment gain or
loss. For the year ended December 31, 2001, the Company recorded a loss of
$964,000 as a component of AOCL, with an offset in other liabilities, to
recognize the change in fair value of these derivatives which are 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. The Company originally
entered into these contracts to hedge the cash flow variability associated with
its obligations under its long-term incentive plans. However, based on
management's assessment that certain performance-based criteria would not be
achieved, the Company ceased recognizing compensation expense relating to the
performance-based portion of one of its long-term
<Page>
incentive plans. As a result, these option contracts did not qualify for hedge
accounting as of June 30, 2001. Accordingly, the changes in the market value of
these contracts through June 30, 2001 were recorded in earnings. Subsequently,
the Company designated a portion of these option contracts as cash flow hedges
of the risk associated with the unvested, unpaid awards under its long-term
incentive plans. Accordingly, subsequent changes in market value related to the
option contracts designated and effective as hedges have been recorded as a
component of AOCL, with any ineffective portion recorded to other expense. The
amount included in AOCL is subject to changes in the stock price and will be
amortized ratably to earnings over the remaining service periods of the hedged
long-term incentive plans. As of December 31, 2001, in connection with this cash
flow hedge, the Company deferred a loss of $1.3 million to AOCL.
The Company also has exposure to changes in foreign currency exchange rates
resulting 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 is also exposed to currency risk on
intercompany transactions (including long-term intercompany loans). The Company
manages these transactional currency risks on a consolidated basis, which allows
it to net its trade payable and receivable exposure. The Company purchases
foreign currency forward contracts to hedge its transaction exposure. The
aggregate notional amount of these contracts at December 31, 2001 is
approximately $356 million. These contracts are generally settled on a monthly
basis. Realized and unrealized gains and losses on foreign currency forward
contracts are recognized in earnings to offset the impact of valuing recorded
foreign currency trade payables, receivables and intercompany transactions. The
Company has not designated these derivatives as hedges, although it believes
these instruments reduce the Company's exposure to foreign currency risk. These
contracts are short-term in nature and the fair value is not significant at
December 31, 2001.
FINANCIAL INSTRUMENTS
As discussed in the Derivative Instruments and Hedging Activities note above,
the Company enters into interest rate swap contracts to modify the interest
characteristics of some of its outstanding debt and purchases foreign currency
forward contracts to mitigate its exposure to changes in foreign currency
exchange rates of recorded transactions (principally foreign currency trade
receivables and payables, and intercompany transactions).
At December 31, 2001, the Company had outstanding interest rate swap contracts
with an aggregate notional amount of $58 million. These contracts are used to
convert the Company's variable rate Euro denominated debt to fixed rate debt. At
December 31, 2000, the Company had interest rate swap contracts with an
aggregate notional amount of $361.8 million. These contracts related to the
Company's $61.8 million variable rate Euro denominated debt and $300 million of
its fixed rate 8.5% Senior Notes. On March 24, 2001, the Company terminated the
$300 million variable interest rate swap contract related to its 8.5% Senior
Notes.
At December 31, 2001, the Company had outstanding foreign currency forward
contracts with an aggregate notional amount of approximately $356 million, to
hedge foreign currency risk on foreign currency accounts receivable and payable
and intercompany loans. These forward contracts are generally outstanding for
one month and are primarily denominated in Euros, Canadian dollars, Swiss
francs, British pounds and Singapore dollars. At December 31, 2000, the Company
had outstanding foreign currency forward contracts with an aggregate notional
amount of approximately $329.5 million.
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.
<Page>
The carrying amounts for cash, accounts receivable, other current assets,
accounts payable and other current liabilities approximate their fair value
because of the short-term maturities of these instruments. The fair value of
long-term debt is based primarily on quoted market values. For long-term debt
which has 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 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.
