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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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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, 2002
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
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MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
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Delaware 22-3436215
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Half Mile Road
Red Bank, NJ 07701
(Address of principal executive offices)
732-933-5000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York Stock Exchange
$0.01 per share
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 is 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: 62,914,879 shares of
Common Stock, par value $.01 per share, as of April 30, 2002, excluding
14,981,707 shares held by the registrant, its subsidiaries and certain Company
trusts, which are not entitled to vote.
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MILLENNIUM CHEMICALS INC.
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1 Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3 Quantitative and Qualitative Disclosures about Market Risk 25
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 26
Signature 27
Disclosure Concerning Forward-Looking Statements
The statements in this Quarterly Report that are not historical facts
are, or may be deemed to be, "forward-looking statements" ("Cautionary
Statements") as defined in the Private Securities Litigation Reform Act of 1995.
Some of these statements can be identified by the use of forward-looking
terminology such as "prospects," "outlook," "believes," "estimates," "intends,"
"may," "will," "should," "anticipates," "expects" or "plans," or the negative or
other variation of these or similar words, or by discussion of trends and
conditions, strategy or risks and uncertainties. In addition, from time to time,
Millennium Chemicals Inc. (the "Company") or its representatives have made or
may make forward-looking statements in other filings that the Company makes with
the Securities and Exchange Commission, in press releases or in oral statements
made by or with the approval of one of its authorized executive officers.
These forward-looking statements are only present expectations. Actual
events or results may differ materially. Factors that could cause such a
difference include:
o the cyclicality and volatility of the segments of the chemical
industry in which the Company and Equistar Chemicals, LP ("Equistar")
operate, particularly fluctuations in the demand for ethylene, its
derivatives and acetyls and the sensitivity of these industry
segments to capacity additions;
o general economic conditions in the geographic regions where the
Company and Equistar generate sales, and the impact of government
regulation and other external factors;
o the ability of Equistar to distribute cash to its partners and
uncertainties arising from the shared control of Equistar and the
Company's future capital commitments to Equistar;
o changes in the cost of energy and raw materials;
o the ability of raw material suppliers to fulfill their commitments;
o the ability of the Company and Equistar to achieve their productivity
improvement, cost reduction and working capital targets;
o the occurrence of operating problems at manufacturing facilities of
the Company or Equistar; fluctuations in currency exchange rates and
other risks of doing business abroad; the cost of compliance with the
extensive environmental regulations affecting the chemical industry
and exposure to liabilities for environmental remediation and other
environmental matters;
o pricing and other competitive pressures; and
o exposure to legal proceedings relating to present and former
operations (including proceedings based on exposure to lead pigments,
asbestos and other materials) and other claims.
2
A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, which is incorporated herein by reference.
Some of these Cautionary Statements are discussed in more detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Quarterly Report. Readers are cautioned not to place undue
reliance on forward-looking or Cautionary Statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
update any forward-looking or Cautionary Statement. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements in this Quarterly Report. Readers are advised to consult
any further disclosures the Company may make on related subjects in subsequent
10-Q, 8-K, and 10-K reports to the Securities and Exchange Commission.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Current assets
Cash and cash equivalents ................................................. $ 71 $ 114
Trade receivables, net .................................................... 211 215
Inventories ............................................................... 329 370
Other current assets ...................................................... 80 61
------ ------
Total current assets .................................................... 691 760
Property, plant and equipment, net ........................................... 866 880
Investment in Equistar ....................................................... 610 677
Deferred income taxes ........................................................ 96 72
Other assets ................................................................. 244 237
Goodwill ..................................................................... 103 378
------ ------
Total assets ............................................................ $2,610 $3,004
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable ............................................................. $ 5 $ 4
Current maturities of long-term debt ...................................... 13 11
Trade accounts payable .................................................... 164 222
Income taxes payable ...................................................... 5 7
Accrued expenses and other liabilities .................................... 136 139
------ ------
Total current liabilities ............................................... 323 383
Long-term debt ............................................................... 1,175 1,172
Other liabilities ............................................................ 550 550
------ ------
Total liabilities ....................................................... 2,048 2,105
------ ------
Commitments and contingencies (Note 10)
Minority interest ............................................................ 22 21
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;
issued 77,896,586 shares at March 31, 2002 and December 31, 2001) ....... 1 1
Paid in capital ........................................................... 1,299 1,299
Retained deficit .......................................................... (365) (20)
Cumulative other comprehensive loss ....................................... (131) (136)
Treasury stock, at cost (14,996,416 and 14,594,614 shares at March 31, 2002
and December 31, 2001, respectively) .................................... (281) (283)
Deferred compensation ..................................................... 17 17
------ ------
Total shareholders' equity .............................................. 540 878
------ -----
Total liabilities and shareholders' equity ............................ $2,610 $3,004
====== ======
See Notes to Consolidated Financial Statements.
4
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions, except share data)
Three Months Ended
March 31,
--------------------
2002 2001
---- ----
Net sales ....................................................... $ 351 $ 444
Operating costs and expenses
Cost of products sold ........................................ 292 343
Depreciation and amortization ................................ 25 28
Selling, development and administrative expense .............. 23 43
Reorganization and other charges ............................. -- 5
------ ------
Operating income ........................................... 11 25
Interest expense ................................................ (22) (22)
Interest income ................................................. 1 1
Equity in loss of Equistar ...................................... (39) (24)
Other expense, net .............................................. (1) --
------ ------
Loss before income taxes, minority interest and cumulative effect
of accounting change ......................................... (50) (20)
Benefit from income taxes ....................................... 20 6
------ ------
Loss before minority interest and cumulative effect of accounting
change ....................................................... (30) (14)
Minority interest ............................................... (1) (1)
------ ------
Loss before cumulative effect of accounting change .............. (31) (15)
Cumulative effect of accounting change .......................... (305) --
------ ------
Net loss ........................................................ $ (336) $ (15)
====== ======
Basic and diluted loss per share:
Before cumulative effect of accounting change ............... $(0.49) $(0.24)
From cumulative effect of accounting change ................. (4.80) --
------ ------
After cumulative effect of accounting change ................ $(5.29) $(0.24)
====== ======
See Notes to Consolidated Financial Statements.
5
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
Three Months Ended
March 31,
-------------------
2002 2001
------- --------
Cash flows from operating activities
Net loss ............................................................ $(336) $ (15)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Cumulative effect of accounting change ........................... 305 --
Depreciation and amortization .................................... 25 28
Deferred income tax benefit ...................................... (24) (3)
Equity in loss of Equistar ....................................... 39 24
Minority interest ................................................ 1 1
Other, net ....................................................... (1) (1)
Changes in assets and liabilities
Increase in trade receivables ..................................... (39) (1)
Decrease in inventories ........................................... 42 6
(Increase) decrease in other current assets ....................... (16) 3
Increase in other assets .......................................... (2) (8)
Decrease in trade accounts payable ................................ (58) (14)
Decrease in accrued expenses and other liabilities and income taxes
payable ......................................................... (1) --
Decrease in other liabilities ..................................... (11) (14)
----- -----
Cash (used in) provided by operating activities ..................... (76) 6
----- -----
Cash flows from investing activities
Capital expenditures ................................................ (13) (28)
Proceeds from sales of property, plant & equipment .................. -- 2
Proceeds from securitization of trade receivables, net of expenses .. 43 --
----- -----
Cash provided by (used in) investing activities ................... 30 (26)
----- -----
Cash flows from financing activities
Dividends to shareholders ........................................... (9) (9)
Proceeds from long-term debt ........................................ 97 25
Repayment of long-term debt ......................................... (87) (54)
Increase in notes payable ........................................... 1 11
----- -----
Cash provided by (used in) financing activities ................... 2 (27)
----- -----
Effect of exchange rate changes on cash ................................ 1 (2)
----- -----
Decrease in cash and cash equivalents .................................. (43) (49)
Cash and cash equivalents at beginning of year ......................... 114 107
----- -----
Cash and cash equivalents at end of period ............................. $ 71 $ 58
===== =====
See Notes to Consolidated Financial Statements.
