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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 September 30, 2003
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)
20 Wight Avenue, Suite 100
Hunt Valley, MD 21030
410-229-4400
(Address of principal executive offices)
(Registrant's telephone number, including area code)
230 Half Mile Road
Red Bank, NJ 07701
732-933-5000
(Former name, former address, and former fiscal year, if changed since last
report)
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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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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: 64,422,974 shares of Common
Stock, par value $.01 per share, as of October 31, 2003, excluding 13,473,612
shares held by the registrant and its subsidiaries, but including 660,326 shares
held by certain Company trusts that are not entitled to be voted.
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1
MILLENNIUM CHEMICALS INC.
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 27
Item 3 Quantitative and Qualitative Disclosures about Market Risk 43
Item 4 Controls and Procedures 43
Part II OTHER INFORMATION
Item 1 Legal Proceedings 44
Item 6 Exhibits and Reports on Form 8-K 44
Signature 45
In this Quarterly Report, the terms "our", "we" and "the Company" refer to
Millennium Chemicals Inc. and its consolidated subsidiaries, except as the
context otherwise requires.
Non-GAAP Financial Measures
Financial measures based on accounting principles generally accepted in the
United States of America ("GAAP") are commonly referred to as GAAP financial
measures. For this purpose, a non-GAAP financial measure is generally defined by
the Securities and Exchange Commission as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be so adjusted in the most
comparable GAAP measure. From time to time the Company discloses so-called
non-GAAP financial measures, primarily EBITDA, Pro Forma EBITDA, Pro Forma
Operating Income, Pro Forma Net Sales and Pro Forma Depreciation and
Amortization. EBITDA represents income from operations before interest, taxes,
depreciation and amortization, other income items, equity earnings and the
cumulative effect of accounting changes. EBITDA is a key measure used by the
banking and investing communities in their evaluation of economic performance.
Accordingly, management believes that disclosure of EBITDA provides useful
information to investors because it is frequently cited by financial analysts in
evaluating companies' performance. Pro Forma EBITDA and Pro Forma Operating
Income include the Company's underlying interest (29.5%) in the results of
Equistar Chemicals, LP ("Equistar"). Pro Forma Net Sales and Pro Forma
Depreciation and Amortization include net sales and depreciation and
amortization, respectively, in accordance with GAAP together with the Company's
underlying interest in Equistar's corresponding amounts. The Company believes
this pro forma information provides useful information to investors regarding
its underlying interest in Equistar. EBITDA and the pro forma measures
identified above are not a measure of operating performance computed in
accordance with GAAP and should not be considered as a substitute for GAAP
measures. Additionally, these measures may not be comparable to similarly named
measures of other companies.
The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding certain items that are unusual in nature or
not comparable from period to period and that are included in GAAP measures of
earnings. Management believes that excluding these items generally helps
investors to compare operating performance between two periods. Such adjusted
data is not reported without an explanation of the items that are excluded.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited) (Restated -
See Note 2)
ASSETS
Current assets
Cash and cash equivalents .................................................. $ 158 $ 125
Trade receivables, net ..................................................... 238 210
Inventories ................................................................ 427 406
Other current assets ....................................................... 66 78
------ ------
Total current assets .................................................... 889 819
Property, plant and equipment, net ............................................ 849 862
Investment in Equistar ........................................................ 494 563
Other assets .................................................................. 48 46
Goodwill ...................................................................... 106 106
------ ------
Total assets ............................................................ $2,386 $2,396
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Notes payable .............................................................. $ -- $ 4
Other short-term borrowings ................................................ -- 14
Current maturities of long-term debt ....................................... 99 12
Trade accounts payable ..................................................... 200 274
Income taxes payable ....................................................... 21 44
Accrued expenses and other liabilities ..................................... 154 127
------ ------
Total current liabilities ............................................... 474 475
Long-term debt ................................................................ 1,264 1,212
Deferred income taxes ......................................................... 290 337
Other liabilities ............................................................. 380 388
------ ------
Total liabilities ....................................................... 2,408 2,412
Commitments and contingencies (Note 11)
Minority interest ............................................................. 28 19
Shareholders' deficit
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 September 30, 2003 and December 31, 2002) ... 1 1
Paid in capital ............................................................ 1,295 1,297
Accumulated deficit ........................................................ (857) (776)
Cumulative other comprehensive loss ........................................ (235) (299)
Treasury stock, at cost (14,240,999 and 14,766,279 shares at September 30,
2003 and December 31, 2002, respectively) ............................... (266) (275)
Deferred compensation ...................................................... 12 17
------ ------
Total shareholders' deficit ............................................. (50) (35)
------ ------
Total liabilities and shareholders' deficit .......................... $2,386 $2,396
====== ======
See Notes to Consolidated Financial Statements.
3
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
------ ----------- ------ -----------
(Restated - (Restated -
See Note 2) See Note 2)
Net sales ..................................................... $ 431 $ 411 $1,262 $1,167
Operating costs and expenses
Cost of products sold ...................................... 362 317 1,019 945
Depreciation and amortization .............................. 28 26 83 76
Selling, development and administrative expense ............ 31 38 98 89
Reorganization and office closure costs .................... 15 -- 16 --
------ ----- ------ ------
Operating (loss) income ................................. (5) 30 46 57
Interest expense .............................................. (25) (23) (72) (67)
Interest income ............................................... 2 1 4 3
(Loss) earnings on Equistar investment ........................ (12) 6 (69) (39)
Other income (expense), net ................................... 2 (1) 1 (2)
------ ----- ------ ------
(Loss) income before income taxes, minority interest and
cumulative effect of accounting change ..................... (38) 13 (90) (48)
Benefit from (provision for) income taxes ..................... 11 (7) 32 24
------ ----- ------ ------
(Loss) income before minority interest and cumulative effect of
accounting change .......................................... (27) 6 (58) (24)
Minority interest ............................................. (1) (1) (5) (2)
------ ----- ------ ------
(Loss) income before cumulative effect of accounting change ... (28) 5 (63) (26)
Cumulative effect of accounting change ........................ -- -- (1) (305)
------ ----- ------ ------
Net (loss) income ............................................. $ (28) $ 5 $ (64) $ (331)
====== ===== ====== ======
Basic and diluted (loss) earnings per share:
Before cumulative effect of accounting change .............. $(0.44) $0.08 $(0.98) $(0.41)
From cumulative effect of accounting change ................ -- -- (0.02) (4.80)
------ ----- ------ ------
After cumulative effect of accounting change ............... $(0.44) $0.08 $(1.00) $(5.21)
====== ===== ====== ======
See Notes to Consolidated Financial Statements.
4
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Millions)
Nine Months Ended
September 30,
-------------------
2003 2002
----- -----------
(Restated -
See Note 2)
Cash flows from operating activities:
Net loss ................................................................... $ (64) $(331)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Cumulative effect of accounting change .................................. 1 305
Depreciation and amortization ........................................... 83 76
Deferred income tax benefit ............................................. (43) (26)
Loss on Equistar investment ............................................. 69 39
Minority interest ....................................................... 5 2
Other, net .............................................................. -- 4
Changes in assets and liabilities:
Increase in trade receivables ........................................ (23) (17)
Decrease in inventories .............................................. 1 30
Decrease (increase) in other current assets .......................... 27 (9)
Decrease (increase) in other assets .................................. 2 (13)
Decrease in trade accounts payable ................................... (82) (22)
Increase in accrued expenses and other liabilities and income taxes
payable ........................................................... -- 25
Decrease in other liabilities ........................................ (23) (11)
----- -----
Cash (used in) provided by operating activities ......................... (47) 52
----- -----
Cash flows from investing activities:
Capital expenditures ....................................................... (29) (43)
----- -----
Cash used in investing activities ....................................... (29) (43)
----- -----
Cash flows from financing activities:
Dividends to shareholders .................................................. (17) (26)
Proceeds from long-term debt, net of financing costs ....................... 356 255
Repayment of long-term debt ................................................ (220) (234)
(Decrease) increase in notes payable and other short-term borrowings ....... (19) 3
----- -----
Cash provided by (used in) financing activities ......................... 100 (2)
----- -----
Effect of exchange rate changes on cash ....................................... 9 (2)
----- -----
Increase in cash and cash equivalents ......................................... 33 5
Cash and cash equivalents at beginning of year ................................ 125 114
----- -----
Cash and cash equivalents at end of period .................................... $ 158 $ 119
===== =====
See Notes to Consolidated Financial Statements.
5
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 accounting principles
generally accepted in the United States of America 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 Annual Report on Form 10-K for the year ended December 31, 2002, as
amended by Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange
Commission on November 12, 2003. 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 and the La Porte Methanol
Company. All significant intercompany accounts and transactions have been
eliminated. The Company's 29.5% investment in Equistar Chemicals, LP
("Equistar"), a joint venture between the Company and Lyondell Chemical Company
("Lyondell"), is accounted for by the equity method; accordingly, the Company's
share of Equistar's pre-tax net income or loss is included in net income or
loss. Certain prior year balances have been reclassified to conform to the
current year presentation, principally $2 and $6 of selling, development and
administrative ("S,D&A") costs allocated to the Company's investment in Equistar
and previously reported in Loss on Equistar investment for the three months and
nine months ended September 30, 2002, respectively, have been reclassified to
Selling, development and administrative expense in the Company's Consolidated
Statements of Operations, as no such S,D&A costs were allocated and reported in
Loss on Equistar investment for the three months and nine months ended September
30, 2003.
Note 2 - Restatement of Financial Statements
The Company restated its financial statements for the years 1998 through
2002 and for the first quarter of 2003, to correct errors in its accounting for
deferred taxes relating to its Equistar investment, the calculation of its
pension benefit obligations and its accounting for a multi-year precious metals
agreement. The Company has filed with the Securities and Exchange Commission
Amendment No. 1 to its Annual Report on Form 10-K for the year ended December
31, 2002, which is dated November 12, 2003 and Amendment No. 1 to its Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2003, which is
dated November 14, 2003, to reflect changes therein required as a consequence of
the restatements described in this Note 2 and the reclassification described in
Note 1 and adjustments to its prior financial statements for the timing of
income and expense recognition associated with legal, environmental and other
reserves established for certain of the Company's predecessor businesses, as
more fully described in the amendment to the Company's Annual Report on Form
10-K. These adjustments for the timing of income and expense recognition did
not change any of the financial information presented in this Quarterly Report
on Form 10-Q and, accordingly, are not discussed in this Quarterly Report.
Deferred tax assets and liabilities and deferred tax expense for the years
1998 through 2002 and for the first quarter of 2003 were restated to
appropriately account for the Company's book and tax basis differences
associated with its investment in Equistar in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). The accounting for deferred taxes associated with Equistar was
previously based on the difference between book and tax basis of a subsidiary
that holds the partnership investment. Deferred tax is now based on the
difference between book and tax basis of the actual partnership interest held by
the subsidiary. The effect of the adjustments to deferred tax assets and
liabilities was to increase net deferred tax liabilities by $425, increase
Accumulated deficit by $440 and decrease Cumulative other comprehensive loss by
$15 at December 31, 2002. The effect of the adjustments to Benefit from income
taxes for the three months and nine months ended September 30, 2002 was less
than $1. In addition, during the course of its review of its deferred taxes, the
Company concluded that its realization of a deferred tax asset of $10 related to
its French subsidiaries was unlikely. The elimination of this deferred tax asset
as of December 31, 2002 resulted in an increase of $10 in net deferred tax
liabilities and Accumulated deficit.
