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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
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Amendment No. 1
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number 1-12091
MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3436215
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Half Mile Road
Red Bank, New Jersey 07701
(Address of principal executive offices)
732-933-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 63,428,561 shares of Common
Stock, par value $.01 per share, as of May 3, 2001, excluding 14,468,025 shares
held by the registrant, its subsidiaries and certain Company trusts, which are
not entitled to vote.
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EXPLANATORY NOTE
Millennium Chemicals Inc. (the "Company") is filing this amendment to
its Form 10-Q for the quarter ended March 31, 2001 to revise the Supplemental
Financial Information of the Company that was included in Note 9 to the
Consolidated Financial Statements of the Company filed as part of Item 1 to such
Form 10-Q. Such revised Supplemental Financial Information includes revisions to
disclose the financial position, results of operations and cash flows of the
Company, Millennium America Inc., an indirect, wholly owned subsidiary of the
Company ("Millennium America"), and subsidiaries of the Company other than
Millennium America. Item 1, as amended, is hereby provided in its entirety.
ITEM 1. FINANCIAL STATEMENTS
MILLENNIUM CHEMICALS INC.
Consolidated Balance Sheets
(Dollars In Millions, Except Share Data)
March 31, December 31,
2001 2000
------------- -------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 58 $ 107
Trade receivables, net 297 306
Inventories 352 373
Other current assets 85 101
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Total current assets
792 887
Property, plant and equipment, net 929 957
Investment in Equistar 738 760
Other assets 228 225
Goodwill 388 391
------------- -------------
Total assets $ 3,075 $ 3,220
============= =============
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 50 $ 39
Current maturities of long-term debt 352 391
Trade accounts payable 144 165
Accrued expenses and other liabilities 188 188
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Total current liabilities
734 783
Long-term debt 764 767
Deferred income taxes 9 19
Other liabilities 624 646
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Total liabilities
2,131 2,215
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Commitments and contingencies (Note 7)
Minority interest 20 22
Shareholders' equity
Preferred stock (par value $.01 per share,
authorized 25,000,000 shares, none issued and
outstanding) - -
Common stock (par value $.01 per share, authorized
225,000,000 shares; 77,896,586 shares issued at
March 31, 2001 and December 31, 2000,
respectively) 1 1
Paid in capital 1,322 1,326
Retained earnings 31 55
Unearned restricted shares (21) (25)
Cumulative other comprehensive loss (141) (107)
Treasury stock (at cost, 14,463,016 and 13,747,228
shares at March 31, 2001 and December 31, 2000,
respectively) (282) (282)
Deferred compensation 14 15
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Total shareholders' equity 924 983
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Total liabilities and shareholders' equity $ 3,075 $ 3,220
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See Notes to Consolidated Financial Statements
3
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Operations
(Dollars in Millions, Except Share Data)
Three Months Ended March 31,
2001 2000
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(Unaudited)
Net sales $ 444 $ 423
Operating costs and expenses
Cost of products sold 343 300
Depreciation and amortization 28 27
Selling, development and
administrative expense 43 50
Restructuring and other charges 5 -
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Operating income 25 46
Interest expense (22) (19)
Interest income 1 1
Equity in (loss) earnings of Equistar (24) 14
Other income, net - 3
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(Loss) income from continuing operations
before provision for income taxes and
minority interest (20) 45
Benefit (provision) for income taxes 6 (17)
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(Loss) income from continuing operations
before minority interest (14) 28
Minority interest (1) (3)
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Net (loss) income $ (15) $ 25
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Net (loss) income per share - basic $ (0.24) 0.38
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Net (loss) income per share - diluted $ (0.24) $ 0.37
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See Notes to Consolidated Financial Statements
4
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Cash Flows
(Dollars in Millions)
Three Months Ended March 31,
2001 2000
--------------------------------
(Unaudited)
Cash flows from operating activities
Net (loss) income $ (15) $ 25
Adjustments to reconcile net (loss)
income to net cash provided
by operating activities
Depreciation and amortization 28 27
Deferred income tax (benefit) provision (3) 3
Restricted stock amortization (1) -
Equity in loss (earnings) of Equistar 24 (14)
Minority interest 1 3
Changes in assets and liabilities
Increase in trade receivables (1) (29)
Decrease in inventories 6 15
Decrease in other current assets 3 21
(Increase) decrease in investments and
other assets (8) 2
Decrease in trade accounts payable (14) (33)
Increase in accrued expenses and other
liabilities and income taxes payable - 23
Decrease in other liabilities (14) (9)
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Cash provided by operating activities 6 34
Cash flows from investing activities
Capital expenditures (28) (21)
Distributions from Equistar - -
Proceeds from sale of fixed assets 2 2