6
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the accompanying unaudited interim consolidated financial statements
do not include all of the disclosures normally required by generally accepted
accounting principles for complete financial statements. The accompanying
consolidated financial statements should be read in conjunction with the
financial statements and disclosures included in the Company's most recent
Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion
of management, the accompanying consolidated financial statements contain all
adjustments necessary to present fairly the financial position and results of
operations for the interim periods.
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. All significant intercompany
accounts and transactions have been eliminated. The Company's 29.5% investment
in Equistar, a joint venture between the Company, Lyondell Chemical Company
("Lyondell") and Occidental Petroleum Corporation ("Occidental"), is accounted
for by the equity method; accordingly, the Company's share of Equistar's pre-tax
net loss is included in the Company's net loss. Certain prior year balances have
been reclassified to conform to the current year presentation including segment
analysis presented in Note 11.
Note 2 - Recent Accounting Developments
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Intangible Assets" ("SFAS No. 142"). Under this new standard, all goodwill,
including goodwill acquired before initial application of the standard, is not
amortized but must be tested for impairment at least annually at the reporting
unit level, as defined in the standard. The Company and Equistar adopted this
standard on January 1, 2002. Accordingly, the Company reported a charge for the
cumulative effect of this accounting change of $275 in the first quarter of 2002
to write off certain of its goodwill related to its Acetyls business based upon
the Company's estimate of fair value for this business using various valuation
methods considering expected future profitability and cash flows. Additionally,
Equistar reported an impairment of its goodwill in the first quarter of 2002.
The write-off at Equistar required an adjustment of $30 to reduce the carrying
value of the Company's investment in Equistar to its approximate proportional
share of Equistar's Partners' capital, which the Company also reported as a
charge for the cumulative effect of this accounting change. Amortization expense
for the three months ended March 31, 2001 for goodwill that was recorded on the
Company's balance sheet was $3. Additionally, the Company's share of
amortization expense reported by Equistar for the three months ended March 31,
2001 for its goodwill, included in Equity in loss of Equistar, was $2. Following
is a reconciliation of the reported net loss to net loss adjusted for goodwill
amortization and the cumulative effect of the accounting change and related per
share amounts:
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
------------------------ --------------------
Amount Per Share Amount Per Share
------ --------- ------ ---------
Reported net loss............................................ $(336) $(5.29) $(15) $(0.24)
Goodwill amortization........................................ - - 3 0.05
Equistar goodwill amortization included
in Equity in loss of Equistar............................ - - 2 0.03
----- ------ ---- ------
Adjusted loss before cumulative effect of accounting change (336) (5.29) (10) (0.16)
Cumulative effect of accounting change....................... 305 4.80 - -
----- ------ ---- ------
Adjusted net loss............................................ $ (31) $(0.49) $(10) $(0.16)
===== ====== ==== ======
7
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 2 - Recent Accounting Developments - Continued
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets. This standard
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. Accretion expense and depreciation expense related to the liability and
capitalized asset retirement costs, respectively, would be recorded in
subsequent periods. Although earlier application is permitted, the Company must
adopt this standard on January 1, 2003 and currently is evaluating the potential
impact on its consolidated financial position and results of operations.
Note 3 - Significant Transactions
In March 2002, the Company transferred its interest in certain European
trade receivables to an unaffiliated third party as the basis for issuing
commercial paper, totaling approximately $51, and received proceeds of $43
upon completion of a securitization transaction under a revolving arrangement
with a one year term, which is treated, in part, as a sale under generally
accepted accounting principles. Accordingly, the transferred trade receivables
that qualify as a sale, approximately $43, were removed from the Company's
Consolidated Balance Sheet. The Company continues to carry its retained
interests in a portion of the transferred assets that do not qualify as a sale,
approximately $8, in Trade receivables, net in its Consolidated Balance Sheet at
amounts that approximate net realizable value based upon the Company's
historical collection rate for these trade receivables. The loss on sale
associated with this transaction was not significant. Administration and
servicing of the trade receivables under the transaction remains with the
Company. Servicing liabilities associated with the transaction are not
significant. Proceeds from this transaction were used to pay down debt.
Note 4 - Inventories
Inventories are stated at the lower of cost or market value. For certain
United States operations representing 22% and 27% of consolidated inventories at
March 31, 2002 and December 31, 2001, respectively, cost is determined under the
last-in, first-out ("LIFO") method. The first-in, first-out ("FIFO") method, or
methods that approximate FIFO, are used by all other subsidiaries.
March 31, December 31,
2002 2001
--------- ------------
Inventories
Finished products...................... $183 $204
In-process products.................... 25 21
Raw materials.......................... 70 93
Other inventories...................... 51 52
---- ----
$329 $370
==== ====
Note 5 - Reorganization and Other Charges
During the first quarter of 2001, the Company announced the closure of
its facilities in Cincinnati, Ohio and recorded reorganization and other charges
of $5 in the Acetyls segment. 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 was closed during the
second quarter of 2001.
8
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 6 - Earnings per Share
The weighted-average number of equivalent shares of common stock
outstanding used in computing earnings per share is as follows:
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Weighted average common stock outstanding - basic and diluted....... 63,476,591 63,509,577
========== ==========
The calculation of diluted earnings per share for the three months ended
March 31, 2002 does not include 91,740 options to purchase common stock, 78,944
restricted shares issued under a Company incentive plan, and 220,995 shares held
by certain of the Company's employee benefit plan trusts. The calculation of
diluted earnings per share for the three months ended March 31, 2001 does not
include 3,125 options to purchase common stock and 330,938 restricted shares
issued under a Company incentive plan. The effect of including these options and
shares would be antidilutive.
Note 7 - Comprehensive Loss
The following table sets forth the components of other comprehensive loss
and total comprehensive loss:
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Net loss............................................................ $(336) $(15)
Other comprehensive income (loss)
Net gains (losses) on derivative financial instruments........... 5 (6)
Minimum pension liability adjustment............................ 1 -
Currency translation adjustment................................. (1) (28)
----- ----
$(331) $(49)
Total comprehensive loss............................................ ===== ====
Note 8 - Long-Term Debt and Credit Arrangements
In 2001, Millennium America Inc. ("Millennium America"), a wholly owned
indirect subsidiary of the Company, entered into a five-year Credit Agreement
(the Credit Agreement") and issued $275 of seven-year 9.25% Senior Notes due
June 15, 2008 ("the 9.25% Senior Notes"). The Credit Agreement includes a
revolving credit portion with total availability of $175 (the "Revolving
Loans"), and a term loan portion (the "Term Loans"). The Company and Millennium
America guarantee the obligations under the Credit Agreement.
The Revolving Loans are available in US dollars, pounds sterling and
euros. The Revolving Loans may be borrowed, repaid and reborrowed from time to
time. The Revolving Loans include a $50 letter of credit subfacility and a
swingline facility in the amount of $25. The Term Loans may be prepaid in part
or in total at the option of the Company at any time, but amounts prepaid may
not be reborrowed. The interest rates on the Revolving Loans and the Term Loans
are floating rates based upon margins over LIBOR, NIBOR, or the Administrative
Agent's prime lending rate, as the case may be. Such margins, as well as the
facility fee, are based on the Company's Leverage Ratio, as defined.