The Company's accrued pension benefit costs, included in Other liabilities,
and its net periodic pension benefit cost were restated for 2002 and for the
first quarter of 2003. The restatement corrected errors in the calculation of
the Company's pension liability. The Company's principal actuarial firm
incorrectly utilized participant data in its 2002 actuarial valuation and
underestimated the accumulated pension benefit obligation at December 31, 2002
for the Company's largest domestic pension plan. The effect of these corrections
was to increase accrued pension benefit cost by $53, decrease net deferred tax
liabilities by $19, increase Accumulated deficit by $1 and increase Cumulative
other comprehensive loss by $33 at December 31, 2002. Net periodic pension
benefit cost changed by less than $1 for the three months ended September 30,
2002, and increased by $1 for the nine months
6
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
ended September 30, 2002 due to this restatement. Net income (loss) for the
three months and nine months ended September 30, 2002 changed by less than $1 as
a result of these errors.
The Company also restated its financial statements for the years 1998
through 2002 and for the first quarter of 2003 due to a change in accounting
treatment for a five-year agreement entered into in 1998 that provides the
Company with the right to use gold owned by a third party, as more fully
described in Note 8. The Company previously accounted for this agreement as an
operating lease but changed the accounting for this agreement to a secured
financing. As a result, Other assets were increased by $4, Current liabilities
were increased by $13, net deferred tax liabilities were decreased by $4, and
Accumulated deficit was increased by $5 at December 31, 2002. This restatement
decreased Operating income for the three months and nine months ended September
30, 2002 by $1 and $3, respectively, decreased Net income by $1 for the three
months ended September 30, 2002, and increased Net loss by $2 for the nine
months ended September 30, 2002.
A summary of the aggregate effect of these restatements and the
reclassification described in Note 1 on the Company's Consolidated Balance
Sheets and Consolidated Statements of Operations for the periods presented
herein is shown below.
December 31, 2002
-------------------------
As Reported As Restated
----------- -----------
Changes to Consolidated Balance Sheet:
Deferred income taxes - asset .......................... $ 75 $ --
Other assets ........................................... 42 46
Total assets ........................................... 2,467 2,396
Other short-term borrowings ............................ -- 14
Accrued expenses and other liabilities ................. 128 127
Total current liabilities .............................. 462 475
Deferred income taxes - liability ...................... -- 337
Other liabilities ...................................... 335 388
Total liabilities ...................................... 2,009 2,412
Accumulated deficit .................................... (320) (776)
Cumulative other comprehensive loss .................... (281) (299)
Total shareholders' equity (deficit) ................... 439 (35)
Total liabilities and shareholders' equity (deficit) ... 2,467 2,396
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
------------------------- -------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Changes to Consolidated Statements of Operations:
Cost of products sold .................................. $ 316 $ 317 $ 944 $ 945
Selling, development and administrative expense ........ 36 38 80 89
Operating income ....................................... 33 30 67 57
Income (loss) on Equistar investment ................... 4 6 (45) (39)
Income (loss) before income taxes, minority interest
and cumulative effect of accounting change ........... 14 13 (44) (48)
(Provision for) benefit from income taxes .............. (7) (7) 22 24
Income (loss) before minority interest and cumulative
effect of accounting change .......................... 7 6 (22) (24)
Income (loss) before cumulative effect of accounting
change ............................................... 6 5 (24) (26)
Net income (loss) ...................................... 6 5 (329) (331)
Basic and diluted earnings (loss) per share:
Before cumulative effect of accounting change ........ 0.10 0.08 (0.38) (0.41)
After cumulative effect of accounting change ......... 0.10 0.08 (5.18) (5.21)
7
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 3 - (Loss) Earnings per Share and Stock-Based Compensation
The weighted-average number of equivalent shares of common stock
outstanding used in computing (loss) earnings per share is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted-average common stock outstanding - basic.......... 64,050,943 63,618,337 63,959,584 63,547,478
Restricted shares.......................................... -- 91,282 -- --
Shares held by employee benefit plan trusts................ -- 227,970 -- --
---------- ---------- ---------- ----------
Weighted-average common stock outstanding - diluted........ 64,050,943 63,937,589 63,959,584 63,547,478
========== ========== ========== ==========
The calculation of diluted loss per share for the three months ended
September 30, 2003 does not include 60,014 restricted shares issued under a
Company incentive plan and 225,982 shares held by certain of the Company's
employee benefit plan trusts. The calculation of diluted loss per share for the
nine months ended September 30, 2003 does not include 60,218 restricted shares
issued under a Company incentive plan and 223,723 shares held by certain of the
Company's employee benefit plan trusts. The calculation of diluted loss per
share for the nine months ended September 30, 2002 does not include 63,998
options to purchase common stock, 91,929 restricted shares issued under a
Company incentive plan, and 227,970 shares held by certain of the Company's
employee benefit plan trusts. The effect of including these options and shares
would be antidilutive.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
encourages a fair-value based method of accounting for employee stock options
and similar equity instruments, which generally would result in the recording
of additional compensation expense in the Company's financial statements.
SFAS No. 123 also allows the Company to continue to account for stock-based
compensation using the intrinsic value for equity instruments under Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"). The Company has
elected to account for such instruments using APB Opinion No. 25 and related
interpretations, and thus has adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, no compensation cost has been recognized for the
stock option plans in the accompanying financial statements as all options
granted had an exercise price equal to the market value of the underlying
Common Stock on the date of grant.
The following table illustrates the effect on net (loss) income and related
(loss) earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------------
2003 2002 2003 2002
------ ----------- ------ --------------
(Restated - (Restated -
See Note 2) See Note 2)
Net (loss) income before cumulative effect of accounting
change.................................................. $ (28) $ 5 $ (63) $ (26)
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all
awards, net of related tax effects...................... -- -- (1) (1)
------ ----- ------ ------
Pro forma net (loss) income before cumulative effect of
accounting change....................................... $ (28) $ 5 $ (64) $ (27)
====== ===== ====== ======
(Loss) earnings per share:
Basic and diluted - as reported......................... $(0.44) $0.08 $(0.98) $(0.41)
====== ===== ====== ======
Basic and diluted - pro forma........................... $(0.44) $0.08 $(0.99) $(0.43)
====== ===== ====== ======
8
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 4 - Recent Accounting Developments
On January 1, 2003, the Company adopted 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, are recorded in subsequent
periods. The Company's asset retirement obligations arise from activities
associated with the eventual remediation of sites used for landfills and mining
and include estimated liabilities for closure, restoration, and post-closure
care. None of the Company's assets are legally restricted for purposes of
settling these obligations. The Company reported an after-tax transition charge
of $1 in the first quarter of 2003 as the cumulative effect of this accounting
change. The impact of adoption was insignificant to the Company's reported
assets and liabilities. The ongoing annual expense resulting from the initial
adoption of SFAS No. 143 is expected to be approximately $1. Activity associated
with the asset retirement obligations other than the effect of initial adoption
of SFAS No. 143 was not significant for each of the three months and nine months
ended September 30, 2003. Disclosure on a pro forma basis of net income and
related per-share amounts as if SFAS No. 143 had been applied during all periods
presented is omitted because the effect on pro forma net income is not
significant. The pro forma amount of the aggregate asset retirement obligation
at September 30, 2003, January 1, 2003, September 30, 2002, and January 1, 2002,
as if SFAS No. 143 had been applied during all periods affected is $13, $12,
$12, and $11, respectively.
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
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. 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
considering expected future profitability and cash flows. Also in accordance
with SFAS No. 142, 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.
Note 5 - Reorganization and Office Closure Costs
In July 2003, the Company announced the implementation of a program to
reduce costs. This program included a reduction of approximately 5% in the
number of the Company's employees worldwide and, effective September 1, 2003,
the closure of the Company's executive offices in Red Bank, New Jersey and the
relocation of its headquarters to the Company's existing administrative offices
in Hunt Valley, Maryland. In addition, the Company announced the suspension of
payment of dividends on its Common Stock.
The Company expects to record charges totaling $19 to $21 associated with
this program. The Company has recorded charges in the three months and nine
months ended September 30, 2003 of $15 and $16, respectively, of which $14 and
$15, respectively, are for severance-related costs and $1 is for contractual
commitments for ongoing lease costs, net of expected sublease income,
associated with the closure of the Red Bank, New Jersey office for the
remaining term of the lease agreement. Substantially all of the remaining
charges for this program, estimated at $3 to $5, are expected to be recorded
during the next several quarters. All costs associated with this program are
accounted for in accordance with SFAS No. 112, "Employer's Accounting for
Postemployment Benefits" ("SFAS No. 112") or SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", as appropriate. Severance-related
cash payments of $7 for the implementation of this program were made in the
three months ended September 30, 2003. Substantially all of the remainder of the
cash payments relating to this program, which are estimated to be approximately
$17, will be disbursed during the next several quarters. Accrued liabilities
associated with this program and included in Accrued expenses and other
liabilities were $7 at September 30, 2003.
Note 6 - European Receivables Securitization Program
Since March 2002, the Company has been transferring its interest in certain
European trade receivables to an unaffiliated third party as its basis for
issuing commercial paper under a revolving securitization arrangement (annually
renewable for a maximum of five years on April 30 of each year at the option of
the third party), with
9
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
maximum availability of 70 million euros, which is treated, in part, as a sale
under accounting principles generally accepted in the United States of America.
Accordingly, transferred trade receivables that qualify as a sale, $58 and $61
outstanding at September 30, 2003 and December 31, 2002, respectively, were
removed from the Company's Consolidated Balance Sheets. The Company continues to
carry its retained interest in a portion of the transferred assets that do not
qualify as a sale, $9 and $9 at September 30, 2003 and December 31, 2002,
respectively, in Trade receivables, net in its Consolidated Balance Sheets at
amounts that approximate net realizable value based upon the Company's
historical collection rate for these trade receivables. Unused availability
under this arrangement at September 30, 2003 was 12 million euros. For the nine
months ended September 30, 2003 and 2002, cumulative gross proceeds from this
securitization arrangement were $253 and $159, respectively. Cash flows from
this securitization arrangement are reflected as operating activities in the
Consolidated Statements of Cash Flows. The cost of sale associated with this
arrangement was $1 and $2 for the three months and nine months ended September
30, 2003, respectively, and $1 and $2 for the three months and nine months ended
September 30, 2002, respectively. Administration and servicing of the trade
receivables under the arrangement remains with the Company. Servicing
liabilities associated with the transaction are not significant. In the event
the Company's unsecured long-term debt is downgraded to a rating of either B2 by
Moody's Investor Services, Inc. ("Moody's") or B by Standard & Poor's ("S&P"),
the counterparty would have the right to terminate the securitization
arrangement. As discussed in Note 8 below, the Company expects to raise
additional funds in the capital markets on or before December 31, 2003, which
would be used in part to terminate this program.
Note 7 - Inventories
Inventories are stated at the lower of cost or market value.
September 30, December 31,
2003 2002
------------- ------------
Finished products .................................. $255 $210
In-process products ................................ 31 30
Raw materials ...................................... 80 106
Maintenance parts and supplies ..................... 61 60
---- ----
$427 $406
==== ====
10
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 8 - Long-Term Debt and Credit Arrangements
On April 25, 2003, the Company received approximately $107 in net proceeds
($109 in gross proceeds) from the issuance and sale by Millennium America Inc.