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Cash used in investing activities (26) (19)
Cash flows from financing activities
Dividends to shareholders (9) (9)
Repurchases of common stock - (23)
Proceeds from long-term debt 25 26
Repayment of long-term debt (54) (34)
Increase in notes payable 11 5
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Cash used in financing activities (27) (35)
Effect of exchange rate changes on cash (2) (2)
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Decrease in cash and cash equivalents (49) (22)
Cash and cash equivalents at beginning of year 107 110
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Cash and cash equivalents at end of period $ 58 $ 88
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See Notes to Consolidated Financial Statements
5
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Changes in Shareholders' Equity
(In Millions) (Unaudited)
Common Stock Treasury Deferred Paid In Retained
Shares Amount Stock Compensation Capital Earnings
--------- --------- --------- ------------ ------- ----------
Balance at December 31, 2000 64 $ 1 $ (282) $ 15 $1,326 $ 55
Comprehensive income
Net loss (15)
Other comprehensive income
Unrealized loss on cash flow hedges
Currency translation adjustment --------- --------- --------- ------------ ------- ----------
Total comprehensive loss - - - - - (15)
Amortization and adjustment of
unearned restricted shares (4)
Issuance of shares from employee
benefit plan trusts 1 (1)
Shares purchased by rabbi trust (1)
Dividend to shareholders (9)
--------- -------- -------- ----------- ------ ---------
Balance at March 31, 2001 64 $ 1 $ (282) $ 14 $1,322 $ 31
Cumulative
Unearned Other
Restricted Comprehensive
Shares Loss Total
----------- -------------- --------
Balance at December 31, 2000 $ (25) $ (107) $ 983
Comprehensive income'
Net loss (15)
Other comprehensive income -
Unrealized loss on cash flow hedges (6) (6)
Currency translation adjustment ---------- -------------- --------
Total comprehensive loss - (34) (49)
Amortization and adjustment of
unearned restricted shares 4 -
Issuance of shares from employee
benefit plan trusts -
Shares purchased by rabbi trust (1)
Dividend to shareholders (9)
----------- -------------- --------
Balance at March 31, 2001 $ (21) $ (141) $ 924
See Notes to Consolidated Financial Statements
6
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 1--Description of Company
Millennium Chemicals Inc. (the "Company") is a major international chemical
company, with leading market positions in a broad range of commodity,
industrial, performance and specialty chemicals, operating through its
subsidiaries: Millennium Inorganic Chemicals Inc. (and its non-United States
affiliates), Millennium Petrochemicals Inc. and Millennium Specialty Chemicals
Inc.; and, through its interest in Equistar Chemicals, LP ("Equistar"), a joint
venture among the Company, Lyondell Chemical Company ("Lyondell") and Occidental
Petroleum Corporation ("Occidental").
The Company and Occidental each have a 29.5% interest in Equistar and Lyondell
has a 41% interest. Equistar owns and operates the petrochemical, polymer and
derivative businesses contributed to it by its partners. Equistar is managed by
a Partnership Governance Committee consisting of representatives of each
partner. Approval of Equistar's strategic plans and other major decisions
require the consent of the representatives of the three partners. All decisions
of Equistar's Governance Committee that do not require unanimity among the
partners may be made by Lyondell's representatives alone. The Company accounts
for its interest in Equistar using the equity method.
In March 2001, the Company restructured its operations into two business units,
the "Growth and Development" unit and the "Operational Excellence" unit. The
Growth and Development unit will focus on identifying, developing and managing
businesses that the Company believes have growth potential and operating margins
exceeding chemical industry averages. The Growth and Development unit includes
the Fragrance and Flavor Chemicals group and the Performance Chemicals group.
The Operational Excellence unit will focus on identifying, developing and
managing businesses with steady cash flow and disciplined growth, and includes
the Acetyls segment and the portion of the Titanium Dioxide and Related Products
segment that is not included in Performance Chemicals, as well as the interest
in Equistar. In connection with this restructuring, the Company realigned its
operations committee and management structure and announced the closure of its
office in Cincinnati, Ohio.
The Company was incorporated on April 18, 1996, and has been publicly owned
since October 1, 1996, when Hanson PLC ("Hanson") transferred its chemical
operations to the Company and, in consideration, all of the then outstanding
shares of the Company's common stock ("Common Stock") were distributed pro rata
to Hanson's shareholders (the "Demerger").
Note 2--Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. Minority interest
represents the minority ownership of the Company's Brazilian subsidiary at cost.
All significant intercompany accounts and transactions have been eliminated. The
unaudited consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the financial statements include all adjustments
necessary for a fair statement of the results of operations and financial
position for the periods presented in conformity with generally accepted
accounting principles. Such adjustments are normal recurring items.
Estimates and Assumptions: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification: Certain prior year balances have been reclassified to conform
with the current year presentation.
Revenue Recognition: Revenue is recognized upon transfer of title and risk of
loss, which is generally upon shipment of product to the customer or upon usage
of the product by the customer in the case of consignment inventories.