9
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 8 - Long-Term Debt and Credit Arrangements - Continued
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. The financial
covenants in the Credit Agreement include a Leverage Ratio and an Interest
Coverage Ratio. The Leverage Ratio is the ratio of total indebtedness to
cumulative EBITDA for the prior four fiscal quarters, each as defined. The
Interest Coverage Ratio is the ratio of cumulative EBITDA for the prior four
fiscal quarters to Net Interest Expense, for the same period, each as defined.
In the fourth quarter of 2001, the Company requested and obtained an amendment
to these and certain other covenants given the difficult business environment at
the time, which continued in early 2002. The Company is required to maintain a
Leverage Ratio of no more than 6.75 to 1.00 for the first and second quarters of
2002, 6.50 to 1.00 for the third quarter of 2002 and 6.00 to 1.00 for the fourth
quarter of 2002 and an Interest Coverage Ratio of no less than 2.00 to 1.00 for
all quarters of 2002. The Company was in compliance with these amended covenants
at March 31, 2002. Economic and business conditions are expected to improve
during the remainder of 2002. However, if such conditions do not improve
adequately and the Company operates at levels similar to those of the first
quarter of 2002, the Company may be required to request either a waiver of, or
an amendment to, one or both of these financial covenants in any subsequent
quarter. The Company believes it would be able to obtain such waiver or
amendment if required. This situation is monitored frequently in order to
assess the likelihood of such compliance. The covenants in the Credit Agreement
also limit, among other things, the ability of the Company and/or certain
subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii)
create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay
dividends on, or purchase, the Company's stock; (v) make restricted payments;
(vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage
in mergers or acquisitions; (ix) engage in domestic accounts receivable
securitization transactions; (x) increase the amount of the $750 indemnity by
Millennium America related to certain Equistar long-term debt (as described
below in this note); and (xi) enter into restrictive agreements. In the event
the Company sells certain assets as specified in the Credit Agreement, the
Term Loans must be prepaid with a portion of the net cash proceeds of such sale.
The obligations under the Credit Agreement are collateralized by: (1) a pledge
of 100% of the stock of the Company's existing and future domestic subsidiaries
and 65% of the stock of certain of the Company's existing and future foreign
subsidiaries, in both cases other than subsidiaries that hold immaterial assets
(as defined in the Credit Agreement), (2) all the equity interests held by the
Company's subsidiaries in Equistar and the La Porte Methanol Company (which
pledges are limited to the right to receive distributions made by Equistar and
the La Porte Methanol Company, respectively), and (3) all present and future
accounts receivable, intercompany indebtedness and inventory of the Company's
domestic subsidiaries, other than subsidiaries that hold immaterial assets.
The Company had $37 outstanding (outstanding borrowings of $30 and
outstanding letters of credit of $7) and $44 outstanding (outstanding borrowings
of $35 and outstanding letters of credit of $9) of the maximum available credit
line of $175 under the revolving credit portion of the Credit Agreement at March
31, 2002 and April 30, 2002, respectively and $115 outstanding under the term
loan portion of the Credit Agreement at March 31, 2002 and April 30, 2002,
respectively. In addition to letters of credit outstanding under the Credit
Agreement, the Company had outstanding letters of credit under other
arrangements of $16 and $17 at March 31, 2002 and April 30, 2002, respectively.
The Company had unused availability under short-term uncommitted lines of
credit, other than the Credit Agreement, of $45 and $46 at March 31, 2002 and
April 30, 2002, respectively.
Millennium America also has outstanding $500 aggregate principal amount
of 7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes") and $250
aggregate principal amount of 7.625% Senior Debentures due November 15, 2026
(the "7.625% Senior Debentures") that 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 and its Restricted Subsidiaries (as defined) to grant liens
or enter into sale/leaseback transactions; (ii) the ability of the Restricted
Subsidiaries to incur additional indebtedness; and, (iii) the ability of
Millennium America and the Company to merge, consolidate or transfer
substantially all of their respective assets. This indenture allows the Company
to grant security on loans of up to 15% of Consolidated Net Tangible Assets, as
defined, of Millennium America. Any reduction in Consolidated Net Tangible
Assets below $1.933 billion would reduce the Company's availability under the
revolving credit portion of the Credit Agreement.
The 9.25% Senior Notes were issued by Millennium America and are
guaranteed by the Company. The indenture under which the 9.25% Senior Notes were
issued contains certain covenants that limit, among other things, the ability of
the Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) pay dividends or
make distributions; (iv) repurchase capital stock;
10
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 8 - Long-Term Debt and Credit Arrangements - Continued
(v) make other restricted payments including, without limitation, investments;
(vi) create liens; (vii) redeem debt that is junior in right of payment to the
9.25% Senior Notes; (viii) sell or otherwise dispose of assets, including
capital stock of subsidiaries; (ix) enter into arrangements that restrict
dividends from subsidiaries; (x) enter into mergers or consolidations; (xi)
enter into transactions with affiliates; and, (xii) enter into sale/leaseback
transactions. However, if the 9.25% Senior Notes receive credit ratings from
both Standard & Poor's ("S&P") and Moody's Investor Services, Inc. ("Moody's")
as specified in the indenture and meet certain other requirements, certain of
these covenants will no longer apply. The indenture governing the Company's
9.25% Senior Notes includes a Consolidated Coverage Ratio, defined as the ratio
of the aggregate amount of EBITDA, as defined, for the four most recent fiscal
quarters to Consolidated Interest Expense, as defined, for the four most recent
fiscal quarters. If this ratio were to cease to be greater than 2.00 to 1.00,
there would be certain restrictions on the Company's ability to incur additional
indebtedness and the Company's ability to pay dividends, repurchase capital
stock or make certain other restricted payments would be limited.
At March 31, 2002, the Company was in compliance with all covenants in
the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625%
Senior Debentures.
Millennium America has entered into an indemnity agreement with Equistar
pursuant to which Millennium America may be required to contribute to Equistar
an amount equal to up to the lesser of $750 or the sum of the principal amount
outstanding under the term loan portion of Equistar's credit facility (not to
exceed $275) and Equistar's 10.125% Senior Notes due 2008 (not to exceed $475),
in each case together with interest. However, pursuant to the terms of this
indemnity agreement, Millennium is only required to pay this amount to Equistar
if the lenders under such credit facility or the holders of such Senior Notes
have not been able to obtain payment after pursuing and exhausting all their
remedies against Equistar, including the liquidation of Equistar's assets. The
indemnity expressly does not create any right in favor of such lenders or such
holders or any person other than Millennium America, Equistar and the partners
in Equistar. The indemnity may be amended or terminated at any time by the
agreement of the partners in Equistar without the consent of the lenders under
such credit facility or the holders of such Senior Notes. The indemnity
agreement replaced a prior guarantee by Millennium America of up to $750 of
Equistar's debt.
The indemnity will remain in effect indefinitely but at any time after
December 31, 2004 Millennium America may, without the consent of the other
partners in Equistar, elect to terminate the indemnity if certain conditions are
met including financial ratios and covenants relating to Equistar. In addition,
Millennium America may, without the consent of the other partners in Equistar,
elect to terminate the indemnity in the event the Company sells its interests in
the subsidiaries that directly hold the partnership interests of Equistar or if
those subsidiaries sell their interests in Equistar, provided a financial
condition relating to Equistar is met.
Note 9 - Derivative Instruments and Hedging Activities
The Company is exposed to market risk, such as changes in currency
exchange rates, interest 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 speculative or trading purposes.