("Millennium America"), a wholly-owned indirect subsidiary of the Company, of
$100 additional principal amount at maturity of its 9.25% Senior Notes due June
15, 2008 (the "9.25% Senior Notes"), which are guaranteed by the Company. The
net proceeds were used to repay all of the $85 of outstanding borrowings at that
time under the revolving loan portion (the "Revolving Loans") of the Company's
credit agreement (the "Credit Agreement"), which expires on June 18, 2006, and
for general corporate purposes. The Company and Millennium America guarantee the
obligations under the Credit Agreement. Under the terms of this issuance and
sale, Millennium America and the Company entered into an exchange and
registration rights agreement with the initial purchasers of the $100 additional
principal amount of these 9.25% Senior Notes. Pursuant to this agreement, each
of Millennium America and the Company agreed to: (1) file with the Securities
and Exchange Commission on or before July 24, 2003 a registration statement
relating to a registered exchange offer for the notes, and (2) use its
reasonable efforts to cause this exchange offer registration statement to be
declared effective under the Securities Act on or before October 22, 2003. On
June 13, 2003, the Company filed a registration statement with the Securities
and Exchange Commission. However, as of November 14, 2003, the Company has not
been able to cause this exchange offer registration statement to be declared
effective. As a result, beginning October 22, 2003, Millennium America and the
Company are obligated to pay additional interest at the annualized rate of
approximately 1.00% to each holder of the $100 additional amount of notes.
Such additional interest will be paid until such time as the registration
statement becomes effective.
At September 30, 2003, the Company had $65 outstanding ($47 of outstanding
borrowings and outstanding undrawn standby letters of credit of $18) of the
maximum available credit line of $175 under the Revolving Loans and,
accordingly, had $110 of unused availability under such facility, and had $47
outstanding under the term loan portion (the "Term Loans") of the Credit
Agreement. At that date, in addition to letters of credit outstanding under the
Credit Agreement, the Company also had outstanding undrawn standby letters of
credit of $6 under other arrangements. The Company had unused availability
under short-term uncommitted lines of credit, other than the Credit Agreement,
of $31 at September 30, 2003.
The Revolving Loans are available in US dollars, British pounds 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. As of September 30, 2003, $18 was outstanding
under the letter of credit subfacility, and no amount under the swingline
facility. The Term Loans may be prepaid in part or in total at the option of the
Company at any time, but any such 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.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. As of September 30, 2003, the Company was not in
compliance with the Leverage Ratio and Interest Coverage Ratio covenants
described below. Accordingly, the Company obtained a waiver on September 30,
2003, which was then extended on November 10, 2003, of the provisions of these
financial covenants. This waiver, as so extended, expires on December 31, 2003.
The Company is seeking an amendment to the Credit Agreement to revise these
financial covenants, among other things. Based on its discussions with the agent
banks and the lending banks under the Credit Agreement, the Company believes
that it will be able to obtain this amendment prior to the expiration of the
waiver. However, the amendment will not become effective unless the Company
obtains at least $110 of long-term financing in the capital markets
prior to the expiration of the current waiver. The funds so obtained would be
used to repay secured Term Loans of approximately $47 and to enable the Company
to terminate its European accounts receivable securitization program of
approximately $60. The Company believes that it will be able to obtain the
requisite financing on or before December 31, 2003, at which time the amendment
to the Credit Agreement referred to above would become effective. If the Company
is not able to obtain the requisite financing on or before December 31, 2003,
the Company believes that it would be able to extend the current waiver to
provide additional time to obtain such financing or otherwise amend or refinance
the Credit Agreement. In addition, the Company had at October 31, 2003,
approximately $125 of cash and cash equivalents held primarily by foreign
subsidiaries, which the Company would
11
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
be able to utilize to provide liquidity in the near-term until it is able to
obtain the requisite financing, or amend or refinance the Credit Agreement. If
the Credit Agreement is terminated and refinanced, the collateral currently
securing the Credit Agreement would be released and available to secure other
debt of the Company or its subsidiaries. The Company expects that it will
incur additional costs in the form of fees and interest in connection with
any such waiver, amendment or refinancing, and that additional restrictions
will be imposed on the Company as a result thereof. The total amount of debt
outstanding under the Credit Agreement at September 30, 2003 of $94, which
includes $47 of Term Loans and $47 of Revolving Loans, is classified as a
current liability at September 30, 2003 because the current waiver expires
at December 31, 2003.
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. To permit the Company to be in compliance, these covenants were amended
in the fourth quarter of 2001, in the second quarter of 2002, and in the second
quarter of 2003. The amendment in the second quarter of 2002 was conditioned
upon consummation of the June 2002 offering of $100 additional principal amount
of the 9.25% Senior Notes and repayment of the Credit Agreement debt described
above. The April 2003 amendment was not conditioned on the sale of 9.25% Senior
Notes. Under the covenants, as amended in April of 2003, the Company is required
to maintain a Leverage Ratio of no more than 5.25 to 1.00 for the fourth quarter
of 2003; 5.00 to 1.00 for the first and second quarters of 2004; 4.75 to 1.00
for the third and fourth quarters of 2004; and 4.00 to 1.00 for the first
quarter of 2005 and thereafter; and an Interest Coverage Ratio of no less than
2.25 to 1.00 for the fourth quarter of 2003; 2.50 to 1.00 for the first, second,
third and fourth quarters of 2004; and 3.00 to 1.00 for the first quarter of
2005 and thereafter. 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; and (x) 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.
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" and, together with the 7.00% Senior Notes and
the 9.25% Senior Notes the "Senior Notes") that are fully and unconditionally
guaranteed by the Company. The indenture under which the 7.00% Senior Notes and
7.625% 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 ("CNTA"), as defined, of Millennium
America and its consolidated subsidiaries. Accordingly, based upon CNTA and
secured borrowing levels at September 30, 2003, any reduction in CNTA below
approximately $1,500 would decrease the Company's availability under the
Revolving Loans by 15% of any such reduction. The 7.00% Senior Notes and
the 7.625% Senior Debentures can be accelerated by the holders thereof if any
other debt in excess of $20 is in default and is accelerated.
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) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." Although the Company has
12
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
no intention at the present time to pay dividends or make distributions,
repurchase its common stock or make other restricted payments, the Company would
be prohibited by this covenant from making any such payments at the present
time. The indenture also requires the calculation of 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 quarters. If this ratio were to cease to be
greater than 2.25 to 1.00, there would be certain restrictions on the Company's
ability to incur additional indebtedness and pay dividends, repurchase capital
stock or make certain other restricted payments. However, if the 9.25% Senior
Notes were to receive investment grade credit ratings from both S&P and Moody's
and meet certain other requirements as specified in the indenture, certain of
these covenants would no longer apply. The 9.25% Senior Notes can be accelerated
by the holders thereof if any other debt in excess of $30 is in default and is
accelerated.
At September 30, 2003, 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, as well as the Senior Notes, are rated BB- by S&P with a
stable outlook. The Company has received a senior implied rating of Ba2 and the
Senior Notes are rated Ba3 by Moody's. Moody's currently has the Company on
CreditWatch for possible downgrade and has assigned a negative outlook. These
ratings are non-investment grade ratings. On March 7, 2003, S&P lowered the
Company's credit rating from investment grade rating BBB- to non-investment
grade rating BB+ with a negative outlook, reflecting S&P's concern regarding the
Company's ability to generate the cash flow necessary to substantially improve
its financial profile during a period of economic uncertainties and higher raw
material costs. On July 22, 2003, S&P again lowered the Company's credit rating
from BB+ to BB, citing the Company's July 2003 announcement regarding weak sales
volume and competitive pricing pressures in the titanium dioxide business for
the second quarter of 2003, as well as lingering economic uncertainties and the
potential for additional raw material pressures in the petrochemical industry as
factors that are likely to further delay the Company's efforts to restore its
financial profile. On August 6, 2003, S&P announced that it had placed the
Company's credit ratings on CreditWatch with negative implications, citing the
Company's August 6, 2003 announcement regarding restatements of financial
statements. On September 22, 2003, S&P, lowered the Company's credit rating to
BB- from BB citing the Company's subpar financial profile and
weaker-than-expected prospects for reducing its substantial debt burden over the
next couple of years. At that time, S&P also removed the Company's credit
ratings from CreditWatch and revised its current outlook from negative to
stable. Moody's affirmed the Company's non-investment grade rating on June 19,
2002, but revised its ratings outlook to negative from stable, reflecting
Moody's concern over the Company's cash flow performance in the fourth quarter
of 2001 and the first quarter of 2002. On July 23, 2003, Moody's announced that
it had placed the Company's credit ratings under review for possible downgrade
due to Moody's concern that weaker North American demand for titanium dioxide
combined with pricing pressure could translate into weaker credit metrics and
less free cash flow for the near term. On August 13, 2003, Moody's announced
that it had lowered the Company's senior implied rating to Ba2, and the Senior
Notes' rating to Ba3, citing the Company's high leverage, modest coverage of
interest expense, weaker than anticipated TiO[u]2 demand and potential covenant
compliance issues. The ratings remain under review by Moody's for possible
downgrade pending Moody's analysis of announced accounting errors and related
financial statement restatements, and the Company's current outlook for its
business. As a result of the non-investment grade ratings by both S&P and
Moody's, the Company was required to provide, in April 2003, a $2.5 letter of
credit, which remains outstanding, to secure its obligations under a real estate
lease, resulting in an equal reduction of availability under the Revolving
Loans. Furthermore, the Company could be required to cash collateralize the
mark-to-market positions of certain derivative instruments which expire in
January 2004, dependent upon the market value of these instruments. Based on the
current market value of the instruments, the Company is not required to place
any funds on deposit with the counterparty to these transactions. In addition,
these actions by Moody's and S&P could heighten concerns of the Company's
creditors and suppliers which could result in these creditors and suppliers
placing limitations on credit extended to the Company and demands from creditors
for additional credit restrictions or security.
The Company uses gold as a component in a catalyst at its La Porte, Texas
facility. In April 1998, the Company entered into an agreement that provided the
Company with the right to use gold owned by a third party for a five-year term.
In April 2003, the Company renewed this agreement for a one-year term and
simultaneously entered into a forward purchase agreement in order to mitigate
the risk of change in the market price of gold. The renewed agreement required
the Company to either deliver the gold to the counterparty at the end of the
term or pay to the counterparty an amount equal to its then-current value. The
renewed agreement provided that if the Company was downgraded below BB by S&P or
Ba2 by Moody's, the third party could require the Company to purchase the gold
at its then-current value. After discussions with the counterparty to the
agreement as to whether the counterparty had the right to require the Company to
purchase the gold due to Moody's August 13, 2003
13
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
announcement referenced above, the Company determined to terminate the renewed
agreement and purchase the gold for its then-current market value. On August 28,
2003, the Company paid the counterparty $14, net of $1 of proceeds from the
termination of its forward purchase contract. The Company's obligation under
this agreement was $14 at December 31, 2002, and was included in Other
short-term borrowings. The change in value of the gold and the Company's
obligation under this agreement, which is included in Selling, development and
administrative expense, was a loss of $1 for each of the three months and nine
months ended September 30, 2003, a loss of $2 for the nine months ended
September 30, 2002, and for the three months ended September 30, 2002 was not
significant. The change in value of the forward purchase agreement was a gain of
$1 for each of the three months and nine months ended September 30, 2003, which
is included in Selling, development and administrative expense.