7
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 2--Significant Accounting Policies--Continued
Costs incurred related to shipping and handling are included in cost of products
sold. Amounts billed to the customer for shipping and handling are included in
sales revenue.
Cash Equivalents: Cash equivalents represent investments in short-term deposits
and commercial paper with banks which have original maturities of 90 days or
less. In addition, other assets include approximately $26 and $29 in restricted
cash at March 31, 2001 and December 31, 2000, respectively, which is on deposit
to satisfy insurance claims.
Inventories: Inventories are stated at the lower of cost or market value. For
certain United States operations representing 35% and 37% of consolidated
inventories at March 31, 2001 and December 31, 2000, respectively, cost is
determined under the last-in, first-out (LIFO) method. The first-in, first-out
(FIFO) method, or methods which approximate FIFO, are used by all other
subsidiaries.
March 31, December 31,
2001 2000
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(Unaudited)
Inventories
Finished products $ 189 $ 188
In-process products 27 26
Raw materials 86 111
Other inventories 50 48
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$ 352 $ 373
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Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, generally 20 to 40 years for buildings and
5 to 25 years for machinery and equipment. Major repairs and improvements
incurred in connection with substantial overhauls or maintenance turnaround are
capitalized and amortized on a straight-line basis until the next planned
turnaround (generally 18 months). Other less substantial maintenance and repair
costs are expensed as incurred.
Capitalized Software Costs: The Company capitalizes costs incurred in the
acquisition and modification of computer software used internally, including
consulting fees and costs of employees dedicated solely to a specific project.
Such costs are amortized over periods not exceeding 7 years and are subject to
impairment evaluation under SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of."
Goodwill: Goodwill represents the excess of the purchase price over the fair
value of net assets allocated to acquired companies. Goodwill is being amortized
using the straight-line method over 40 years. Management periodically evaluates
goodwill for impairment based on the anticipated future cash flows
attributable to its operations. Such expected cash flows, on an undiscounted
basis, are compared to the carrying value of the tangible and intangible assets,
and if impairment is indicated, the carrying value of goodwill is adjusted.
In the opinion of management, no impairment of goodwill existed at
March 31, 2001.
Environmental Liabilities and Expenditures: Accruals for environmental matters
are recorded in operating expenses when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated. Accrued
liabilities are exclusive of claims against third parties, except where payment
has been received or the amount of liability or contribution by such other
parties, including insurance companies, has been agreed, and are not discounted.
Environmental costs are capitalized if the costs increase the value of the
property and/or mitigate or prevent contamination from future operations.
8
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 2--Significant Accounting Policies--Continued
Foreign Currency: Assets and liabilities of the Company's foreign subsidiaries
are translated at the exchange rates in effect at the balance sheet dates, while
revenue, expenses and cash flows are translated at average exchange rates for
the reporting period. Resulting translation adjustments are recorded as a
component of cumulative other comprehensive loss in shareholders' equity. Gains
and losses resulting from changes in foreign currency on transactions
denominated in currencies other than the functional currency of the respective
subsidiary are recognized in income as they occur.
Derivative Instruments and Hedging Activities: All derivatives are recognized on
the balance sheet at their fair value. On the date the derivative contract is
entered into, the Company designates the derivative as (1) a hedge of the fair
value of a recognized asset or liability or of an unrecognized firm commitment
("fair value" hedge), (2) a hedge of a forecasted transaction ("cash flow"
hedge), (3) a foreign-currency fair-value or cash-flow hedge ("foreign currency"
hedge) or (4) a hedge of a net investment in a foreign operation.
Changes in the fair value of a derivative that is highly effective as -- and
that is designated and qualifies as -- a fair-value hedge, along with the loss
or gain on the hedged asset or liability that is attributable to the hedged risk
(including losses or gains on firm commitments), are recorded in current-period
earnings. Changes in the fair value of a derivative that is highly effective as
-- and that is designated and qualifies as -- a cash-flow hedge are recorded in
Other comprehensive income ("OCI"), until earnings are affected by the
variability of cash flows. Changes in the fair value of derivatives that are
highly effective as -- and that are designated and qualify as --
foreign-currency hedges are recorded in either current-period earnings or OCI,
depending on whether the hedge transaction is a fair-value hedge or a cash-flow
hedge. If, however, a derivative is used as a hedge of a net investment in a
foreign operation, its changes in fair value, to the extent effective as a
hedge, are recorded in the cumulative translation adjustments account within
shareholders' equity. For derivative instruments not designated as hedging
instruments, changes in fair values are recognized in earnings in the current
period.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair-value, cash flow, or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge, or that it has ceased to be a
highly effective hedge, the Company discontinues hedge accounting prospectively.