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 utilizes forward exchange contracts with various terms. As of March 31,
2002, these contracts had expiration dates no later than December 2002.
The Company utilizes forward exchange contracts with contract terms
normally lasting less than three months to protect against the adverse effect
that exchange rate fluctuations may have on foreign currency denominated trade
receivables and trade payables. These derivatives have not been designated as
hedges for accounting purposes. The gains and losses on both the derivatives and
the foreign currency denominated trade receivables and payables are
11
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 9 - Derivative Instruments and Hedging Activities - Continued
recorded in current earnings. Net gains included in earnings, which offset a
similar amount of losses from foreign currency denominated trade receivables and
payables, were $2 in the three months ended March 31, 2002.
In addition, the Company utilizes forward exchange contracts that 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 other comprehensive income ("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. During the three months ended March 31, 2002, net
gains on forward exchange contracts designated as cash flow hedges reclassified
to earnings to match the gain or loss on the underlying transaction being hedged
were not significant. Hedge ineffectiveness had no significant impact on
earnings for the first quarter of 2002. No forward exchange contract cash flow
hedges were discontinued during the first quarter of 2002. The Company estimates
that approximately $3 of net gains on foreign currency cash flow hedges included
in OCI at March 31, 2002 will be reclassified to earnings during the next twelve
months.
Commodity Price Risk Management: Raw materials used by the Company are
subject to price volatility caused by demand 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
various terms. As of March 31, 2002, these swaps had expiration dates no later
than January 2004. 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. During the three months ended March 31, 2002, net losses on
commodity swaps designated as cash flow hedges of $2 were reclassified to Cost
of products sold to match the gain on the underlying transaction being hedged.
Hedge ineffectiveness had no significant impact on earnings for the first
quarter of 2002. No commodity swap cash flow hedges were discontinued in the
first quarter of 2002. The Company estimates that approximately $4 of net losses
on commodity swaps included in OCI at March 31, 2002 will be reclassified to
earnings during the next twelve months.
Interest Rate Risk Management: The Company selectively uses derivative
instruments to manage its ratio of debt bearing fixed interest rates to debt
bearing variable interest rates. During the three months ended March 31, 2002,
the Company entered into interest-rate swap agreements, designated as fair value
hedges, to synthetically convert $300 notional amount of its fixed-rate debt
into variable-rate debt. The gains and losses on both the interest rate swaps
and the hedged portion of the underlying debt are recorded in Interest expense.
All existing fair value hedges are completely effective; therefore, there is no
impact to earnings due to hedge ineffectiveness.
Note 10 - Commitments and Contingencies
Legal and Environmental: The Company and various of its subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. These include proceedings alleging injurious exposure of the
plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries, cases alleging
historic premises-based exposure to asbestos-containing materials at various
worksites and, as set forth in more detail below, cases alleging personal
injury, property damage and remediation costs associated with use of lead in
paint. Typically, such proceedings involve claims made by many plaintiffs
against many defendants in the chemical industry. In addition, certain
subsidiaries of the Company have been named as defendants, potentially
responsible parties ("PRPs") or both in a number of environmental proceedings,
or have other environmental remediation obligations.
Together with other alleged past manufacturers of lead-based paint and
lead pigments for use in paint, a current subsidiary, as well as alleged
predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, school districts, individuals and one state, and seek
recovery under a variety of theories, including negligence, failure to warn,
breach of warranty, conspiracy, market share liability, fraud, misrepresentation
and nuisance. These legal proceedings are in various pre-trial stages. The
Company is vigorously defending all lead-related legal proceedings.
12
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 10 -Commitments and Contingencies - Continued
Celanese AG ("Celanese") filed suit against Millennium Petrochemicals
Inc., a wholly owned operating subsidiary of the Company, on September 30, 1999
in the United States District Court for the Southern District of Texas alleging
infringement of a Celanese patent relating to acetic acid production technology.
In the suit, Celanese seeks monetary damages and injunctive relief, including
royalties. The Company believes it has substantial defenses to this lawsuit and
is vigorously defending it.
On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit in the
United States District Court for the District of Minnesota, against Millennium
Inorganic Chemicals Inc., a wholly owned operating subsidiary of the Company,
alleging breach of contract and other related causes of action arising out of a
contract between the two parties for the supply of packaging equipment. The
Company believes it has substantial defenses to these allegations and has filed
a counterclaim against Slidell.
With respect to the legal proceedings referred to above, the Company
believes that it has valid defenses and intends to defend them vigorously.
However, litigation is subject to uncertainties and the Company is unable to
guarantee the outcome of these proceedings.
Certain Company subsidiaries have been named as defendants, 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 are on the Superfund
National Priorities List of the United States Environmental Protection Agency
("EPA") or similar state lists. The Company has estimated its individual
exposure at these sites to be between twenty-five thousand dollars and $29. One
potentially significant site at which a Company subsidiary is a PRP concerns
alleged polychlorinated biphenyl contamination of a section of the Kalamazoo
River in Michigan. In October 2000, the Kalamazoo River Study Group, of which
the Company's subsidiary is a member, submitted to the State of Michigan a Draft
Remedial Investigation and Draft Feasibility Study that evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
cost for all parties of approximately $73. The Company has accrued for its
estimated share of costs for this matter. The EPA has now taken over from the
State as lead agency at the site. Neither the EPA nor the State of Michigan
has commented on the draft study.
The Company believes that the reasonably probable and estimable range of
potential liability for all legal and environmental proceedings, collectively,
but which primarily relates to environmental remediation activities and other
environmental proceedings, is between $80 and $90 and has accrued $83 as of
March 31, 2002. The Company expects that cash expenditures related to these
potential liabilities will not be concentrated in any single year and, based on
information currently available, the Company does not expect the outcome of
these proceedings, either individually or in the aggregate, will have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
Note 11 - Operations by Business Segment
The Company's principal operations are managed and grouped as three
separate business segments: Titanium Dioxide ("TiO[u]2") and Related Products;
Acetyls; and, Specialty Chemicals. Operating income and expense not identified
to the three separate business segments, consisting primarily of
employee-related costs for certain former employees, the mining operations of
the Company's Brazilian subsidiary for the recovery of non-TiO[u]2-related
materials and certain other expenses unrelated to the three separate business
segments, are reflected as Other. The following is a summary of the Company's
operations by business segment:
13
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 11 - Operations by Business Segment - Continued
Three Months Ended
March 31,
--------------------
2002 2001
----- ----
Net sales
Titanium Dioxide and Related Products................... $260 $317
Acetyls................................................. 65 99
Specialty Chemicals..................................... 24 26
Other................................................... 2 2
---- ----
Total................................................. $351 $444
==== ====
Operating income (loss)
Titanium Dioxide and Related Products................... $ 10 $ 28
Acetyls................................................. (7) (8)
Specialty Chemicals..................................... 4 4
Other................................................... 4 1
---- ----
Total................................................. $ 11 $ 25(1)
==== ====
Depreciation and amortization
Titanium Dioxide and Related Products................... $ 20 $ 21
Acetyls................................................. 3 5
Specialty Chemicals..................................... 2 2
---- ----
Total................................................. $ 25 $ 28
==== ====
Capital expenditures
Titanium Dioxide and Related Products................... $ 12 $ 23
Acetyls................................................. - 2
Specialty Chemicals..................................... 1 1
Other................................................... - 2
---- ----
Total................................................. $ 13 $ 28
==== ====
--------------
(1) Includes non-recurring reorganization and other charges of $5.