The maturities of the Company's Long-term debt through 2008 and thereafter
are as follows:
October 1-
December 31,
2003 2004 2005 2006 2007 2008 Thereafter Total
------------ ---- ---- ---- ---- ---- ---------- ------
Revolving Loans ................ $-- $47 $-- $ -- $-- $ -- $ -- $ 47
Term Loans ..................... -- 47 -- -- -- -- -- 47
7.00% Senior Notes ............. -- -- -- 500 -- -- -- 500
7.625% Senior Debentures ....... -- -- -- -- -- -- 250 250
9.25% Senior Notes ............. -- -- -- -- -- 475 -- 475
Other Long-term debt ........... 2 5 5 5 2 1 4 24
--- --- --- ---- --- ---- ---- ------
Maturities of Long-term debt ... $ 2 $99 $ 5 $505 $ 2 $476 $254 1,343
=== === === ==== === ==== ====
Non-cash components of Long-term
debt ....................... 20
------
Total debt ..................... 1,363
Less: Current maturities of
long-term debt .............. (99)
------
Total Long-term debt ........... $1,264
======
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 September
30, 2003, these contracts had expiration dates no later than September 2004.
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 recorded in
current earnings. Net amounts included in earnings, which offset similar amounts
from foreign currency denominated trade receivables and payables, were gains of
$3 and $6 in the three months and nine months ended September 30, 2003,
respectively, and a loss of $2 and a gain of $2 in the three months and nine
months ended September 30, 2002, respectively.
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
14
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
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. Net amounts 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 a net loss of $1 and $5 for the three
months and nine months ended September 30, 2003, respectively, and a net gain of
$1 and $4 for the three months and nine months ended September 30, 2002,
respectively. Hedge ineffectiveness had no significant impact on earnings for
each of the three months and nine months ended September 30, 2003 and 2002. No
forward exchange contract cash flow hedges were discontinued during the three
months and nine months ended September 30, 2003 and 2002. The Company currently
estimates that net losses of approximately $3 ($2 net of tax) on foreign
currency cash flow hedges included in OCI at September 30, 2003 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
and commodity options with various terms to manage the volatility related to
anticipated purchases of natural gas and certain commodities, a portion of which
exposes the Company to natural gas price risk. As of September 30, 2003, these
instruments had expiration dates no later than March 2004. Certain of these
instruments are designated as cash flow hedges. The mark-to-market gains or
losses on qualifying hedges are 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 immediately in Cost of products sold. During
the three months ended September 30, 2003, net losses on commodity swaps
designated as cash flow hedges reclassified to Cost of products sold were $1,
and for the nine months ended September 30, 2003, were not significant. During
the three months and nine months ended September 30, 2002, net losses of $1 and
$4, respectively, on commodity swaps designated as cash flow hedges were
reclassified to Cost of products sold to match the gain or loss on the
underlying transaction being hedged. Hedge ineffectiveness had no significant
impact on results of operations for the three months and nine months ended
September 30, 2003 and 2002. No commodity swap cash flow hedges were
discontinued in the three months ended September 30, 2003 or the three months
and nine months ended September 30, 2002. Net losses on commodity swap cash flow
hedges that were discontinued in the nine months ended September 30, 2003 were
not significant. The Company currently estimates that net losses on commodity
swaps included in OCI at September 30, 2003 that will be reclassified to
earnings during the next twelve months will not be significant.
In addition, the Company utilizes commodity swap and option arrangements to
manage price volatility related to anticipated purchases of certain commodities,
a portion of which exposes the Company to natural gas price risk. These
derivatives have not been designated as hedges for accounting purposes. The
gains and losses on these instruments are recorded in current earnings. Net
losses included in earnings were $1 and $2 in the three months and nine months
ended September 30, 2003, respectively. The Company held no such instruments
during the nine months ended September 30, 2002.
In April 2003, the Company entered into a forward purchase agreement in
order to mitigate the risk of change in the market price of gold. This forward
purchase contract was terminated in August 2003 when the Company discontinued
its arrangement for the right to use gold owned by a third party, as more fully
described in Note 8. This derivative was not designated as a hedge for
accounting purposes. The gain on this instrument, which is included in Selling,
development and administrative expense, and offsets a similar amount of loss on
the Company's obligation under the gold agreement, while the agreement was in
effect, was $1 for each of the three months and nine months ended September 30,
2003.
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. At September 30, 2003, the Company had
outstanding interest rate swap agreements with a notional amount of $225, which
are designated as fair value hedges of underlying fixed-rate obligations. The
fair value of these interest rate swap agreements was approximately $5 at
September 30, 2003 resulting in an increase in the carrying value of long-term
debt and the recognition of a corresponding swap asset. The gains and losses on
both the interest rate swaps and the hedged portion of the underlying debt are
recorded in Interest expense. In addition, at September 30, 2003, the Company
had outstanding an interest forward rate agreement with a notional amount of
$50, which is designated as a cash flow hedge of outstanding variable rate debt.
The fair value of this interest rate swap agreement was not significant at
September 30, 2003. The Company also had an interest forward rate agreement with
a notional amount of $50, which has not been designated as a hedge for
accounting purposes. The gains and losses on this derivative are recorded in the
current period in Interest expense. The fair value of this interest rate swap
agreement was not significant at
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
September 30, 2003. Hedge ineffectiveness had no significant impact on earnings
for the three months and nine months ended September 30, 2003 and 2002.
Note 10 - Comprehensive Income (Loss)
The following table sets forth the components of other comprehensive income
(loss) and total comprehensive (loss) income:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ----------- ---- -----------
(Restated - (Restated -
See Note 2) See Note 2)
Net (loss) income............................................... $(28) $ 5 $(64) $(331)
Other comprehensive income (loss):
Net gains (losses) on derivative financial instruments....... 1 4 (2) 6
Minimum pension liability adjustment......................... -- -- -- 1
Currency translation adjustment.............................. 7 (14) 66 10
---- ---- ---- -----
Total comprehensive (loss) income................................ $(20) $ (5) $ -- $(314)
==== ==== ==== =====
Note 11 - Commitments and Contingencies
Legal and Environmental: The Company and various Company subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. The Company believes that it has valid defenses to these
proceedings and is defending them vigorously. However, litigation is subject to
uncertainties and the Company is unable to guarantee the outcome of these
proceedings. In addition, the Company may be subject to potential unknown
liabilities associated with its present and former operations for which it may
be responsible.
Together with other alleged past manufacturers of lead-based paint and lead
pigments for use in paint, the Company, 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, counties, school districts, individuals and the State of
Rhode Island, seek recovery under a variety of theories, including negligence,
failure to warn, breach of warranty, conspiracy, market share liability, fraud,
misrepresentation and public nuisance. Legal proceedings relating to lead
pigment or paint are in various procedural stages or pre-trial, post-trial and
post-dismissal settings.
One proceeding relating to lead pigment or paint was tried in 2002. On
October 29, 2002, after a trial in which the jury deadlocked, the court in the
State of Rhode Island v. Lead Industry Association, Inc., et al, commenced in
the Superior Court of Providence, Rhode Island, on October 13, 1999, declared a
mistrial. The sole issue before the jury in this phase of the proceeding was
whether lead pigment in paint in and on public and private Rhode Island
buildings constitutes a "public nuisance." On March 20, 2003, the court denied
the motions for the judgment as a matter of law filed by both sides during and
after the trial. The case is set for retrial in April 2004.
There are eleven pending legal proceedings relating to lead pigment or
paint in various pre-trial stages. There are three pending legal proceedings
relating to lead pigment or paint that were dismissed after motions to dismiss
or for summary judgment were granted by courts in favor of the defendants, but
are now pending appeal. There are two legal proceedings in which the court
granted summary judgment in favor of the defendants and for which notices of
appeal have been filed. There are four legal proceedings relating to lead
pigment or paint which have been voluntarily dismissed by the plaintiffs. There
is also one legal proceeding relating to lead pigment or paint that was
dismissed after summary judgment was granted by the court in favor of the
defendants, but which has not been appealed. There are four legal proceedings
relating to lead pigment or paint that were abated under the laws of the State
of Texas pending the resolution of an appeal in another legal proceeding
involving lead pigment or paint where summary judgment was granted by the court
in favor of one defendant. During the abatement period, expected to last one to
two years, no defense costs will be incurred for the abated legal proceedings.
Finally, there are five legal proceedings relating to lead pigment or paint that
have been filed with a court, are pending, but have yet to be formally served on
the Company, any of its subsidiaries, or alleged predecessor companies. One
additional legal
16
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
proceeding was similarly filed, never served on the Company or any defendant,
and was withdrawn. The case will be automatically dismissed for failure to
prosecute after one year.
The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has insurance
policies that potentially provide approximately one billion dollars in indemnity
coverage for lead-based paint and lead pigment litigation. As a result of
insurance coverage litigation initiated by the Company, an Ohio trial court
issued a decision in 2002 effectively requiring certain insurance carriers to
resume paying defense costs in the lead-based paint and lead pigment cases.
Indemnity coverage was not at issue in the Ohio court's decision. The insurance
carriers may appeal the Ohio decision regarding defense costs, and they have in
the past and may in the future attempt to deny indemnity coverage if there is
ever a settlement or an adverse judgment in any lead-based paint or lead pigment
case.
In 1986, a predecessor of a company that is now a subsidiary of the Company
sold its recently acquired Glidden Paints business. As part of that sale, the
seller agreed to indemnify the purchaser against certain claims made during the
first eight years after the sale; the purchaser agreed to indemnify the seller
against such claims made after the eight-year period. With the exception of the
two cases discussed below, all pending lead-based paint and lead pigment
litigation involving the Company and its subsidiaries, including the Rhode
Island case, was filed after the eight-year period. Accordingly, the Company
believes that it is entitled to full indemnification from the purchaser against
lead-based paint and lead pigment cases filed after the eight-year period. The
purchaser disputes that it has such an indemnification obligation, and claims
that the seller must indemnify it. Since the Company's defense costs to date
largely have been covered by insurance and there never has been a settlement
paid by, nor any judgment rendered against, the Company (or any other company
sued in any lead-based paint or lead pigment litigation), the parties'
indemnification claims have not been ruled on by a court.
A current subsidiary and an alleged predecessor company are parties to the
only two remaining cases originally filed within the eight-year period following
the 1986 sale of the Glidden Paints business referred to above. In the first of
these cases, The City of New York, et al. v. Lead Industries Association, Inc.,
et al., commenced in the Supreme Court of the State of New York on June 8, 1989,
the New York City Housing Authority brought an action relating to tens of
thousands of public housing units. All claims in that case have been dropped
except for those relating to two housing projects. The other remaining case,
Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common
Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes five minors as
plaintiffs. Dispositive motions were filed in that case in late 2002 and have
yet to be ruled on by the court.