Income Taxes: Deferred income taxes result from temporary differences between
the financial statement basis and income tax basis of assets and liabilities and
are computed using enacted marginal tax rates of the respective tax
jurisdictions. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full. The Company and certain of its
subsidiaries have entered into tax-sharing and indemnification agreements with
Hanson or its subsidiaries in which the Company and/or its subsidiaries
generally agreed to indemnify Hanson or its subsidiaries for income tax
liabilities attributable to periods when such other operations were included in
the consolidated tax returns of the Company's subsidiaries.
Research and Development: The cost of research and development efforts is
expensed as incurred. Such costs aggregated $6 for each of the three months
ended March 31, 2001 and 2000.
9
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 2--Significant Accounting Policies--Continued
Earnings per share: The weighted-average number of equivalent shares of Common
Stock outstanding used in computing earnings per share is as follows:
For Three Months Ended
March 31,
2001 2000
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(Unaudited)
Basic 63,509,577 66,203,843
Options - -
Restricted shares - 547,458
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Diluted 63,509,577 66,751,301
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The first quarter of 2001 computation of diluted earnings per share does not
include 3,125 options to purchase Common Stock and 330,938 restricted shares
issued under the Long Term Incentive Plan, as their effect would be
antidilutive.
Note 3--Restructuring and Other Charges
During the first quarter of 2001, the Company announced the realignment of its
operating and management structure to take better advantage of the Company's
existing growth-oriented businesses and achieve higher returns from its
operations that have lower growth rates. In connection with the realignment, the
Company announced the closure of its facilities in Cincinnati, Ohio and recorded
restructuring and other charges of $5. These charges included $3 of severance
and other termination benefits related to the termination of about 35 employees
involved in technical, marketing and administrative activities, as well as $2
related to the write-down of assets, lease termination costs and other charges
associated with the Cincinnati facility. The office in Cincinnati is expected to
close at the end of the second quarter of 2001.
Note 4--Long-Term Debt and Credit Arrangements
March 31, December 31,
2001 2000
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(Unaudited)
Revolving Credit Facility bearing interest at the bank's
prime lending rate, or at LIBOR or NIBOR plus .275%
at the option of the Company plus a
facility Fee of .15% to be paid quarterly $ 350 $ 388
7% Senior Notes due 2006 500 500
7.625% Senior Debentures due 2026 249 249
Debt payable through 2007 at interest rates ranging
from 2% to 9.5% 17 21
Less current maturities of long-term debt (352) (391)
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$ 764 $ 767
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10
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 4--Long-Term Debt and Credit Arrangements--Continued
Under the Revolving Credit Agreement, as most recently amended on January 12,
2000, certain of the Company's subsidiaries may borrow up to $500 under the
Company's unsecured multi-currency revolving credit facility (the "Credit
Agreement"). The Company guarantees borrowings under this facility. Borrowings
under the Credit Agreement may consist of standby loans or uncommitted
competitive loans offered by syndicated banks through an auction bid procedure.
Loans may be borrowed in U.S. dollars and/or other currencies. The proceeds from
the borrowings may be used to provide working capital and for general corporate
purposes.
The Company is in the process of refinancing borrowings under the Credit
Agreement, which matures in late July 2001. The new borrowings are expected to
have a higher interest cost than the debt currently outstanding under the Credit
Agreement.
The Credit Agreement contains covenants and provisions that restrict, among
other things, the ability of the Company and its material subsidiaries to: (i)
create liens on any of its property or assets, or assign any rights to or
security interests in future revenues; (ii) engage in sale-and-leaseback
transactions; (iii) engage in mergers, consolidations or sales of all or
substantially all of their assets on a consolidated basis; (iv) enter into
agreements restricting dividends and advances by their subsidiaries; and, (v)
engage in transactions with affiliates other than those based on arm's-length
negotiations. The Credit Agreement also limits the ability of certain
subsidiaries of the Company to incur indebtedness or issue preferred stock. In
addition, the Credit Agreement requires the Company to satisfy certain financial
performance criteria. On January 12, 2000, one of the financial covenants in the
Credit Agreement was amended to permit the Company to remain compliant after the
1999 charge for loss in value of the Equistar investment. The Company is in
compliance with all the covenants in the Credit Agreement.
The Senior Notes and Senior Debentures were issued by Millennium America Inc., a
wholly owned subsidiary of the Company, and are guaranteed by the Company. The
indenture under which the Senior Notes and Senior Debentures were issued
contains certain covenants that limit, among other things: (i) the ability of
Millennium America Inc. and its Restricted Subsidiaries (as defined) to grant
liens or enter into sale-and-leaseback transactions; (ii) the ability of the
Restricted Subsidiaries to incur additional indebtedness; and, (iii) the ability
of Millennium America Inc. and the Company to merge, consolidate or transfer
substantially all of their respective assets.
Note 5--Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The cumulative effect of
adopting SFAS 133 as of January 1, 2001 was not material to the Company's
financial statements.