<Table>
<Caption>
2001
Carrying Fair
(In thousands) Amount Value
Long-term debt $ (1,392,833) $ (1,407,996)
Interest rate swap contracts (a) $ (1,197) $ (1,197)
Foreign currency forward
contracts (a) $ (111) $ (63)
<Caption>
2000
Carrying Fair
(In thousands) Amount Value
Long-term debt $ (1,479,394) $ (1,448,536)
Interest rate swap contracts (a) $ (993) $ 14,566
Foreign currency forward
contracts (a) $ (326) $ 3,682
</Table>
(a) Carrying amount relates to contracts designated as hedges and is primarily
included in other liabilities.
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 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, 2001 was $145 million. The Company estimates its
potential environmental liability to range from $120 million to $160 million at
December 31, 2001. It is possible that the Company's estimates for environmental
remediation liabilities may change in the future should
<Page>
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
(the "Court"), entered an order finding that Uniroyal Chemical Co./Cie
(Uniroyal) (a wholly owned subsidiary of the Company) is jointly and severally
liable to the United States and Hercules Incorporated (Hercules) and Uniroyal
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 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 liable to
the United States for approximately $2.3 million and liable to Hercules in
contribution for approximately $700,000. On April 10, 2001, the United States
Court of Appeals for the Eighth Circuit (the "Appeals Court") (i) reversed a
decision in favor of the United States and against Hercules with regard to the
issue of divisibility of harm and remanded the case back to the Court for a
trial on the issue; (ii) affirmed the finding of arranger liability against
Uniroyal; and (iii) set aside the findings of contribution between Hercules and
Uniroyal by the Court pending a decision upon remand. The Appeals Court also
deferred ruling on all constitutional issues raised by Hercules and Uniroyal
pending subsequent findings by the Court. On June 6, 2001, the Appeals Court
denied Uniroyal's petition for rehearing by the full Appeals Court on the
Appeals Court's finding of arranger liability against Uniroyal and on December
10, 2001, Uniroyal's Writ of Certiorari with the United States Supreme Court
with regard to the issues of its arranger liability was denied. On December 12,
2001, the Court concluded hearings pursuant to the April 10, 2001, remand by the
Appeals Court. A decision from the Court is expected during the second quarter
of 2002.
The Company has standby letters of credit and guarantees with various financial
institutions. At December 31, 2001, the Company had $67.4 million of outstanding
letters of credit and guarantees primarily related to its environmental
remediation liabilities and insurance obligations.
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 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, the Company has defined 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 and surfactants) and
Other (petroleum additives, refined products, industrial 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 expense and income
taxes. Corporate assets are principally cash, intangible assets, including
goodwill, and other assets maintained for general corporate
<Page>
purposes. A summary of business data for the Company's reportable segments for
the years 2001, 2000 and 1999 follows.
<Table>
<Caption>
Information by Business Segment
(In thousands) 2001 2000 1999
Sales
Polymer Products
Polymer Additives $ 878,603 $ 992,690 $ 620,188
Polymers 288,742 335,081 316,300
Polymer Processing
Equipment 202,653 310,490 300,016
Eliminations (13,805) (14,175) (3,469)
1,356,193 1,624,086 1,233,035
Specialty Products
OrganoSilicones 432,255 484,424 158,925
Crop Protection 411,311 413,706 294,798
Other 519,039 516,214 405,600
1,362,605 1,414,344 859,323
$ 2,718,798 $3,038,430 $ 2,092,358
Operating Profit