The Company believes that it has valid defenses to the pending lead-based
paint and lead pigment proceedings and is vigorously defending them. However,
litigation is inherently subject to many uncertainties. There can be no
assurance that additional lead-based paint and lead pigment litigation will not
be filed against the Company or its subsidiaries in the future asserting similar
or different legal theories and seeking similar or different types of damages
and relief. While an outcome such as that reached in the Rhode Island proceeding
may have a positive effect on the lead-based paint and lead pigment litigation
against the Company, its subsidiaries and other defendants by reducing the
number and nature of future claims and proceedings, other adverse court rulings
or determinations of liability, among other factors, could encourage an increase
in the number of future claims and proceedings. In addition, from time to time,
legislation and administrative regulations have been enacted or proposed to
impose obligations on present and former manufacturers of lead-based paint and
lead pigment respecting asserted health concerns associated with such products
or to overturn successful court decisions. Due to the uncertainties involved,
the Company is unable to predict the outcome of lead-based paint and lead
pigment litigation, the number or nature of possible future claims and
proceedings, or the effect that any legislation and/or administrative
regulations may have on the Company or its subsidiaries. In addition, management
cannot reasonably estimate the scope or amount of the costs and potential
liabilities related to such litigation, or any such legislation and regulations.
Based upon, among other things, the outcome of such litigation to date,
including the dismissal of most of the over 50 lawsuits brought in recent years,
management does not currently believe, but can not assure, that the costs or
potential liabilities ultimately determined to be attributable to the Company
arising out of such litigation will have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company. The Company has not accrued any potential liabilities for judgments or
settlements resulting from lead-based paint and lead pigment litigation.
The Company and various Company subsidiaries are defendants in a number of
pending legal proceedings relating to present and former operations alleging
injurious exposure of plaintiffs to various chemicals and other materials on the
premises of, or manufactured by, the Company's current and former subsidiaries.
Typically, such
17
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
proceedings involve claims made by many plaintiffs against many defendants in
the chemical industry. Millennium Petrochemicals, a wholly-owned indirect
subsidiary of the Company, is one of a number of defendants in 90 active
premises-based asbestos cases (i.e., where the alleged exposure to
asbestos-containing materials was to employees of third-party contractors or
subcontractors on the premises of certain facilities, and did not relate to any
products manufactured or sold by the Company or any of its predecessors).
Millennium Petrochemicals is responsible for these premises-based cases as a
result of its indemnification obligations under the Company's agreements with
Equistar; however, Equistar will be required to indemnify Millennium
Petrochemicals for any such claims filed on or after December 1, 2004 related to
the assets or businesses contributed by Millennium Petrochemicals to Equistar.
In addition, various other Company subsidiaries and alleged former subsidiaries
are among a number of defendants in 60 active premises-based asbestos cases. The
Company believes that it has valid defenses to these proceedings and is
defending them vigorously. However, litigation is subject to uncertainties and
the Company is unable to guarantee the outcome of these proceedings.
On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit 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.
In the suit, Slidell seeks unspecified monetary damages. The Company believes it
has substantial defenses to these allegations and has filed a counterclaim
against Slidell.
The Company's businesses are subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances concerning, among other things,
emissions to the air, discharges and releases to land and water, the generation,
handling, storage, transportation, treatment and disposal of wastes and other
materials and the remediation of environmental pollution caused by releases of
wastes and other materials (collectively, "Environmental Laws"). The operation
of any chemical manufacturing plant and the distribution of chemical products
entail risks under Environmental Laws, many of which provide for substantial
fines and criminal sanctions for violations. There can be no assurance that
significant costs or liabilities will not be incurred with respect to the
Company's operations and activities. In particular, the production of TiO[u]2,
TiCl[u]4, VAM, acetic acid, methanol and certain other chemicals involves the
handling, manufacture or use of substances or compounds that may be considered
to be toxic or hazardous within the meaning of certain Environmental Laws, and
certain operations have the potential to cause environmental or other damage.
Significant expenditures including facility-related expenditures could be
required in connection with any investigation and remediation of threatened or
actual pollution, triggers under existing Environmental Laws tied to production
or new requirements under Environmental Laws.
The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flows in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company, will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the Texas Commission on Environmental Quality (the
"TCEQ") submitted a plan to the United States Environmental Protection Agency
("EPA") requiring the eight-county Houston/Galveston, Texas area to come into
compliance with the National Ambient Air Quality Standard for ozone by 2007.
These requirements would have mandated significant reductions of nitrogen oxide
("NOx") emissions requiring increased capital investment by Equistar of between
$200 and $260 before the 2007 regulatory deadline, as well as create higher
annual operating costs. In December 2002, the TCEQ adopted revised rules, which
changed the required NOx emission reduction levels from 90% to 80% while
requiring new controls on emissions of highly reactive volatile organic
compounds ("HRVOCs"), such as ethylene, propylene, butadiene and butanes. Based
on the 80% NOx reduction requirement, Equistar estimates that its aggregate
related capital expenditures could total between $165 and $200 before the 2007
deadline, of which $45 has been incurred as of September 30, 2003, and could
result in higher annual operating costs. This result could potentially affect
cash distributions from Equistar to the Company. Equistar is still assessing the
impact of the new HRVOC control requirements. Additionally, the TCEQ plans to
make a final review of these rules, with final rule revisions to be adopted by
May 2004. The timing and amount of these expenditures are subject to regulatory
and other uncertainties, as well as obtaining the necessary permits and
approvals. At this time, there can be no guarantee as to the ultimate capital
cost of implementing any final plan developed to ensure ozone attainment by the
2007 deadline.
From time to time, various agencies may serve cease and desist orders or
notices of violation on an operating unit or deny its applications for certain
licenses or permits, in each case alleging that the practices of the operating
unit are not consistent with regulations or ordinances. In some cases, the
relevant operating unit may seek to meet
18
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
with the agency to determine mutually acceptable methods of modifying or
eliminating the practice in question. On April 14, 2003, a subsidiary of the
Company received a Proposed Director's Final Findings and Orders from the Ohio
Environmental Protection Agency (the "Ohio EPA"), for alleged violations of Ohio
environmental regulations. On August 7, 2003, the Company settled the matter by
agreeing to pay a penalty of $0.106. The Company believes that its operating
units generally operate in compliance with applicable regulations and ordinances
in a manner that should not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties ("PRPs"), or both, in a number of environmental proceedings
associated with waste disposal sites or facilities currently or previously
owned, operated or used by the Company's current or former subsidiaries or their
predecessors, some of which are on the Superfund National Priorities List of the
EPA or similar state lists. These proceedings seek cleanup costs, damages for
personal injury or property damage, or both. Based upon third-party technical
reports, the projections of outside consultants or outside counsel, or both, the
Company has estimated its individual exposure at these sites to be between $0.01
and $23. In the most significant of these proceedings, a subsidiary is named as
one of four PRPs at the Kalamazoo River Superfund Site in Michigan. The site
involves contamination of river sediments and floodplain soils with
polychlorinated biphenyls. Originally commenced on December 2, 1987 in the
United States District Court for the Western District of Michigan as Kelly v.
Allied Paper, Inc., et al., the matter was stayed and is being addressed under
the Comprehensive Environmental Response, Compensation and Liability Act. In
October 2000, the Kalamazoo River Study Group (the "KRSG"), of which one of the
Company's subsidiaries is a member, submitted to the State of Michigan a Draft
Remedial Investigation and Draft Feasibility Study (the "Draft Study"), which
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 collective cost of approximately $73. The five
remedial options considered in the Draft Study range from no action to total
dredging of the river and off-site disposal of the dredged materials. In
February 2001, the PRPs, at the request of the State of Michigan, also evaluated
nine additional potential remedies. The cost for these remedial options ranged
from $0 to $2.5 billion, however, the Company strongly believes that both the $0
figure and the $2.5 billion figure are remote. During 2001, additional sampling
activities were performed in discrete parts of the river. At the end of 2001,
the EPA assumed responsibility for the site at the request of the State. While
the State submitted negative comments to the EPA on the Draft Study, the EPA has
yet to comment. The Company is paying 35% of the costs for the river portion of
the investigation based on an interim allocation. The Company has estimated its
liability at this site based upon its share of the KRSG Draft Study's
recommended remedy. However, guidance as to how the EPA will likely proceed at
the Kalamazoo site with respect to further evaluation and remediation is not
expected until early 2004. At that time, the Company's estimate of its liability
and its accrual will be reevaluated. Recently, the EPA identified 14 private
entities and 7 municipalities and sent them formal requests for information
regarding their possible connection with the Kalamazoo site. The Company's
ultimate liability for the Kalamazoo site will depend on many factors that have
not yet been determined, including the ultimate remedy selected by the EPA, the
number and financial viability of the other members of the KRSG as well as of
other PRPs outside the KRSG, and the determination of the final allocation among
the members of the KRSG and other PRPs.
The Company believes that the reasonably probable and estimable 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 $59 and $80 and has
accrued $66 as of September 30, 2003. The Company expects that cash expenditures
related to these potential liabilities will be made over a number of years, and
will not be concentrated in any single year. This accrual also reflects the
fact that certain Company subsidiaries have contractual obligations to indemnify
other parties against certain environmental and other liabilities. For example,
the Company agreed as part of its demerger (i.e., spin-off) from Hanson plc
("Hanson"), a company incorporated in the United Kingdom, on October 1, 1996 to
indemnify Hanson and certain of its subsidiaries against certain of such
contractual indemnification obligations, and Millennium Petrochemicals agreed
as part of the December 1, 1997 formation of Equistar to indemnify Equistar for
certain liabilities related to the assets contributed by Millennium
Petrochemicals to Equistar in excess of $7, which threshold was exceeded in
2001. The terms of these indemnification agreements do not limit the maximum
potential future payments to the indemnified parties. The maximum amount of
future indemnification payments is dependent upon many factors and is not
practicable to estimate.
19
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
No assurance can be given that actual costs for known legal and
environmental matters will not exceed accrued amounts, or that estimates made
with respect to indemnification obligations will be accurate. In addition, it is
possible that costs will be incurred with respect to legal and environmental
matters that currently are unknown or as to which it is currently not possible
to make an estimate. Based upon information currently available, the Company
believes, but can not assure, that the resolution of these legal and
environmental matters will not, either individually or in the aggregate, have a
material adverse effect on its consolidated financial position, results of
operations or cash flows.
Note 12 - 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
Specialty Chemicals. Operating income and expense not identified with the three
separate business segments, including certain of the Company's S,D&A costs not
allocated to its three business segments, employee-related costs from
predecessor businesses and certain other expenses, including costs associated
with the Company's reorganization and cost reduction program announced in July
2003, are reflected as Other. The following is a summary of the Company's
operations by business segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2003 2002 2003 2002
---- ----------- ------ -----------
(Restated - (Restated -
See Note 2) See Note 2)
Net sales
Titanium Dioxide and Related Products .... $293 $296 $ 874 $ 858
Acetyls .................................. 115 91 316 239
Specialty Chemicals ...................... 23 24 72 70
---- ---- ------ ------
Total ................................. $431 $411 $1,262 $1,167
==== ==== ====== ======
Operating (loss) income (1)
Titanium Dioxide and Related Products .... $ 7 $ 21 $ 51 $ 46
Acetyls .................................. 6 8 18 3
Specialty Chemicals ...................... (1) 2 3 8
Other .................................... (17) (1) (26) --
---- ---- ------ ------
Total ................................. $ (5) $ 30 $ 46 $ 57
==== ==== ====== ======
Depreciation and amortization
Titanium Dioxide and Related Products .... $ 24 $ 21 $ 69 $ 61
Acetyls .................................. 2 3 8 9
Specialty Chemicals ...................... 2 2 6 6
---- ---- ------ ------
Total ................................. $ 28 $ 26 $ 83 $ 76
==== ==== ====== ======
Capital expenditures
Titanium Dioxide and Related Products .... $ 9 $ 14 $ 26 $ 37
Acetyls .................................. 1 1 1 1
Specialty Chemicals ...................... -- 3 2 5
---- ---- ------ ------
Total ................................. $ 10 $ 18 $ 29 $ 43
==== ==== ====== ======
- ----------
(1) The Other segment includes $15 and $16 of costs for the three months and
nine months ended September 30, 2003, respectively, as a result of the Company's
cost-reduction program (see Note 5), and a benefit of $5 from a reduction of
reserves due to favorable resolution of environmental claims related to
predecessor businesses reserved for in prior years in the nine months ended
September 30, 2002.