The Company is exposed to market risk, such as changes in currency exchange
rates and commodity pricing. To manage the volatility relating to these
exposures, the Company selectively enters into derivative transactions pursuant
to the Company's policies for hedging practices. Designation is performed on a
specific exposure basis to support hedge accounting. The changes in fair value
of these hedging instruments are offset in part or in whole by corresponding
changes in the fair value or cash flows of the underlying exposures being
hedged. The Company does not hold or issue derivative financial instruments for
trading purposes.
11
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 5--Derivative Instruments and Hedging Activities--Continued
Foreign Currency Exposure Management: The Company manufactures and sells its
products in a number of countries throughout the world and, as a result, is
exposed to movements in foreign currency exchange rates. The primary purpose of
the Company's foreign currency hedging activities is to manage the volatility
associated with foreign currency purchases and foreign currency sales. The
Company primarily utilizes forward exchange contracts with maturities of less
than twelve months.
In addition, the Company utilizes forward exchange contracts which qualify as
cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales and inventory purchases. Gains and losses on
these instruments are deferred in OCI until the underlying transaction is
recognized in earnings. The earnings impact is reported either in Net sales or
Cost of products sold to match the underlying transaction being hedged. As of
March 31, 2001, approximately $4 of deferred net losses on foreign currency cash
flow hedges accumulated in OCI are expected to be reclassified to earnings
during the next twelve months.
The Company hedges its net investment position in major currencies. To
accomplish this, the Company borrows directly in foreign currencies and
designates a portion of the foreign currency debt as a hedge of net investments.
Currency effects of these hedges, reflected in the cumulative translation
section of shareholders' equity, produced a $11 gain during the quarter, leaving
an accumulated net balance of $38.
Commodity Price Risk Management: Raw materials used by the Company are subject
to price volatility caused by weather and supply conditions and other
unpredictable factors. The Company selectively uses commodity swap arrangements
to manage the volatility related to anticipated purchases of natural gas with a
maximum maturity of three years. These market instruments are designated as cash
flow hedges. The mark-to-market gain or loss on qualifying hedges is included in
OCI to the extent effective, and reclassified into cost of products sold in the
period during which the hedged transaction affects earnings. The mark-to-market
gains or losses on ineffective portions of hedges are recognized in cost of
products sold immediately. As of March 31, 2001, approximately $1 of deferred
net losses on commodity swaps accumulated in OCI are expected to be reclassified
to earnings during the next twelve months. No cash flow hedges were discontinued
during the quarter ended March 31, 2001.
Note 6--Related Party Transactions
One of the Company's subsidiaries purchases ethylene from Equistar at
market-related prices pursuant to an agreement made in connection with the
formation of Equistar. Under the agreement, the subsidiary is required to
purchase 100% of its ethylene requirements for its La Porte, Texas, facility up
to a maximum of 330 million pounds per year from Equistar. The agreement
automatically renews annually. The initial term of the contract was through
December 1, 2000 and was automatically renewed. Either party may terminate on
one year's notice and neither party has provided such notice.
One of the Company's subsidiaries sells vinyl acetate monomer ("VAM") to
Equistar at formula-based prices pursuant to an agreement entered into in
connection with the formation of Equistar. Under this agreement, Equistar is
required to purchase 100% of its VAM feedstock requirements for its La Porte,
Texas, Clinton and Morris, Illinois plants, estimated to be 48 to 55 million
pounds per year, up to a maximum of 60 million pounds per year ("Annual
Maximum") for the production of ethylene vinyl acetate products at those
locations. If Equistar fails to purchase at least 42 million pounds of VAM in
any calendar year, the Annual Maximum quantity may be reduced by as much as the
total purchase deficiency for one or more successive years. In order to reduce
the Annual Maximum quantity, Equistar must be notified within at least 30 days
prior to restricting the VAM purchases provided that the notice is not later
than 45 days after the year of the purchase deficiency. The agreement
automatically renews annually. The initial term of the contract was through
December 31, 2000 and was automatically renewed. Either party may terminate on
one year's notice and neither party has provided such notice.
12
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 6--Related Party Transactions--Continued
One of the Company's subsidiaries and Equistar have entered into various
operating, manufacturing and technical service agreements. These agreements
provide the subsidiary with certain utilities, administrative office space, and
health, safety and environmental services.
Note 7--Commitments and Contingencies
Legal and Environmental: The Company and various of its subsidiaries are
defendants in a number of pending legal proceedings incidental to present and
former operations. These include several proceedings alleging injurious exposure
of the plaintiffs to various chemicals and other materials manufactured by the
Company's current and former subsidiaries. Typically, such proceedings involve
large claims made by many plaintiffs against many defendants in the chemical
industry. The Company does not expect that the outcome of these proceedings,
either individually or in the aggregate, will have a material adverse effect
upon the consolidated financial position, results of operations or cash flows of
the Company.