Polymer Products
Polymer Additives $ 34,274 $ 79,482 $ 67,880
Polymers 44,534 71,771 82,951
Polymer Processing
Equipment (15,647) 24,640 19,981
63,161 175,893 170,812
Specialty Products
OrganoSilicones 46,135 84,139 16,784
Crop Protection 80,804 83,756 69,194
Other 28,319 32,449 25,144
155,258 200,344 111,122
Corporate (38,760) (45,483) (28,573)
Amortization (38,860) (39,271) (27,460)
Special items (194,399) (23,148) (224,518)
$ (53,600) $ 268,335 $ 1,383
Depreciation and Amortization
Polymer Products
Polymer Additives $ 46,537 $ 47,523 $ 30,054
Polymers 14,826 12,752 13,957
Polymer Processing
Equipment 2,765 2,543 2,951
64,128 62,818 46,962
</Table>
<Page>
<Table>
Specialty Products
OrganoSilicones 25,003 23,293 6,929
Crop Protection 18,196 15,837 9,414
Other 21,201 22,314 19,615
64,400 61,444 35,958
Corporate 57,042 57,755 33,728
$ 185,570 $ 182,017 $ 116,648
(In thousands) 2001 2000 1999
Segment Assets
Polymer Products
Polymer Additives $ 576,643 $ 753,048 $ 788,062
Polymers 144,787 196,876 226,678
Polymer Processing
Equipment 101,498 122,743 128,679
822,928 1,072,667 1,143,419
Specialty Products
OrganoSilicones 381,609 388,244 384,392
Crop Protection 285,047 306,103 316,733
Other 261,009 369,321 438,699
927,665 1,063,668 1,139,824
Corporate 1,481,595 1,391,992 1,443,375
$ 3,232,188 $ 3,528,327 $ 3,726,618
Capital Expenditures
Polymer Products
Polymer Additives $ 42,775 $ 47,383 $ 49,005
Polymers 8,559 13,774 23,938
Polymer Processing
Equipment 4,160 3,355 3,204
55,494 64,512 76,147
Specialty Products
OrganoSilicones 44,339 47,760 8,586
Crop Protection 12,517 12,470 17,458
Other 18,317 21,212 21,333
75,173 81,442 47,377
Corporate 5,975 8,860 8,258
$ 136,642 $ 154,814 $ 131,782
Equity Method Investments
Polymer Products
Polymer Additives $ 43,024 $ 41,832 $ 33,051
Polymers 1,134 6,765 7,551
Polymer Processing
Equipment -- -- --
</Table>
<Page>
<Table>
$ 44,158 $ 48,597 $ 40,602
Specialty Products
OrganoSilicones 45 48 52
Crop Protection 24,465 20,725 22,262
Other 3,002 11,441 11,194
27,512 32,214 33,508
Corporate -- 1,750 --
$ 71,670 $ 82,561 $ 74,110
Geographic Information
Sales are attributed based on location of customer
(In thousands) 2001 2000 1999
Sales
United States $ 1,359,644 $ 1,644,125 $ 1,140,401
Canada 123,470 145,566 108,041
Latin America 183,851 179,239 132,674
Europe/Africa 763,685 722,513 505,597
Asia/Pacific 288,148 346,987 205,645
$ 2,718,798 $ 3,038,430 $ 2,092,358
Property, plant and equipment
United States $ 683,140 $ 822,669 $ 938,555
Canada 43,008 48,215 47,869
Latin America 28,429 15,307 15,021
Europe/Africa 253,383 270,435 233,836
Asia/Pacific 14,023 25,461 27,064
$ 1,021,983 $ 1,182,087 $ 1,262,345
</Table>
<Page>
Summarized Unaudited Quarterly Financial Data
<Table>
<Caption>
(In thousands, except per share data)
2001
First Second Third Fourth
Net sales $ 737,936 $ 724,032 $ 651,921 $ 604,909
Gross profit 223,349 221,030 197,313 171,770
Net earnings
(loss) 15,770 13,894 (68,208) (85,400)
Net earnings (loss)
per common share:
Basic .14 .12 (.60) (.76)
Diluted .14 .12 (.60) (.76)
Dividends per
common share .05 .05 .05 .05
Market price per
common share:
High 12.19 12.10 11.08 9.65
Low 10.06 9.72 6.20 6.35
2000
Net sales 769,018 802,886 738,456 728,070
Gross profit 251,302 272,092 227,542 210,406
Net earnings
(loss) 29,673 41,541 21,560 (3,501)
Net earnings (loss)
per common share:
Basic .26 .36 .19 (.03)
Diluted .26 .36 .19 (.03)
Dividends per
common share .05 .05 .05 .05
Market price per
common share:
High 14.19 13.88 12.94 11.06
Low 9.00 9.31 7.69 6.94
</Table>
Responsibility for Financial Statements
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America 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.
<Page>
Independent Auditors' Report
The Board of Directors and Stockholders
Crompton Corporation
We have audited the accompanying consolidated balance sheets of Crompton
Corporation and subsidiaries (the Company) as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2001.