20
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
September 30, December 31,
2003 2002
------------- ------------
Goodwill
Titanium Dioxide and Related Products .............. $ 58 $ 58
Acetyls ............................................ 48 48
---- ----
Total ........................................... $106 $106
==== ====
Note 13 - Information on Equistar
The following is summarized financial information for Equistar:
September 30, December 31,
2003 2002
------------- ------------
Current assets .................................................. $1,196 $1,126
Noncurrent assets ............................................... 3,749 3,926
------ ------
Total assets ................................................. $4,945 $5,052
====== ======
Current liabilities ............................................. $ 625 $ 714
Noncurrent liabilities .......................................... 2,634 2,417
Partners' capital ............................................... 1,686 1,921
------ ------
Total liabilities and partners' capital ...................... $4,945 $5,052
====== ======
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ -------
Net sales........................................................ $1,642 $1,508 $4,880 $ 4,106
Operating income (loss).......................................... 12 71 (60) 18
(Loss) income before cumulative effect of accounting change...... (40) 22 (235) (132)
Cumulative effect of accounting change........................... -- -- -- (1,053)
Net (loss) income................................................ (40) 22 (235) (1,185)
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.
On March 31, 2003, Equistar completed transactions involving a 15-year
propylene supply arrangement and the sale of its Bayport polypropylene
production facility in Pasadena, Texas. Equistar received total cash proceeds of
approximately $194, including the value of the polypropylene inventory sold.
Approximately $159 of the total cash proceeds represented a partial prepayment
under the propylene supply arrangement. Equistar's results for the nine months
ended September 30, 2003, include a $12 loss on the sale of the polypropylene
production facility.
In April 2003, Equistar issued $450 of 10.625% senior notes due in 2011.
The proceeds, net of associated fees, were used to prepay $300 of 8.5% notes due
in the first quarter of 2004, approximately $122 of the $296 of outstanding term
loans under Equistar's credit facility and prepayment premiums of approximately
$17. Equistar's results for the nine months ended September 30, 2003, include
$19 of debt prepayment costs, consisting of the $17 prepayment premium and the
write-off of $2 of unamortized debt issuance costs related to the prepaid term
loan.
21
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
Note 14-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 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 September 30, 2003 and December 31, 2002, the Condensed
Consolidating Statements of Operations for the three months and nine months
ended September 30, 2003 and 2002, and the Condensed Consolidating Statements of
Cash Flows for the nine months ended September 30, 2003 and 2002 are provided
for the Company as supplemental financial information to the Company's
consolidated financial statements to disclose the financial position, results of
operations and cash flows of (i) the Company, (ii) Millennium America, and (iii)
all subsidiaries of the Company other than Millennium America (the
"Non-Guarantor Subsidiaries"). The investment in subsidiaries of Millennium
America and the Company are accounted for by the equity method; accordingly, the
shareholders' (deficit) equity of Millennium America and the Company are
presented as if each of those companies and their respective subsidiaries were
reported on a consolidated basis.
22
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
Note 14 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals Inc.
Condensed Consolidating America Inc. Chemicals Inc. Non-Guarantor and
Balance Sheets (Issuer) (Guarantor) Subsidiaries Eliminations Subsidiaries
------------ -------------- ------------- ------------ --------------
September 30, 2003
ASSETS
Inventories ............................. $ -- $ -- $ 427 $ -- $ 427
Other current assets .................... 15 -- 447 -- 462
Property, plant and equipment, net ...... -- -- 849 -- 849
Investment in Equistar .................. -- -- 494 -- 494
Investment in subsidiaries .............. 344 100 -- (444) --
Other assets ............................ 16 -- 32 -- 48
Goodwill ................................ -- -- 106 -- 106
Due from parent and affiliates, net ..... 807 -- -- (807) --
------ ---- ------ ------- ------
Total assets ......................... $1,182 $100 $2,355 $(1,251) $2,386
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term debt .... $ 94 $ -- $ 5 $ -- $ 99
Other current liabilities ............... 33 -- 342 -- 375
Long-term debt .......................... 1,247 -- 17 -- 1,264
Deferred income taxes ................... -- -- 290 -- 290
Other liabilities ....................... -- -- 380 -- 380
Due to parent and affiliates, net ....... -- 150 657 (807) --
------ ---- ------ ------- ------
Total liabilities .................... 1,374 150 1,691 (807) 2,408
Minority interest ....................... -- -- 28 -- 28
Shareholders' (deficit) equity .......... (192) (50) 636 (444) (50)
------ ---- ------ ------- ------
Total liabilities and shareholders'
(deficit) equity .................. $1,182 $100 $2,355 $(1,251) $2,386
====== ==== ====== ======= ======
December 31, 2002 (Restated - See Note 2)
ASSETS
Inventories ............................. $ -- $ -- $ 406 $ -- $ 406
Other current assets .................... 10 -- 403 -- 413
Property, plant and equipment, net ...... -- -- 862 -- 862
Investment in Equistar .................. -- -- 563 -- 563
Investment in subsidiaries .............. 349 95 -- (444) --
Other assets ............................ 15 -- 31 -- 46
Goodwill ................................ -- -- 106 -- 106
Due from parent and affiliates, net ..... 638 -- -- (638) --
------ ---- ------ ------- ------
Total assets ......................... $1,012 $ 95 $2,371 $(1,082) $2,396
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term debt .... $ 3 $ -- $ 9 $ -- $ 12
Other current liabilities ............... 8 -- 455 -- 463
Long-term debt .......................... 1,196 -- 16 -- 1,212
Deferred income taxes ................... -- -- 337 -- 337
Other liabilities ....................... -- -- 388 -- 388
Due to parent and affiliates, net ....... -- 130 508 (638) --
------ ---- ------ ------- ------
Total liabilities .................... 1,207 130 1,713 (638) 2,412
Minority interest ....................... -- -- 19 -- 19
Shareholders' (deficit) equity .......... (195) (35) 639 (444) (35)
------ ---- ------ ------- ------
Total liabilities and shareholders'
(deficit) equity .................. $1,012 $ 95 $2,371 $(1,082) $2,396
====== ==== ====== ======= ======
23
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
(Dollars in millions, except share data)
Note 14 - Supplemental Financial Information - Continued
Millennium Millennium Millennium
Condensed Consolidating America Inc. Chemicals Inc. Non-Guarantor Chemicals Inc.
Statements of Operations (Issuer) (Guarantor) Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
Three Months Ended
September 30, 2003
Net sales ......................... $ -- $ -- $431 $ -- $431
Cost of products sold ............. -- -- 362 -- 362
Depreciation and amortization ..... -- -- 28 -- 28
Selling, development and
administrative expense ......... -- 1 30 -- 31
Reorganization and office closure
costs .......................... -- -- 15 -- 15
---- ---- ---- ---- ----
Operating loss ................. -- (1) (4) -- (5)
Interest expense, net ............. (24) -- 1 -- (23)
Intercompany interest income
(expense), net ................. 25 -- (25) -- --
Loss on Equistar investment ....... -- -- (12) -- (12)
Equity in (loss) earnings of
subsidiaries ................... (10) (28) -- 38 --
Other income, net ................. -- -- 1 -- 1
Benefit from income taxes ......... -- 1 10 -- 11
---- ---- ---- ---- ----
Net (loss) income .............. $ (9) $(28) $(29) $ 38 $(28)
==== ==== ==== ==== ====
Three Months Ended
September 30, 2002 (Restated - See
Note 2)
Net sales ......................... $ -- $ -- $411 $ -- $411
Cost of products sold ............. -- -- 317 -- 317
Depreciation and amortization ..... -- -- 26 -- 26
Selling, development and
administrative expense ......... 1 -- 37 -- 38
---- ---- ---- ---- ----
Operating (loss) income ........ (1) -- 31 -- 30
Interest expense, net ............. (22) -- -- -- (22)
Intercompany interest income
(expense), net ................. 26 (1) (25) -- --
Earnings on Equistar investment ... -- -- 6 -- 6
Equity in (loss) earnings of
subsidiaries ................... (4) 6 -- (2) --
Other expense, net ................ -- -- (2) -- (2)
Provision for income taxes ........ (1) -- (6) -- (7)
---- ---- ---- ---- ----
Net (loss) income .............. $ (2) $ 5 $ 4 $ (2) $ 5
==== ==== ==== ==== ====
24
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 14 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals Inc.
Condensed Consolidating America Inc. Chemicals Inc. Non-Guarantor and
Statements of Operations (Issuer) (Guarantor) Subsidiaries Eliminations Subsidiaries
------------ -------------- ------------- ------------ --------------
Nine Months Ended
September 30, 2003
Net sales.................... $ -- $ -- $1,262 $ -- $1,262
Cost of products sold........ -- -- 1,019 -- 1,019
Depreciation and amortization -- -- 83 -- 83
Selling, development and
administrative expense.... -- 1 97 -- 98
Reorganization and office
closure costs............. -- -- 16 -- 16
----- ---- ------ ---- ------
Operating (loss) income... -- (1) 47 -- 46
Interest expense, net........ (69) -- 1 -- (68)
Intercompany interest income
(expense), net............ 73 (2) (71) -- --
Loss on Equistar investment.. -- -- (69) -- (69)
Equity in (loss) earnings of
subsidiaries.............. (69) (62) -- 131 --
Other expense, net........... -- -- (4) -- (4)
(Provision for) benefit
from income taxes......... (1) 1 32 -- 32
Cumulative effect of
accounting change......... -- -- (1) -- (1)
----- ---- ------ ---- ------
Net (loss) income......... $ (66) $(64) $ (65) $131 $ (64)
===== ==== ====== ==== ======
Nine Months Ended
September 30, 2002 (Restated
- - See Note 2)
Net sales.................... $ -- $ -- $1,167 $ -- $1,167
Cost of products sold........ -- -- 945 -- 945
Depreciation and amortization -- -- 76 -- 76
Selling, development and
administrative expense.... 1 -- 88 -- 89
----- ----- ------ ---- ------
Operating (loss) income... (1) -- 58 -- 57
Interest expense, net........ (64) -- -- -- (64)
Intercompany interest income
(expense), net............ 79 (4) (75) -- --
Loss on Equistar investment.. -- -- (39) -- (39)
Equity in (loss) earnings of
subsidiaries.............. (364) (328) -- 692 --
Other expense, net........... -- -- (4) -- (4)
(Provision for) benefit from
income taxes.............. (5) 1 28 -- 24
Cumulative effect of
accounting change......... -- -- (305) -- (305)
----- ----- ------ ---- ------
Net (loss) income......... $(355) $(331) $ (337) $692 $ (331)
===== ===== ====== ==== ======
25
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 14 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals Inc.