Together with other alleged past manufacturers of lead pigments for use in paint
and lead-based paint, a former subsidiary of a discontinued operation has been
named as a defendant or third party defendant in various legal proceedings
alleging that it and other manufacturers are responsible for personal injury and
property damage allegedly associated with the use of lead pigments in paint. The
legal proceedings seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and nuisance. The plaintiffs in these
actions generally seek to impose on the defendants responsibility for alleged
damages and health concerns associated with the use of lead-based paints. These
cases are in various pre-trial stages. The Company is vigorously defending all
litigation related to the use of lead. Although liability, if any, that may
result is not reasonably capable of estimation, the Company believes that, based
on information currently available, the disposition of such claims in the
aggregate should not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Certain of the Company's subsidiaries have been named as defendants, potentially
responsible parties ("PRPs"), or both, in a number of environmental proceedings
associated with waste disposal sites and facilities currently or previously
owned, operated or used by the Company's subsidiaries or their predecessors,
some of which disposal sites or facilities are on the Superfund National
Priorities List of the United States Environmental Protection Agency ("EPA") or
similar state lists. These proceedings seek cleanup costs, damages for personal
injury or property damage, or both. Certain of these proceedings involve claims
for substantial amounts, individually ranging in estimates from less than $0.3
to $29. One potentially significant matter in which a Company subsidiary is a
PRP concerns alleged PCB contamination of a section of the Kalamazoo River from
Kalamazoo, Michigan, to Lake Michigan for which a remedial
investigation/feasibility study has been completed and submitted to the State of
Michigan. This matter has been stayed and now is being addressed through the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
by the Kalamazoo River Study Group, of which the Company's subsidiary is a
member.
Celanese International Corporation ("Celanese") filed suit in 1999 against a
Company subsidiary alleging infringement of a Celanese patent relating to acetic
acid production technology. In this suit, Celanese seeks monetary damages and
injunctive relief. The Company has substantial defenses to this lawsuit and is
vigorously defending it.
13
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 7--Commitments and Contingencies--Continued
The Company believes that the range of potential liability for environmental and
other legal contingencies, collectively, but which primarily relates to
environmental remediation activities and other environmental proceedings, is
between $100 and $104 and has accrued $104 as of March 31, 2001. The Company's
ultimate liability in connection with these proceedings may depend on many
factors, including the volume of material contributed to the sites, the number
of other PRPs and their financial viability and the remediation methods and
technologies to be used.
Purchase Commitments: The Company has various agreements for the purchase of ore
used in the production of titanium dioxide that expire in 2002. Total
commitments to purchase ore under these agreements is approximately $345. The
Company has certain other agreements to purchase raw materials and utilities
with various terms extending through 2020. The obligation under these agreements
is approximately $446.
Other Contingencies: The Company is organized under the laws of Delaware and is
subject to United States federal income taxation of corporations. However, in
order to obtain clearance from the United Kingdom Inland Revenue as to the
tax-free treatment of the Demerger stock dividend for United Kingdom tax
purposes for Hanson and Hanson's shareholders, Hanson agreed with the United
Kingdom Inland Revenue that the Company will continue to be centrally managed
and controlled in the United Kingdom at least until September 30, 2001. Hanson
also agreed that the Company's Board of Directors will be the only medium
through which strategic control and policy-making powers are exercised, and that
board meetings almost invariably will be held in the United Kingdom during this
period. The Company has agreed not to take, or fail to take, during such
five-year period, any action that would result in a breach of, or constitute
non-compliance with, any of the representations and undertakings made by Hanson
in its agreement with the United Kingdom Inland Revenue and to indemnify Hanson
against any liability and penalties arising out of a breach of such agreement.
The Company's By-Laws provide for similar constraints. The Company and Hanson
estimate that such indemnification obligation would have amounted to
approximately $421 if it had arisen during the twelve months ended September 30,
1997, and that such obligation will decrease by approximately $84 on each
October 1st prior to October 1, 2001, when it will expire.
If the Company ceases to be a United Kingdom tax resident at any time, the
Company will be deemed for purposes of United Kingdom corporation tax on
chargeable gains to have disposed of all of its assets at such time. In such a
case, the Company would be liable for United Kingdom corporation tax on
chargeable gains on the amount by which the fair market value of those assets at
the time of such deemed disposition exceeds the Company's tax basis in those
assets. The tax basis of the assets would be calculated in pounds sterling,
based on the fair market value of the assets (in pounds sterling) at the time of
acquisition of the assets by the Company, adjusted for United Kingdom inflation.
Accordingly, in such circumstances, the Company could incur a tax liability even
though it has not actually sold the assets and even though the underlying value
of the assets may not actually have appreciated (due to currency movements).
Since it is impossible to predict the future value of the Company's assets,
currency movements and inflation rates, it is possible to predict the magnitude
of such liability, should it arise.
14
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in Millions, Except Share Data)
Note 8--Operations by Business Segment
The Company's principal operations are managed and grouped as three separate
business segments: Titanium Dioxide and Related Products; Acetyls; and,
Fragrance and Flavor Chemicals.