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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
(KPMG |_| signature)
Stamford, Connecticut
January 31, 2002
<Page>
Five Year Selected Financial Data
<Table>
<Caption>
(In millions of dollars, except per share data) 2001 2000 1999 1998 1997
Summary of Operations
Net sales $2,718.8 3,038.4 2,092.4 1,796.1 1,851.2
Gross profit $ 813.5 961.3 731.0 649.9 655.2
Operating profit (loss) $ (53.6) 268.3 1.4 218.3 224.3
Interest expense $ 109.9 120.4 69.8 78.5 103.3
Other expense (income) $ 25.1 5.5 48.0 (158.9) (27.8)
Earnings (loss) before income taxes and extraordinary loss $ (188.6) 142.4 (116.4) 298.7 148.8
Provision (benefit) for income taxes $ (64.7) 53.1 42.9 115.4 56.7
Earnings (loss) before extraordinary loss $ (123.9) 89.3 (159.3) 183.3 92.1
Extraordinary loss $ -- -- (15.7) (21.5) (5.3)
Net earnings (loss) $ (123.9) 89.3 (175.0) 161.8 86.8
Special items, net of tax (included above):
Facility closure, severance and related costs $ (75.0) (15.0) -- (21.1) --
Asset impairments $ (50.8) -- -- -- --
Gain (loss) on sale of businesses $ (14.1) -- (38.7) 92.1 --
Acquired in-process research and development $ -- -- (195.0) -- --
Merger and related costs $ -- -- (20.6) -- --
Severance and other costs $ -- -- -- (7.8)
Special environmental charge $ -- -- -- (9.0)
Postretirement settlement gain $ -- -- -- 16.8
Early extinguishment of debt $ -- (15.7) (21.5) (5.3)
Other $ -- -- -- (5.0)
Total special items, net of tax $ (139.9) (15.0) (270.0) 44.5 (5.3)
Per Share Statistics
Basic
Earnings (loss) before extraordinary loss $ (1.10) .78 (1.91) 2.48 1.25
Net earnings (loss) $ (1.10) .78 (2.10) 2.20 1.18
Diluted $
Earnings (loss) before extraordinary loss $ (1.10) .78 (1.91) 2.42 1.22
Net earnings (loss) $ (1.10) .78 (2.10) 2.14 1.15
Dividends $ .20 .20 .10 .05 .05
Book value $ 4.84 6.69 6.50 .96 (.27)
Common stock trading range: $
High $ 12.19 14.19 21.38 32.81 27.38
Low $ 6.20 6.94 7.13 13.25 17.88
Average shares outstanding (thousands) - Basic $113,061 113,644 83,507 73,696 73,373
Average shares outstanding (thousands) - Diluted $113,061 115,165 83,507 75,700 75,358
Financial Position
Working capital $ 132.5 361.4 141.8 203.4 352.0
Current ratio $ 1.2 1.5 1.1 1.5 2.0
Total assets $3,232.2 3,528.3 3,726.6 1,408.9 1,548.8
Total debt $1,422.6 1,506.8 1,391.0 664.2 898.1
Stockholders' equity (deficit) $ 547.5 754.0 759.9 66.7 (20.1)
Total capital employed $1,970.2 2,260.8 2,150.9 730.9 878.0
Debt to total book capital % $ 72.2 66.7 64.7 90.9 102.3
Debt to total market capital % $ 58.3 56.0 47.1 32.3 32.3
Profitability Statistics (Before Special Items)
% Operating profit on sales $ 5.2 9.6 10.8 14.5 13.6
% Earnings on sales $ 0.6 3.4 4.5 6.5 5.0
% Earnings on average total capital $ 3.8 7.9 11.4 18.6 16.5
% Return on average equity $ 2.2 14.0 27.2 N/A N/A
Other Statistics
EBITDA before special items $ 320.4 468.0 335.8 345.9 332.0
Capital spending $ 136.6 154.8 131.8 66.6 50.2
Depreciation $ 146.7 142.7 89.2 59.4 58.7
Amortization $ 38.9 39.3 27.4 21.1 21.2
Number of employees $ 7,340 8,306 8,612 5,536 5,583
</Table>
<Page>
Corporate Management
Vincent A. Calarco
Chairman, President and
Chief Executive Officer
Robert W. Ackley
Executive Vice President
Polymer Processing Equipment
James J. Conway
Executive Vice President
Performance Chemicals and Elastomers
Mary Gum
Executive Vice President