March 31, December 31,
2002 2001
-------- ------------
Goodwill
Titanium Dioxide and Related Products................... $ 55 $ 55
Acetyls................................................. 48 323
---- ----
Total............................................... $103 $378
==== ====
14
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 12 - Information on Equistar
The following is summarized financial information for Equistar:
March 31, December 31,
2002 2001
-------- --------
Current assets ..................................... $1,047 $1,226
Noncurrent assets .................................. 4,001 5,082
------ ------
Total assets .................................... $5,048 $6,308
====== ======
Current liabilities ................................ $ 527 $ 661
Noncurrent liabilities ............................. 2,463 2,410
Partners' capital .................................. 2,058 3,237
------ ------
Total liabilities and partners' capital ........ $5,048 $6,308
====== ======
Three Months Ended
March 31,
---------------------------
2002 2001
------------- ----------
Net sales.................................................. $ 1,136 $1,773
Operating loss............................................. (75) (36)
Loss before cumulative effect of accounting change......... (126) (77)
Cumulative effect of accounting change..................... (1,053) --
Net loss................................................... (1,179) (77)
The Company recorded $30 related to its share of Equistar's write-down of
goodwill during the three months ended March 31, 2002. Even though the Company's
share (i.e., 29.5%) of Equistar's write-down is higher than the amount recorded
by the Company, most of the write-down was previously taken by the Company in
1999 when it wrote down its investment in Equistar by $639.
Note 13 - Supplemental Financial Information
Millennium America, a wholly owned indirect subsidiary of 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, the 7.625% Senior Debentures, and
the 9.25% Senior Notes, and is the principal borrower under the Company's
five-year Credit Agreement, which replaced the Company's previously existing
revolving credit agreement. Millennium America guarantees all obligations under
the Credit Agreement. The 7% Senior Notes, the 7.625% Senior Debentures and the
9.25% Senior Notes, as well as outstanding amounts under the Credit Agreement,
are guaranteed by the Company. Accordingly, the following Condensed
Consolidating Balance Sheets at March 31, 2002 and December 31, 2001 and the
Condensed Consolidating Statements of Operations and Cash Flows for the three
months ended March 31, 2002 and 2001, are provided for Millennium Chemicals Inc.
as supplemental financial information of the Company to disclose the financial
position, results of operations and cash flows of the Company, Millennium
America, and all subsidiaries of the Company other than Millennium America. The
investment in subsidiaries is accounted for on the equity method.
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals Inc.
America Chemicals Non-Guarantor and
Inc. Inc. Subsidiaries Eliminations Subsidiaries
---- ---- ------------ ------------- ------------
March 31, 2002
--------------
ASSETS
Inventories ......................... $ -- $ -- $ 329 $ -- $ 329
Other current assets ................ 9 -- 353 -- 362
Property, plant and equipment, net .. -- -- 866 -- 866
Investment in Equistar .............. -- -- 610 -- 610
Investment in subsidiaries .......... 4,878 1,045 -- (5,923) --
Other assets ........................ 12 -- 328 -- 340
Goodwill ............................ -- -- 103 -- 103
Due from parent and affiliates ...... 1,521 17 -- (1,538) --
------ ------ ------ ------- ------
Total assets ..................... $6,420 $1,062 $2,589 $(7,461) $2,610
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $4 $ -- $ 9 $ -- $ 13
Other current liabilities ........... 30 -- 280 -- 310
Long-term debt ...................... 1,159 -- 16 -- 1,175
Other liabilities ................... 5 -- 545 -- 550
Due to parent and affiliates ........ 857 117 564 (1,538) --
------ ------ ------ ------- ------
Total liabilities ................ 2,055 117 1,414 (1,538) 2,048
Minority interest ................... -- -- 22 -- 22
Shareholders' equity ................ 4,365 945 1,153 (5,923) 540
------ ------ ------ ------- ------
Total liabilities and
shareholders' equity ........... $6,420 $1,062 $2,589 $(7,461) $2,610
====== ====== ====== ======= ======
December 31, 2001
-----------------
ASSETS
Inventories ......................... $ -- $ -- $ 370 $ -- $ 370
Other current assets ................ 6 -- 384 -- 390
Property, plant and equipment, net .. -- -- 880 -- 880
Investment in Equistar .............. -- -- 677 -- 677
Investment in subsidiaries .......... 5,220 1,041 -- (6,261) --
Other assets ........................ 13 -- 296 -- 309
Goodwill ............................ -- -- 378 -- 378
Due from parent and affiliates ...... 640 -- -- (640) --
------ ------ ------ ------- ------
Total assets ..................... $5,879 $1,041 $2,985 $(6,901) $3,004
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 3 $ -- $ 8 $ -- $ 11
Other current liabilities ........... 17 -- 355 -- 372
Long-term debt ...................... 1,156 -- 16 -- 1,172
Other liabilities ................... -- 1 549 -- 550
Due to parent and affiliates ........ -- 89 551 (640) --
------ ------ ------ ------- ------
Total liabilities ................ 1,176 90 1,479 (640) 2,105
Minority interest ................... -- -- 21 -- 21
Shareholders' equity ................ 4,703 951 1,485 (6,261) 878
------ ------ ------ ------- ------
Total liabilities and
shareholders' equity ........... $5,879 $1,041 $2,985 $(6,901) $3,004
====== ====== ====== ======= ======
16
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Non-Guarantor Chemicals Inc.
America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------- --------------- ---------------- -------------- ----------------
Three Months Ended
March 31, 2002
--------------
Net sales..................... $ - $ - $ 351 $ - $ 351
Cost of products sold......... - - 292 - 292
Depreciation and amortization. - - 25 - 25
Selling, development and
administrative expense..... - - 23 - 23
------ ---- ----- ----- ------
Operating income........... - - 11 - 11
Interest (expense) income, net (22) - 1 - (21)
Intercompany interest income
(expense), net............. 27 (1) (26) - -
Equity in loss of Equistar.... - - (39) - (39)
Equity in (loss) earnings of
subsidiaries............... (342) 4 - 338 -
Other expense, net............ - - (2) - (2)
Income taxes.................. (2) - 22 - 20
Cumulative effect of
accounting
change..................... - - (305) - (305)
------ ---- ------ ----- ------
Net (loss) income.......... $(339) $ 3 $(338) $338 $(336)
====== ==== ====== ===== ======
Three Months Ended
March 31, 2001
--------------
Net sales..................... $ - $ - $ 444 $ - $ 444
Cost of products sold......... - - 343 - 343
Depreciation and amortization. - - 28 - 28
Selling, development and
administrative expense..... - - 43 - 43
Reorganization and other
charges.................... - - 5 - 5
------ ---- ------ ----- ------
Operating income........... - - 25 - 25
Interest expense, net......... (20) - (1) - (21)
Intercompany interest income
(expense), net............. 27 - (27) - -
Equity in loss of Equistar.... - - (24) - (24)
Equity in (loss) earnings of
subsidiaries............... (28) 8 - 20 -
Other expense, net............ - - (1) - (1)
Income taxes.................. (2) - 8 - 6
------ ---- ------ ----- ------
Net (loss) income ......... $ (23) $ 8 $ (20) $ 20 $ (15)
====== ==== ====== ===== ======
17
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Non-Guarantor Chemicals Inc.