Condensed Consolidating America Inc. Chemicals Inc. Non-Guarantor and
Statements of Cash Flows (Issuer) (Guarantor) Subsidiaries Eliminations Subsidiaries
------------ -------------- ------------- ------------ --------------
Nine Months Ended
September 30, 2003
Cash flows from operating
activities............................. $ 21 $ (2) $(66) $-- $ (47)
----- ---- ---- --- -----
Cash flows from investing activities:
Capital expenditures................... -- -- (29) -- (29)
----- ---- ---- --- -----
Cash used in investing activities... -- -- (29) -- (29)
----- ---- ---- --- -----
Cash flows from financing
activities:
Dividends to shareholders.............. -- (17) -- -- (17)
Proceeds from long-term debt........... 354 -- 2 -- 356
Repayment of long-term debt............ (212) -- (8) -- (220)
Intercompany........................... (163) 19 144 -- --
Decrease in notes payable and other
short-term borrowings............... -- -- (19) -- (19)
----- ---- ---- --- -----
Cash (used in) provided by
financing activities............. (21) 2 119 -- 100
----- ---- ---- --- -----
Effect of exchange rate changes on
cash................................... -- -- 9 -- 9
----- ---- ---- --- -----
Increase in cash and cash equivalents..... -- -- 33 -- 33
Cash and cash equivalents at beginning
of year................................ 6 -- 119 -- 125
----- ---- ---- --- -----
Cash and cash equivalents at end of
period................................. $ 6 $ -- $152 $-- $ 158
===== ==== ==== === =====
Nine Months Ended
September 30, 2002
Cash flows from operating activities...... $ (6) $ (4) $ 62 $-- $ 52
----- ---- ---- --- -----
Cash flows from investing activities:
Capital expenditures................... -- -- (43) -- (43)
----- ---- ---- --- -----
Cash used in investing activities... -- -- (43) -- (43)
----- ---- ---- --- -----
Cash flows from financing activities:
Dividends to shareholders.............. -- (26) -- -- (26)
Proceeds from long-term debt........... 245 -- 10 -- 255
Repayment of long-term debt............ (228) -- (6) -- (234)
Intercompany........................... (3) 30 (27) -- --
Increase in notes payable.............. -- -- 3 -- 3
----- ---- ---- --- -----
Cash provided by (used in)
financing activities............. 14 4 (20) -- (2)
----- ---- ---- --- -----
Effect of exchange rate changes on
cash.................................. -- -- (2) -- (2)
----- ---- ---- --- -----
Increase (decrease) in cash and cash
equivalents............................ 8 -- (3) -- 5
Cash and cash equivalents at
beginning of year...................... 5 -- 109 -- 114
----- ---- ---- --- -----
Cash and cash equivalents at end of
period................................. $ 13 $ -- $106 $-- $ 119
===== ==== ==== === =====
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Disclosure Concerning Forward-Looking Statements
The statements in this Quarterly Report on Form 10-Q (the "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, 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 as at the
time of this filing. Actual events or results may differ materially. Factors
that could cause such a difference include:
o the cyclicality and volatility of the chemical industries 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 industries 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, in particular, the events in
the Middle East;
o the ability of Equistar to distribute cash to its partners and
uncertainties arising from the Company's shared control of Equistar,
and the Company's contractual commitments regarding possible future
capital contributions to Equistar;
o changes in the cost of energy and raw materials, particularly natural
gas and ethylene, and the ability of the Company and Equistar to pass
on cost increases to their customers;
o the Company's substantial indebtedness and its impact on the Company's
cash flows, business operations and ability to obtain additional
financing. A failure to comply with the covenants and other
restrictions in the Company's debt instruments would lead to
additional restrictions and costs, or an acceleration of the Company's
indebtedness;
o limitations on credit extended to the Company and demands from
creditors and suppliers for additional credit restrictions or
security;
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 without
adversely affecting reliability or employee retention, and the
occurrence of operating problems at manufacturing facilities of the
Company or Equistar;
o risks of doing business outside the United States, including currency
fluctuations;
o the cost of compliance with the extensive environmental regulations
affecting the chemical industry and exposure to liabilities for
environmental remediation and other environmental matters relating to
the Company's and Equistar's current and former operations;
o pricing and other competitive pressures; and
o legal proceedings relating to present and former operations (including
proceedings based on alleged exposure to lead-based paints and lead
pigments, asbestos and other materials), ongoing or future tax audits,
pension and retiree medical costs, and other claims.
A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to this Quarterly Report.
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
27
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, including amendments thereto, to the Securities and
Exchange Commission.
Cost Reduction Program; Suspension of Dividend
On July 21, 2003, the Company announced that it would implement a program
to reduce costs. This program included a reduction of approximately 5% in the
number of the Company's employees worldwide. The Company closed its executive
offices in Red Bank, New Jersey, effective September 1, 2003, and relocated its
headquarters to Hunt Valley, Maryland, where the Company has existing
administrative offices. In addition, the Company announced the suspension of
payment of dividends on its Common Stock. Given the volatile industry in which
it operates, the Company initiated these actions to reduce expenses and
strengthen its balance sheet.
The Company expects to realize approximately $20 million of annual
operating expense savings from the cost-reduction program announced on July 21,
2003. The Company expects to record charges totaling $19 million to
$21 million associated with this program. The Company recorded charges,
primarily for severance-related costs, of $15 million and $1 million in the
three months ended September 30, 2003 and June 30, 2003, respectively.
Substantially all of the remaining charges for this program, estimated at
$3 million to $5 million, are expected to be recorded during the next several
quarters. Severance-related cash payments of $7 million for the implementation
of this program were made in the third quarter of 2003. Substantially all of
the remainder of the cash payments relating to this program, which are
estimated to be approximately $17 million, will be disbursed during the next
several quarters.
Operating Results
The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls, and Specialty
Chemicals. Operating income and expense not identified with the three separate
business segments, including certain of the Company's S,D&A costs not allocated
to its three business segments, employee-related costs from predecessor
businesses and certain other expenses, including costs associated with the
Company's reorganization and cost reduction program announced in July 2003, are
reflected as Other. 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 included in this Quarterly Report). 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 and the discussion included
in its Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A
filed with the Securities and Exchange Commission on November 12, 2003.
28
Results of Consolidated Operations
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
------ ----------- ------ -----------
(Restated)* (Restated)*
(Millions, except share data)
Net sales .............................................. $ 431 $ 411 $1,262 $1,167
Operating (loss) income ................................ (5)(1) 30 46 (1) 57
(Loss) earnings on Equistar investment ................. (12) 6 (69)(2) (39)
(Loss) income before cumulative effect of accounting
change .............................................. (28) 5 (63) (26)
Net (loss) income ...................................... (28) 5 (64) (331)
Basic and diluted (loss) earnings per share:
Before cumulative effect of accounting change ....... (0.44) 0.08 (0.98) (0.41)
After cumulative effect of accounting change ........ (0.44) 0.08 (1.00) (5.21)
- ----------
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
(1) Includes $15 million and $16 million of costs for the three months and nine
months ended September 30, 2003, respectively, associated with the
Company's cost-reduction program announced in July 2003.
(2) Includes $6 million representing the Company's share of Equistar's debt
prepayment costs associated with Equistar's early payment of debt with
proceeds from a private placement of senior notes, and $4 million
representing the Company's share of Equistar's loss on the sale of assets
of its polypropylene production facility in Pasadena, Texas.
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
The Company's net loss was $28 million, or $0.44 per share, for the third
quarter of 2003, down from net income of $5 million, or $0.08 per share, for the
third quarter of 2002. The Company's majority-owned businesses reported a
pre-tax loss of $26 million in the third quarter of 2003 compared to pre-tax
income of $7 million in the same period of 2002. Results for the majority-owned
businesses in the third quarter of 2003 include $15 million ($10 million after
tax) of reorganization and office closure costs as a result of the Company's
cost-reduction program announced in July 2003 (see "Cost Reduction Program;
Suspension of Dividend" above). The Company reported a pre-tax loss of $12
million on its investment in Equistar for the third quarter of 2003 compared to
pre-tax income of $6 million for the third quarter of 2002.
The Company's third quarter 2003 operating loss, including $15 million of
reorganization and office closure costs, was $5 million compared to operating
income of $30 million in the same period of the prior year. Operating income
decreased by $14 million in the Titanium Dioxide and Related Products business
segment, by $3 million in the Specialty Chemicals business segment, by $2
million in the Acetyls business segment, and was down by $16 million in Other
operating income and expense not identified with the three separate business
segments, which includes $15 million of reorganization and office closure costs
for the three months ended September 30, 2003.
Net sales of $431 million for the third quarter of 2003 increased by $20
million, or 5%, compared to the same period of 2002 primarily due to higher
sales prices and foreign currency strength against the US dollar in the Titanium
Dioxide and Related Products and Acetyls business segments. TiO[u]2 and acetyls
average selling prices, after reaching a low in the first quarter of 2002, rose
steadily from the second quarter of 2002 to the second quarter of 2003 as
certain of the Company's worldwide price increases for TiO[u]2 and for Acetyls'
principal products announced during 2002 and the first quarter of 2003 were
gradually realized. Sales volume for the third quarter of 2003 for the Acetyls
business
29
segment was higher than in the same quarter in the prior year primarily due to
higher acetic acid sales volume, but was lower for the Titanium Dioxide and
Related Products business segment. Specialty Chemicals revenue decreased by $1
million, or 4%, compared to the prior year quarter, as lower average selling
prices for flavor and fragrance products more than offset higher sales volume.
Manufacturing costs were generally higher for most of the Company's
products in the third quarter of 2003 as compared to the same period of 2002
primarily due to the unfavorable effect of translating local currency
manufacturing costs into a weaker US dollar, higher utility and feedstock costs,
particularly natural gas and ethylene, and an overall decrease in fixed cost
absorption. Fixed cost absorption was lower due to a reduction in plant
operating rates, primarily in the TiO[u]2 business segment due to planned
slowdowns and unscheduled operating disruptions.
Third quarter 2003 Selling, development and administrative ("S,D&A") costs
of $31 million decreased by $7 million, or 18%, from the prior year quarter due
to a decrease in employee-related costs and various other expenses as the result
of the Company's focus on tight cost management.
The Company recorded a pre-tax charge of $15 million ($10 million
after-tax) in the three months ended September 30, 2003, as the result of its
previously announced cost-reduction program (see "Cost Reduction Program;
Suspension of Dividend" above).