The following is a summary of the Company's operations by business segment:
Three Months Ended March 31,
2001 2000
-------------------------------
(Unaudited)
Net sales
Titanium Dioxide and Related Products $ 319 $ 323
Acetyls 99 69
Fragrance and Flavor Chemicals 26 31
------------ ------------
Total $ 444 $ 423
============ ============
Operating income (loss)
Titanium Dioxide and Related Products $ 29 $ 32
Acetyls (3) 7
Fragrance and Flavor Chemicals 4 7
Unallocated costs (1) (5) -
------------- -------------
Total $ 25 $ 46
============= =============
Depreciation and amortization
Titanium Dioxide and Related Products $ 21 $ 21
Acetyls 5 4
Fragrance and Flavor Chemicals 2 2
------------- -------------
Total $ 28 $ 27
============= =============
Capital expenditures
Titanium Dioxide and Related Products $ 23 $ 16
Acetyls 2 2
Fragrance and Flavor Chemicals 1 3
Corporate 2 -
------------- -------------
Total $ 28 $ 21
============= =============
(1) Represents restructuring and other charges
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Share Data)
Note 9 -- Supplemental Financial Information
Millennium America Inc. ('Millennium America'), a wholly owned indirect
subsidiary of Millennium Chemicals Inc. (the 'Company'), is a holding company
for all of the Company's operating subsidiaries other than its operations in the
United Kingdom, France, Brazil and Australia. Millennium America is the issuer
of the 7% Senior Notes due November 15, 2006 and the 7.625% Senior Debentures
due November 15, 2026 and is the principal borrower under the Company's
Revolving Credit Agreement. The Senior Notes and Senior Debentures, as well as
the borrowings under the Revolving Credit Agreement, are guaranteed by the
Company. Accordingly, the following Condensed Consolidating Balance Sheets at
March 31, 2001 and December 31, 2000, Condensed Consolidating Statements of
Operations for the three months ended March 31, 2001 and 2000, and Condensed
Consolidating Statements of Cash Flows for the three months ended March 31, 2001
and 2000 are provided for Millennium Chemicals Inc. as supplemental financial
statements of the Company to disclose the financial position, results of
operations and cash flows of the Company, Millennium America and all other
subsidiaries of the Company other than Millennium America. The investment in
subsidiaries is accounted for on the equity method.
16
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Share Data)
Millennium Millennium Millennium
America Inc. Chemicals Inc. Non-guarantor Chemicals Inc.
(Issuer) (Guarantor) Subsidiaries Eliminations and Subsidiaries
-------- ----------- ------------ ------------ ----------------
March 31, 2001 (Unaudited)
ASSETS
Inventories....................... $ $ $ 352 $ 352
Other current assets.............. 1 439 440
Property, plant and equipment,
net............................. 929 929
Investment in Equistar............ 738 738
Investment in subsidiaries........ 5,201 984 (6,185) --
Other assets...................... 3 225 228
Goodwill.......................... 388 388
Due from parent and affiliates.... 673 (673) --
------ ------ ------ -------- ------
Total assets.................. $5,878 $ 984 $3,071 $ (6,858) $3,075
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current maturities of long-term
debt............................ $ 350 $ $ 2 $ $ 352
Other current liabilities......... 56 326 382
Long-term debt.................... 749 15 764
Other liabilities................. 3 630 633
Due to parent and affiliates...... 57 616 (673) --
------ ------ ------ -------- ------
Total liabilities............. 1,155 60 1,589 (673) 2,131
Minority interest................. 20 20
Shareholders' equity.............. 4,723 924 1,462 (6,185) 924
------ ------ ------ -------- ------
Total liabilities and
shareholders' equity........ $5,878 $ 984 $3,071 $ (6,858) $3,075
====== ====== ====== ======== ======
December 31, 2000
ASSETS
Inventories....................... $ $ $ 373 $ $ 373
Other current assets.............. 1 527 528
Property, plant and equipment,
net............................. 957 957
Investment in Equistar............ 760 760
Investment in subsidiaries........ 5,229 1,033 (6,441) --
Other assets...................... 3 208 211
Goodwill.......................... 391 391
Due from parent and affiliates.... 633 (633) --
------ ------ ------ -------- ------
Total assets.................. $5,866 $1,033 $3,216 $ (7,074) $3,220
====== ====== ====== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current maturities of long-term
debt............................ $ 360 $ $ 31 $ $ 391
Other current liabilities......... 24 368 392
Long-term debt.................... 749 18 767
Other liabilities................. 3 662 665
Due to parent and affiliates...... 47 586 (633) --
------ ------ ------ -------- ------
Total liabilities............. 1,133 50 1,665 (633) 2,215
Minority interest................. 22 22
Shareholders' equity.............. 4,733 983 1,529 (6,441) 983
------ ------ ------ -------- ------
Total liabilities and
shareholders' equity........ $5,866 $1,033 $3,216 $ (7,074) $3,220
====== ====== ====== ======== ======
17
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Share Data)
Millennium
Millennium Millennium Chemicals Inc.