America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------- --------------- ---------------- -------------- ----------------
Three Months Ended
March 31, 2002
--------------
Cash flows from operating activities . $(34) $(1) $(74) $ 33 $(76)
---- --- ---- ---- ----
Cash flows from investing activities
Capital expenditures ............... -- -- (13) -- (13)
Proceeds from securitization of
trade receivables, net of expenses -- -- 43 -- 43
---- --- ---- ---- ----
Cash provided by investing
activities ...................... -- -- 30 -- 30
---- --- ---- ---- ----
Cash flows from financing activities
Dividends to shareholders .......... -- (9) -- -- (9)
Proceeds from long-term debt ....... 95 -- 2 -- 97
Repayment of long-term debt ........ (85) -- (2) -- (87)
Intercompany ....................... 21 14 (2) (33) --
Increase in notes payable .......... -- -- 1 -- 1
---- --- ---- ---- ----
Cash provided by (used in)
financing activities ............ 31 5 (1) (33) 2
---- --- ---- ---- ----
Effect of exchange rate changes on
cash ................................ -- -- 1 -- 1
---- --- ---- ---- ----
(Decrease) increase in cash and cash
equivalents ...................... (3) 4 (44) -- (43)
---- --- ---- ---- ----
Cash and cash equivalents at
beginning of year ................... 5 -- 109 -- 114
---- --- ---- ---- ----
Cash and cash equivalents at end of
period ............................ $ 2 $ 4 $ 65 $ -- $ 71
==== === ==== ==== ====
Three Months Ended
March 31, 2001
--------------
Cash flows from operating activities . $(23) $ 8 $ 1 $ 20 $ 6
---- --- ---- ---- ----
Cash flows from investing activities
Capital expenditures ............... -- -- (28) -- (28)
Proceeds from sales of property,
plant & equipment ................. -- -- 2 -- 2
---- --- ---- ---- ----
Cash used in investing activities -- -- (26) -- (26)
---- --- ---- ---- ----
Cash flows 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)
---- --- ---- ---- ----
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
==== === ==== ==== ====
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls, and Specialty
Chemicals. The Company also holds a 29.5% interest in Equistar, which is
accounted for using the equity method. (See Note 1 to the Consolidated Financial
Statements.) A discussion of Equistar's financial results for the relevant
period is included below, as the Company's interest in Equistar represents a
significant component of the Company's assets and Equistar's results can have a
significant effect on the Company's consolidated results of operations.
The following information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto. In connection
with the forward-looking statements that appear in the following information,
please carefully review the Cautionary Statements in the "Disclosure Concerning
Forward-Looking Statements" on Pages 2 and 3 of this Quarterly Report.
Results of Consolidated Operations
Three Months Ended
March 31,
----------------------
2002 2001
------- -------
(Millions, except share data)
Net sales.................................................. $ 351 $ 444
Operating income........................................... 11 25 (1)
Equity in loss of Equistar................................. (39) (24)(2)
Loss before cumulative effect of accounting change......... (31) (15)
Net Loss................................................... (336) (15)
Basic and diluted loss per share
Before cumulative effect of accounting change........... (0.49) (0.24)
After cumulative effect of accounting change............ (5.29) (0.24)
--------------
(1) Includes non-recurring reorganization and other charges of $5 million ($4
million after tax).
(2) Includes $6 million representing the Company's share of costs related to
the shutdown of Equistar's Port Arthur, Texas plant ($4 million after
tax)
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
The Company's first quarter 2002 net loss of $31 million before the
cumulative effect of the change in accounting for goodwill reflects continued
difficult economic and business conditions in the Company's wholly owned
businesses and Equistar's business. Operating income was lower in both the
Acetyls and Titanium Dioxide and Related Products business segments compared to
the prior year quarter, while profits in the Specialty Chemicals segment were
equal to the prior year.
The Company and Equistar adopted SFAS No. 142 on January 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized but must be tested for impairment
at least annually at the reporting unit level. Operating income for the first
quarter of 2001 included $3 million of goodwill amortization expense. The
Company reported a charge for the cumulative effect of an accounting change of
$275 million in the first quarter of 2002 to write off certain of its goodwill
related to its Acetyls business based upon the Company's estimate of fair value
for this business using various valuation methods considering expected future
profitability and cash flows. Additionally, Equistar reported an impairment of
its goodwill in the first quarter of 2002. The write-off at Equistar required an
adjustment of $30 million to reduce the carrying value of the Company's
investment in Equistar to its approximate proportional share of Equistar's
Partners' capital, which the Company also reported as a charge for the
cumulative effect of an accounting change.
19
Net sales for the three months ended March 31, 2002 decreased $93 million
or 21% from the same period of 2001 primarily due to lower selling prices in the
Titanium Dioxide and Related Products and Acetyls business segments. Prices for
many of the Company's products remained at depressed levels during the first
quarter of 2002, although TiO[u]2 prices appear to have reached bottom, as March
prices were level with February and price increases have been announced by all
major TiO[u]2 producers. The Company's worldwide price increases for TiO[u]2 and
for Acetyls' principal products, announced during the first quarter of 2002, had
minimal impact on first quarter actual prices, since contracts with most of the
Company's large-volume TiO[u]2 customers include periods of price protection and
the Company's Acetyls price increase is not scheduled to go into effect until
the second quarter of 2002. The benefits of such price increases may not be
fully realized by the Company for several months.
Both manufacturing and selling, development and administrative ("S,D&A")
costs were significantly lower in the first quarter of 2002 as compared with the
same period of 2001. Manufacturing costs in 2002 were lower due to productivity
and reliability improvements, the natural gas price decline from the extremely
high levels experienced early in 2001, and the realization of benefits from the
Company's cost-saving initiatives, including the idling of its high-cost
sulfate-process TiO[u]2 plant in Hawkins Point, MD ("HPP") at the end of the
third quarter of 2001. S,D&A costs were down $20 million or 47% from the prior
year quarter. The significant reduction in S,D&A costs was achieved primarily
through the Company's cost-reduction initiatives, which included benefits from
the Company's 2001 reorganization and 15% reduction in workforce, reduced
external consultant fees, reduced employee travel and bonuses, and various
other cost reductions.
Outlook for 2002
Cautious optimism continues to build within the markets Millennium serves
and the Company expects modest business improvement in the remaining quarters of
2002. However, prices for most of Millennium's products remained depressed
during the first quarter of 2002 ahead of announced price increases for its
principal products, which are expected to take effect gradually. The success and
timing of these price increases will depend upon the continuation of the pattern
of increases in downstream customer demand experienced in the first quarter.
Sustaining benefits from cost containment and reduction programs remains a
priority.
In addition, the level of natural gas prices is critical to Acetyls
business segment profitability in 2002. Natural gas fixed-price purchase
contracts entered into by the Acetyls business segment in 2001 expired at the
end of the first quarter of 2002. If natural gas prices remain below prior year
levels, the Acetyls segment operating profit should be favorably impacted
beginning in the second quarter of 2002. However, if natural gas prices
increase, the Acetyls segment operating profit would be adversely affected if
the Company cannot pass those price increases on to its customers.
Equistar expects modestly improved demand coupled with the expiration of
many of its fixed price natural gas and natural gas liquids contracts to result
in improved results in the second quarter of 2002. The improved results assume
that there are no significant increases in raw material costs.
20
Segment Analysis
Segment discussions highlight profitability trends of the Company's
businesses exclusive of reorganization charges and the effect of the elimination
of goodwill amortization in accordance with SFAS No. 142.
Titanium Dioxide and Related Products
Three Months Ended
March 31,
--------------------
2002 2001
------ ------
(Millions)
Net sales.................................................. $260 $317
Operating income........................................... 10 28
Operating income excluding goodwill amortization........... 10 29
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Operating income in the first quarter 2002 declined by $19 million or 66%
from the same quarter last year, primarily due to significantly lower sales
prices and lower sales volume, partially offset by lower manufacturing and S,D&A
costs.