OSi Specialties and Urethanes
Alfred F. Ingulli
Executive Vice President
Crop Protection
William A. Stephenson
Executive Vice President
Plastics and Petroleum Additives
Peter Barna
Senior Vice President and
Chief Financial Officer
John T. Ferguson II
Senior Vice President and
General Counsel
Edward L. Hagen
Senior Vice President
Strategy and Development
Marvin H. Happel
Senior Vice President
Organization and Administration
Walter K. Ruck
Senior Vice President
Operations
Other Corporate Officers
John R. Jepsen
Vice President, Treasurer
Barry J. Shainman
Secretary
Michael F. Vagnini
Corporate Controller
Gerald H. Fickenscher
Regional Vice President
Europe, Africa &
the Middle East
Mark E. Harakal
Regional Vice President
Asia-Pacific
Michel J. Duchesne
Regional Vice President
Latin America
Board of Directors
Vincent A. Calarco
Chairman of the Board
President and Chief Executive Officer
Robert A. Fox (1,4)
Managing General Partner
Fox Investments L.P.
Chairman
AgriCapital Advisors
Roger L. Headrick (2,3)
Managing General Partner
HMCH Ventures
Leo I. Higdon, Jr. (2)
President
College of Charleston
Harry G. Hohn (2,3)
Retired Chairman and
Chief Executive Officer
New York Life Insurance Company
C.A. Piccolo (1,3)
President and Chief Executive Officer
HealthPic Consultants, Inc.
Bruce F. Wesson (1,4)
President
Galen Associates
General Partner
Galen Partners, L.P.
Patricia K. Woolf, Ph.D. (1,4)
Private Investor and Lecturer
Department of Molecular Biology
Princeton University
1 Member of Audit Committee
2 Member of Finance and Pension Committee
3 Member of Organization, Compensation and Governance Committee
4 Member of Safety, Health and Environment Committee
Corporate Data
Corporate Headquarters
Through 9/30/02:
One American Lane
Greenwich, CT 06831 USA
(203) 552-2000
As of 10/1/02:
199 Benson Road
Middlebury, CT 06749 USA
(203) 573-2000
Website
www.cromptoncorp.com
NYSE symbol
CK
<Page>
Auditors
KPMG LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
Transfer Agent and Registrar
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 288-9541
www.melloninvestor.com
Form 10-K
A copy of the Company's report on Form 10-K for 2001, as ?led with the
Securities and Exchange Commission, may be obtained free of charge by writing to
the Corporate Secretary at the appropriate Corporate Headquarters address above.
Annual Meeting
The annual meeting of stockholders will be held at 11:15 a.m. on Tuesday, April
30, 2002, at
Dolce Heritage
522 Heritage Road
Southbury, CT 06488
Investor Relations
William A. Kuser
(203) 552-2000 through 9/30/02
(203) 573-2000 as of 10/1/02
Bill_Kuser@cromptoncorp.com
Media Relations
Debra Durbin
(203) 573-2000
Debra_Durbin@cromptoncorp.com
For an interactive version of this report visit www.cromptoncorp.com/ar2001
(C)2002 Crompton Corporation.
All rights reserved.
(Crompton logo) is a registered trademark of Crompton Corporation.
(R) and (TM) indicate registered and unregistered trade and service marks.
(Responsible Care(R) logo)
Crompton is a member of the American Chemistry Council and a signatory of the
Council's Responsible Care(R) Program. The company is committed to a continuous
effort to improve performance in safety, health and environmental quality.
(Crompton logo)
Through 9/30/02:
One American Lane
Greenwich, CT 06831 USA
(203) 552-2000
Through 9/30/02:
One American Lane
Greenwich, CT 06831 USA
(203) 552-2000