America Inc. Chemicals Inc. Non-guarantor and
(Issuer) (Guarantor) Subsidiaries Eliminations Subisidiaries
-------- ----------- ------------ ------------ -------------
March 31, 2001
(Unaudited)
Net sales................. $ $ $444 $ -- $ 444
Cost of products sold..... 343 343
Depreciation and
amortization............ 28 28
Selling, development and
administrative
expenses................ 43 43
Restructuring and other
charges................. 5 5
---- --- ---- ----- ------
Operating income...... -- -- 25 -- 25
Interest expense, net..... (20) (1) (21)
Intercompany interest
income/(expense)........ 27 (27) --
Loss in earnings of
Equistar................ (24) (24)
Equity in (loss)/earnings
of subsidiaries........... (28) 8 20 --
Other income (expense),
net..................... (1) (1)
(Provision) benefit for
income taxes............ (2) 8 6
---- --- ---- ----- ------
Net (loss) income..... $(23) $ 8 $(20) $ 20 $ (15)
==== === ==== ===== ======
March 31, 2000
(Unaudited)
Net sales................. $ $ $488 $ (65) $ 423
Cost of products sold..... 365 (65) 300
Depreciation and
amortization............ 27 27
Selling, development and
administrative
expense................. 50 50
---- --- ---- ----- ------
Operating income...... -- -- 46 -- 46
Interest expense, net..... (18) (18)
Intercompany interest
income/(expense)........ 27 (27) --
Equity in earnings of
Equistar................ 14 14
Equity in earnings
of subsidiaries........... 17 2 (19) --
Other income (expense),
net..................... --
(Provision) benefit for
income taxes............ (3) (14) (17)
---- --- ---- ----- ------
Net income (loss)..... $ 23 $ 2 $ 19 $ (19) $ 25
==== === ==== ===== ======
18
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Share Data)
Millennium Millennium Millennium
America Inc. Chemicals Inc. Non-guarantor Chemicals Inc.
(Issuer) (Guarantor) Subsidiaries Eliminations and Subsidiaries
-------- ----------- ------------ ------------ ----------------
March 31, 2001 (Unaudited)
Cash flow from operations.............. $(23) $ 8 $ 1 $ 20 $ 6
Cash flow from investing activities
Capital expenditures............... (28) (28)
Proceeds from sale of fixed
assets........................... 2 2
---- --- ---- ---- -----
Cash used in investing
activities................... -- -- (26) -- (26)
Cash flow from financing activities
Dividends to shareholders.......... (9) (9)
Proceeds from long-term debt....... 25 25
Repayment of long-term debt........ (25) (29) (54)
Intercompany....................... 4 1 15 (20) --
Increase (decrease) in notes
payable.......................... 19 (8) 11
---- --- ---- ---- -----
Cash provided by (used in) financing
activities........................... 23 (8) (22) (20) (27)
Effect of exchange rate changes on
cash................................. (2) (2)
---- --- ---- ---- -----
Increase (decrease) in cash and cash
equivalents.......................... -- -- (49) -- (49)
Cash and cash equivalents at beginning
of year.............................. 107 107
---- --- ---- ---- -----
Cash and cash equivalents at end of
period............................... $ -- $-- $ 58 $-- $ 58
==== === ==== ==== =====
March 31, 2000 (Unaudited)
Cash flow from operations.............. $ 23 $ 2 $ 28 $(19) $ 34
Cash flow from investing activities
Capital expenditures............... (21) (21)
Proceeds from sale of fixed
assets........................... 2 2
---- --- ---- --- -----
Cash used in investing
activities................... -- -- (19) -- (19)
Cash flow from financing activities
Dividends to shareholders.......... (9) -- (9)
Repurchase of common stock......... (23) (23)
Proceeds from long-term debt....... 25 1 26
Repayment of long-term debt........ (15) (19) (34)
Intercompany....................... (36) 7 10 19 --
Increase in notes payable.......... 3 2 5
---- --- ---- --- -----
Cash (used in) provided by financing
activities........................... (23) (2) (29) 19 (35)
Effect of exchange rate changes on
cash................................. (2) (2)
---- --- ---- --- -----
Decrease in cash and cash
equivalents.......................... -- -- (22) -- (22)
Cash and cash equivalents at beginning
of year.............................. 110 110
---- --- ---- --- -----
Cash and cash equivalents at end of
period............................... $ -- $-- $ 88 $-- $ 88
==== === ==== === =====
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
MILLENNIUM CHEMICALS INC.
Date: July 5, 2001 /s/ John E. Lushefski
------------------------------------
John E. Lushefski
Senior Vice President and
Chief Financial Officer
(as duly authorized officer and
principal financial officer)
20