Sales revenue in the first quarter of 2002 decreased by $57 million or
18% versus the prior year due to lower average selling prices and lower sales
volume. The first quarter average TiO[u]2 selling price was 16% below the prior
year in US dollar terms and 14% lower in local currencies. Continued competitive
pricing and depressed economic conditions held prices below first quarter 2001
levels in all three major TiO[u]2 markets, with coatings, plastics, and paper
down 16%, 18%, and 14%, respectively, and in all major geographic regions of the
world. TiO[u]2 prices in the first quarter of 2002 were also lower than the
fourth quarter 2001 average, but price increases have been announced by most
major producers, including the Company. The Company announced TiO[u]2 price
increases scheduled to become effective beginning March 1, 2002 to begin to
restore margins, which have become unacceptably poor after more than a year of
rapid and excessive price decreases in all world areas.
TiO[u]2 sales volume during the first quarter was 3% below the prior
year. Regional sales volume was mixed, with North America down 5%, Latin America
down 39%, Asia/Pacific up 18%, and Europe up 2% from the first quarter of last
year. Volume was flat in coatings and down 26% in the paper and value markets,
while plastics showed a significant increase of 15% over the same quarter last
year, reflecting the Company's highest-ever quarterly sales volume for the
plastics business.
TiO[u]2 cost per metric ton was 10% lower than the prior year quarter.
Productivity and reliability improvements, cost-cutting initiatives, and the
benefit of translating local currency manufacturing costs into a stronger US
dollar more than offset lower fixed cost absorption due to decreased production.
In addition, the idling of the high-cost HPP sulfate-process plant, which was
still in operation in the first quarter of 2001, had a favorable impact on
manufacturing cost compared to the prior year. The overall operating rate of the
Company's TiO[u]2 plants in the first quarter of 2002 was 80%, down from 88%
(including the HPP sulfate-process plant) in the same period last year.
S,D&A expenses were lower by $16 million, or down 46% compared to the
prior year quarter. The significant reduction in S,D&A costs was achieved
primarily through the Company's cost-reduction initiatives, which included
benefits from the Company's 2001 reorganization and reduction in workforce,
reduced external consultant fees, reduced employee travel and bonuses, and
various other cost reductions.
Outlook for 2002
Earnings should improve slightly in the second quarter over the first
quarter as sales volume should increase seasonally due to the North American and
European coatings season and global TiO[u]2 price increases should be gradually
realized.
21
Acetyls
Three Months Ended
March 31,
-------------------
2002 2001
----- ------
(Millions)
Net sales.................................................. $65 $99
Operating loss............................................. (7) (8)
Operating loss excluding reorganization charges and
goodwill amortization................................... (7) (1)
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Acetyls operating loss for the three months ended March 31, 2002 was $7
million, $6 million more than the first quarter of 2001. Net sales decreased by
$34 million or 34% to $65 million, primarily due to selling prices that were
significantly below prior year levels. Vinyl acetate monomer ("VAM") and acetic
acid prices were down by 35% and 31%, respectively, due to lower ethylene and
natural gas prices and weak economic conditions. Strong acetic acid sales volume
in North America and new business in Europe were offset by the effects of weak
demand for VAM. Overall, sales volume was up 1% over the first quarter of 2001.
Production costs were lower for both VAM and acetic acid, down 24% and
19%, respectively, in comparison to the first quarter of 2001. Lower feedstock
prices, particularly natural gas, were partially offset by lower fixed cost
absorption due to reduced production resulting from continued oversupply in the
marketplace. Although natural gas prices have declined from the extremely high
levels experienced early in 2001, the Company did not enjoy the full benefit of
the lower prices in the first quarter of 2002. Unfavorable fixed-price natural
gas purchase positions entered into during the first quarter of 2001 negatively
impacted operating profit by approximately $7 million in the first three months
of 2002.
First quarter 2002 S,D&A expenses in the Acetyls business segment were $2
million or 40% lower than the same period of 2001. This significant reduction
was achieved through the Company's cost-saving initiatives, which included
benefits from the Company's 2001 reorganization and reduction in workforce and
various other cost reductions.
Outlook for 2002
Profitability should improve in the second quarter of 2002 over the first
quarter with the absence of higher cost fixed-price natural gas purchase
positions that expired at the end of the first quarter and expected moderate
improvement in sales volume. Profitability will, however, continue to be
impacted by volatile energy markets.
Specialty Chemicals
Three Months Ended
March 31,
--------------------
2002 2001
------ ------
(Millions)
Net sales.................................................. $24 $26
Operating income........................................... 4 4
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Operating income in the first quarter of 2002 was flat with the prior
year first quarter despite slightly lower sales revenue. Net sales decreased by
8% to $24 million, as sales volume was down 22% from the first quarter of 2001,
especially in Japan, due to the global economic slowdown. The average price for
all product lines was up 19% from last year, partially due to sales of new
cooling agent products at higher unit prices.
22
The average cost of crude sulfate turpentine ("CST"), the principal raw
material for the business, was flat with the same period of 2001. First quarter
2002 manufacturing costs were lower compared to the first quarter of 2001, as
energy costs returned to more normal levels in 2002.
S,D&A expenses for the first three months of 2002 were favorable by $1
million or 25% compared to the prior year quarter. This significant reduction
was achieved through the Company's cost-saving initiatives, which included
benefits from the Company's 2001 reorganization and various other cost
reductions.
Outlook for 2002
The market for fragrance chemicals remains competitive and this situation
continues to be exacerbated by the strong US dollar. Even so, price increases
were enacted for most fragrance chemical offerings, as well as for most cleaners
and solvents. After the very difficult year in 2001, some volume recovery is
expected in 2002. In addition, new product development efforts continue, with a
new cooling agent and a new flavor chemical launched at the beginning of 2002.
CST costs are expected to remain at first quarter levels for the second quarter
of 2002, due to the unfavorable conditions in the broader market for that
feedstock. Operating results for the second quarter of 2002 are expected to be
similar to the first quarter.
Other
Three Months Ended
March 31,
-------------------
2002 2001
------ -----
(Millions)
Net sales.................................................. $2 $2
Operating income........................................... 4 1
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Other operating income in the first quarter of 2002 increased by $3
million from the first quarter of 2001. Revenue from sales of
non-TiO[u]2-related materials recovered from the mining operations of the
Company's Brazilian subsidiary were flat with the same period last year. The
increase in operating income was primarily due to favorable adjustments in
accrued employee-related costs for certain former employees and other reduced
expenses.
Outlook for 2002
Operating income from income and expense items not identified to the
three separate business segments for the second quarter of 2002 is expected to
be similar to the first quarter.
Equistar
Three Months Ended
March 31,
-------------------
2002 2001
---- ----
(Millions)
Equity in loss............................................. $(39) $(24)
Equity in loss excluding plant closure charges and
goodwill amortization...................................... (39) (16)
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
An equity loss of $39 million before the cumulative effect of the change
in accounting for goodwill was recorded in the first quarter of 2002 compared to
a loss of $16 million last year, excluding unusual items and goodwill
amortization. The increase in the loss was due to lower sales prices and volumes
and lower margins in Equistar's petrochemicals segment in the first quarter of
2002 compared to the prior year first quarter, attributable to ongoing industry
overcapacity. Sales prices decreased more than the cost of raw materials as
average benchmark sales prices for
23
ethylene were 41% lower in the first quarter of 2002 compared to the prior year
first quarter, while average benchmark prices for co-product propylene were 29%
lower in the first quarter of 2002 compared to the prior year first quarter. The
increased loss in the petrochemicals segment was partly offset by improved
operating results in Equistar's polymers segment, primarily reflecting higher
polymers margins in the first quarter of 2002 compared to the prior year first
quarter as decreases in raw material costs outweighed lower sales prices.
Outlook for 2002
Equistar expects modestly improved demand coupled with the expiration of
many of its fixed price natural gas and natural gas liquids contracts to result
in improved results in the second quarter of 2002. The improved results assume
that there are no significant increases in raw material costs.
Liquidity and Capital Resources
Cash used in operating activities for the three months ended March 31,
2002 was $76 million compared to $6 million provided in the same period of 2001.
The $82 million decrease was due to lower operating income ($14 million) and
unfavorable changes in working capital, primarily unfavorable movements in trade
receivables and trade accounts payable during 2002 versus the prior year ($82
million), partially offset by a larger decrease in inventories in 2002 ($36
million).
Cash provided by investing activities was $30 million in the first
quarter of 2002 versus $26 million used in the first quarter of 2001. The
Company spent approximately $13 million in the three months ended March 31, 2002
for capital expenditures, down from $28 million for the same period in 2001, and
received $43 million in proceeds from the securitization of certain European
trade receivables. Proceeds from this transaction were used, primarily, to pay
down debt outstanding under the Credit Agreement. See Note 8 of Notes to
Consolidated Financial Statements in this Quarterly Report for additional
information concerning the Company's long-term debt and financing activities.
Cash provided by financing activities was $2 million for the first three
months of 2002 compared to $27 million used in the first three months of 2001.
The 2002 period reflects $11 million of net borrowings while the 2001 period
included $18 million of net repayments. Dividends paid to shareholders totaled
$9 million in both periods.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. The financial
covenants in the Credit Agreement include a Leverage Ratio and an Interest
Coverage Ratio. The Leverage Ratio is the ratio of total indebtedness to
cumulative EBITDA for the prior four fiscal quarters, each as defined. The
Interest Coverage Ratio is the ratio of cumulative EBITDA for the prior four
fiscal quarters to Net Interest Expense, for the same period, each as defined.
In the fourth quarter of 2001, the Company requested and obtained an amendment
to these and certain other covenants given the difficult business environment at
the time, which continued in early 2002. The Company is required to maintain a
Leverage Ratio of no more than 6.75 to 1.00 for the first and second quarters of
2002, 6.50 to 1.00 for the third quarter of 2002 and 6.00 to 1.00 for the fourth
quarter of 2002 and an Interest Coverage Ratio of no less than 2.00 to 1.00 for
all quarters of 2002. The Company was in compliance with these amended covenants
at March 31, 2002. Economic and business conditions are expected to improve
during the remainder of 2002. However, if such conditions do not improve
adequately and the Company operates at levels similar to those of the first
quarter of 2002, the Company may be required to request either a waiver of or an
amendment to one or both of these financial covenants in any subsequent quarter.
The Company believes it would be able to obtain such waiver or amendment if
required. This situation is monitored frequently in order to assess the
likelihood of such compliance.
The indenture governing the Company's $500 million aggregate principal
amount of 7.00% Senior Notes due November 15, 2006 and $250 million aggregate
principal amount of 7.625% Senior Debentures due November 15, 2026 allows the
Company to grant security on loans of up to 15% of Consolidated Net Tangible
Assets, as defined, of Millennium America. Any reduction in Consolidated Net
Tangible Assets below $1.933 billion would reduce the Company's availability
under the revolving credit portion of the Credit Agreement.
The indenture governing the Company's 9.25% Senior Notes includes a
Consolidated Coverage Ratio, defined as the ratio of the aggregate amount of
EBITDA, as defined, for the four most recent fiscal quarters to Consolidated
Interest Expense, as defined, for the four most recent fiscal quarters. If this
ratio were to cease to be greater than 2.00 to 1.00, there would be certain
restrictions on the Company's ability to incur additional indebtedness and the
Company's ability to pay dividends, repurchase capital stock or make certain
other restricted payments would be limited.
24
At March 31, 2002, the Company was in compliance with all covenants in
the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625%
Senior Debentures.
The Company is currently rated BBB- by S&P and Ba1 by Moody's. The
Company's investment grade rating was placed on negative outlook by S&P on
October 1, 2001. If the Company were to be downgraded by S&P, the Company could
be required to cash collateralize the mark-to-market positions of certain
derivative instruments. Based on current market prices of these instruments, the
Company could be required to place an additional $7 million on deposit with the
counterparty of these transactions. In addition, the Company could be required
to provide a $2.5 million letter of credit in accordance with a real estate
lease. Obtaining this letter of credit could result in an equal reduction of
availability under the revolving credit portion of the Credit Agreement.
The Company's focus in 2002 is to continue to reduce costs, working
capital levels and capital spending. The Company believes these efforts, as
necessary, along with the borrowing availability under the Credit Agreement,
will be sufficient to fund the Company's cash requirements until business
conditions improve. At April 30, 2002, the Company had $44 million outstanding
(outstanding borrowings of $35 million and outstanding letters of credit of $9
million) of the maximum available credit line of $175 million under the
revolving credit portion of the Credit Agreement and $115 million outstanding
under the term loan portion of the Credit Agreement. Additionally, at April 30,
2002, the Company had unused availability under short-term uncommitted lines of
credit, other than the Credit Agreement, of $46 million.
Critical Accounting Policies
The preparation of the Company's financial statements requires management
to apply generally accepted accounting principles to the Company's specific
circumstances and make estimates and assumptions that affect the reported amount
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The critical accounting policies discussed in the Company's most recent
Annual Report on Form 10-K for the year ended December 31, 2001 are updated as
follows:
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of net assets allocated to acquired companies. In June 2001, the FASB
issued SFAS No. 142. Under this new standard, all goodwill, including goodwill
acquired before initial application of the standard, is not amortized but must
be tested for impairment at least annually at the reporting unit level, as
defined in the standard. The Company and Equistar adopted this standard on
January 1, 2002. Accordingly, the Company reported a charge for the cumulative
effect of an accounting change of $275 million in the first quarter of 2002 to
write off certain of its goodwill related to its Acetyls business based upon the
Company's estimate of fair value for this business using various valuation
methods considering expected future profitability and cash flows. Additionally,
Equistar reported an impairment of its goodwill in the first quarter of 2002.
The write-off at Equistar required an adjustment of $30 million to reduce the
carrying value of the Company's investment in Equistar to its approximate
proportional share of Equistar's Partners' capital, which the Company also
reported as a charge for the cumulative effect of an accounting change.
Amortization expense for the three months ended March 31, 2001 for goodwill that
was recorded on the Company's balance sheet was $3 million. Additionally, the
Company's share of amortization expense reported by Equistar for the three
months ended March 31, 2001 for its goodwill, included in Equity in loss of
Equistar, was $2 million.
Recent Accounting Developments
See Note 2 to Consolidated Financial Statements included in this
Quarterly Report for discussion of recent accounting developments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Note 9 to Consolidated Financial Statements included in this
Quarterly Report for discussion of the Company's management of foreign currency
exposure, commodity price risk and interest rate risk through its use of
derivative instruments and hedging activities.
25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
99.1 Information relevant to forward-looking statements (Filed as
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).*
(b) Reports on Form 8-K.
Current Reports on Form 8-K dated February 1, 2002, March 20, 2002, and
May 2, 2002 were filed during the quarter ended March 31, 2002 and through
the date hereof.
---------------
* Incorporated by reference.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MILLENNIUM CHEMICALS INC.
Date: May 13, 2002 By: /s/ JOHN E. LUSHEFSKI
---------------------------------------
John E. Lushefski
Senior Vice President and Chief
Financial Officer (as duly authorized
officer and principal financial officer)
27
STATEMENT OF DIFFERENCES
Characters normally expressed as subscript shall be preceded by..............[u]