The Company reported a pre-tax loss on its investment in Equistar of $12
million for the third quarter of 2003 compared to pre-tax income of $6 million
for the same quarter last year. The decrease in Equistar's results for the third
quarter of 2003 compared to the same period of 2002 is primarily due to higher
raw material and energy costs, particularly natural gas, which were only
partially offset by higher sales prices.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
The Company's loss before the cumulative effect of accounting changes was
$63 million, or $0.98 per share, for the nine months ended September 30, 2003
and $26 million, or $0.41 per share, for the same period of 2002. Before the
cumulative effect of accounting changes, the Company's majority-owned businesses
reported a pre-tax loss of $21 million in the first nine months of 2003 compared
to a pre-tax loss of $9 million in the same period of 2002. Results for the
majority-owned businesses for the nine months ended September 30, 2003 include
$16 million ($10 million after tax) of reorganization and office closure costs
as a result of the Company's cost-reduction program announced in July 2003 (see
"Cost Reduction Program; Suspension of Dividend" above). The cumulative effect
of the accounting change for SFAS No. 143, reported in the first quarter of
2003 due to required changes in the method for recognition of asset retirement
obligations, was $1 million or $0.02 per share. The cumulative effect of the
accounting change for SFAS No. 142, reported in the first quarter of 2002 due
to the write-off of certain of the Company's and Equistar's goodwill, was $305
million or $4.80 per share. The Company's pre-tax loss on its investment in
Equistar for the nine months ended September 30, 2003 of $69 million increased
by $30 million, 77% more than the pre-tax loss of $39 million for the same
period of 2002.
Operating income of $46 million for the nine months ended September 30,
2003 decreased by $11 million compared to the same period of 2002, including $16
million of reorganization and office closure costs in the nine months ended
September 30, 2003. Operating income increased by $15 million in the Acetyls
business segment and by $5 million in the Titanium Dioxide and Related Products
business segment, but was down by $5 million in the Specialty Chemicals business
segment and down by $26 million in Other operating income and expense not
identified with the three separate business segments, which includes the $16
million of reorganization and office closure costs for the nine months ended
September 30, 2003.
Net sales of $1,262 million for the nine months ended September 30, 2003
increased by $95 million, or 8%, compared to the same period of 2002 primarily
due to higher sales prices and foreign currency strength against the US dollar
in the Titanium Dioxide and Related Products and Acetyls business segments.
TiO[u]2 and acetyls average selling prices, after reaching a low in the first
quarter of 2002, rose steadily from the second quarter of 2002 to the second
quarter of 2003 as certain of the Company's worldwide price increases for
TiO[u]2 and for Acetyls' principal products announced during 2002 and the first
quarter of 2003 were gradually realized. Sales volume for the Titanium Dioxide
and Related Products business segment was lower in the nine months ended
September 30, 2003 compared to the corresponding period in the prior year, while
sales volume was higher in the Acetyls business segment. Specialty Chemicals
revenue increased by $2 million, or 3%, over the prior year period as higher
sales volume more than offset lower average selling prices for flavor and
fragrance products.
30
Manufacturing costs were generally higher for most of the Company's
products in the nine months ended September 30, 2003 compared to the same period
of 2002 primarily due to higher utility and feedstock costs, particularly
natural gas and ethylene, the unfavorable effect of translating local currency
manufacturing costs into a weaker US dollar, and higher maintenance and fixed
costs, partially offset by an overall increase in fixed cost absorption. Higher
fixed cost absorption due to increased plant operating rates in the TiO[u]2 and
Specialty Chemicals business segments was partially offset by lower fixed cost
absorption in the Acetyls business segment.
S,D&A costs of $98 million for the nine months ended September 30, 2003
increased by $9 million, or 10%, from the prior year period. The increase from
the nine months ended September 30, 2002 was due primarily to higher expenses
associated with selling and marketing and research and development, lower
income in 2003 from employee benefit plans related to predecessor businesses,
and an unfavorable change in net foreign currency transaction gains and losses,
partially offset by a decrease in current employee-related costs.
The Company recorded a pre-tax charge of $16 million ($10 million
after-tax) in the nine months ended September 30, 2003, as the result of its
previously announced cost-reduction program (see "Cost Reduction Program;
Suspension of Dividend" above).
The Company reported a pre-tax loss on its investment in Equistar of $69
million for the nine months ended September 30, 2003, an increase of $30 million
compared to a pre-tax loss of $39 million for the same period last year. The
pre-tax loss for the nine months ended September 30, 2003 includes $6 million
representing the Company's share of debt prepayment costs incurred by Equistar
and $4 million representing the Company's share of Equistar's loss on the sale
of assets (see Note 13 to the Consolidated Financial Statements included in this
Quarterly Report). The remaining increase in the Company's share of Equistar's
pre-tax loss for the nine months ended September 30, 2003 compared to the same
period of 2002 is primarily due to lower sales volume, partially offset by
higher product margins. In response to higher raw material and energy costs in
the first nine months of 2003 compared to the first nine months of 2002,
Equistar implemented significant sales price increases for substantially all of
its petrochemicals and polymers products. However, the magnitude of these price
increases had a negative effect on product demand and contributed to lower sales
volume in the first nine months of 2003 compared to the same period of 2002.
Outlook for 2003
Operating income in the TiO[u]2 business segment is expected to be
slightly lower in the fourth quarter of 2003 compared to the third quarter
of 2003. Production rates will continue to be low as required for normal
seasonally slow demand conditions and to manage inventory levels. Pricing as
measured in average US dollars per metric ton is expected to remain relatively
flat.
Operating profit in the Acetyls business segment for the fourth quarter of
2003 is expected to be higher than the third quarter of 2003, reflecting lower
average opening inventory cost and stable market conditions.
Results for the Specialty Chemicals business segment in the fourth quarter
of 2003 are expected to be similar to those in the third quarter of 2003.
Fragrance and Flavor chemicals markets remain competitive, with continued price
pressure in most markets. Crude sulfate turpentine ("CST") supply and demand
balance remains tight, and higher-cost alternative feedstock will be used as
required. Supply chain improvements are reducing inventory levels, which is
expected to result in lower fourth quarter operating rates.
Equistar is currently implementing price increases in polyethylene;
however, raw material and energy costs remain volatile and continue to impact
margins. The fourth quarter is typically a slow quarter for chemicals; but, in
October 2003, sales volume and pricing have been consistent with the levels
experienced late in the third quarter of 2003. At the beginning of October,
Equistar began a seven-week maintenance turnaround at one of its large liquid
raw-material based ethylene plants. To compensate for this activity, Equistar
will produce a greater than normal percentage of its ethylene from natural
gas-based raw materials. Based on current costs and co-product prices, this
activity is expected to negatively impact quarterly earnings by an estimated $5
million to $10 million. The cash expenditures for the maintenance turnaround are
expected to be approximately $50 million. The global economy has shown signs of
improvement, but improvements in the chemical business are being overshadowed by
ongoing volatility in raw material and energy prices.
31
Segment Analysis
Titanium Dioxide and Related Products
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Millions)
Net sales............................................... $293 $296 $874 $858
Operating income........................................ 7 21 51 46
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Operating income of $7 million for the Titanium Dioxide and Related
Products business segment for the third quarter of 2003 decreased by $14
million, or 67%, from $21 million for the three months ended September 30, 2002,
primarily due to higher manufacturing and other cost of sales ($31 million) and
lower sales volume ($3 million), partially offset by higher average selling
prices ($17 million) and lower S,D&A expenses ($3 million).
Net sales for the third quarter of 2003 of $293 million decreased by $3
million, or 1%, compared to the same quarter in 2002 due to lower sales volume,
partially offset by higher average selling prices and foreign currency strength
against the US dollar. The average TiO[u]2 selling price for the third quarter
of 2003 was 8% higher than the third quarter of the prior year in US dollar
terms and 4% higher in local currencies. US dollar TiO[u]2 selling prices in the
third quarter of 2003 were higher than in the third quarter of 2002 due to the
favorable effect of translating sales denominated in stronger foreign currencies
into US dollars, and the realization of all or portions of the worldwide price
increases for TiO[u]2 previously announced by the Company and most other major
producers during 2002 and the first quarter of 2003. The favorable effect of
higher average selling prices was more than offset by an 8% decrease in sales
volume that was primarily due to weak economic conditions.
Manufacturing and other costs of sales for the quarter ended September 30,
2003 were higher than in the same quarter of 2002 due to the unfavorable effect
of translating manufacturing costs incurred in stronger foreign currencies into
US dollars, lower fixed cost absorption due to decreased production volume,
higher maintenance and utility costs, including higher natural gas costs, and
higher fixed costs. The overall operating rate of the Company's TiO[u]2 plants
was 84% in the third quarter of 2003, compared to 90% in the same period of
2002. The decrease was due to planned slowdowns and unscheduled operating
disruptions resulting from the European heat wave, the power blackout in the
Northeastern United States and Hurricane Isabel.
S,D&A expenses in the third quarter of 2003 decreased by $3 million, or
10%, compared to the prior year quarter, primarily due to a favorable change in
net foreign currency transaction gains and losses.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
Operating income of $51 million for the Titanium Dioxide and Related
Products business segment for the nine months ended September 30, 2003 increased
by $5 million, or 11%, from $46 million for the nine months ended September 30,
2002, primarily due to higher average selling prices ($82 million), partially
offset by higher manufacturing and other costs of sales ($63 million), lower
sales volume ($8 million), and higher S,D&A expenses ($6 million).
Net sales for the nine months ended September 30, 2003 of $874 million were
$16 million, or 2%, higher than in the comparable period of 2002, due to higher
average selling prices and foreign currency strength against the US dollar,
partially offset by lower sales volume. For the nine months ended September 30,
2003, the average TiO[u]2 selling price was 13% higher than in the same period
of 2002 in US dollar terms and 6% higher in local currencies. US dollar TiO[u]2
selling prices for the nine months ended September 30, 2003 were higher than in
the same period of 2002 due to the realization in the most recent period of all
or portions of the worldwide price increases for TiO[u]2 previously announced by
the Company and most other major producers during 2002 and the first quarter of
2003, and the favorable effect of translating sales denominated in stronger
foreign currencies into US dollars. The favorable effect of higher average
selling prices was partially offset by a 9% decrease in sales volume, primarily
due to the lack of a coatings season in most of North America due to poor
weather conditions in many areas, as well as weak economic conditions.
Manufacturing and other costs of sales for the nine months ended September
30, 2003 were higher than in the nine months ended September 30, 2002 due to the
unfavorable effect of translating manufacturing costs incurred in
32
stronger foreign currencies into US dollars, higher maintenance and fixed costs,
and higher costs for utilities, including higher natural gas costs, partially
offset by higher fixed cost absorption due to increased production volume. The
overall operating rate of the Company's TiO[u]2 plants for the nine months ended
September 30, 2003 was 89%, up from 87% in the same period of last year.
S,D&A expenses for the nine months ended September 30, 2003 increased $6
million, or 8%, from the same period in the prior year primarily due to higher
expenses associated with selling and marketing, research and development and
professional services fees, partially offset by a decrease in employee-related
costs.
Acetyls
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ----------- ---- -----------
(Restated)* (Restated)*
(Millions)
Net sales............................................... $115 $91 $316 $239
Operating income........................................ 6 8 18 3
- ----------
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
For the three months ended September 30, 2003, operating income for the
Acetyls business segment decreased by $2 million from the third quarter of 2002.
This decrease was primarily due to increased manufacturing and other costs of
sales ($25 million), partially offset by an increase in average selling prices
($17 million), a reduction in S,D&A expenses ($4 million) and an increase in
sales volume ($2 million).
For the quarter ended September 30, 2003, sales for the Acetyls business
segment increased by $24 million, or 26%, from the comparable period in 2002
primarily due to an increase in selling prices. For the three months ended
September 30, 2003, the aggregate US dollar price for vinyl acetate monomer
("VAM") and acetic acid increased by 16% over the third quarter of 2002. Certain
worldwide price increases that were announced during 2002 and the first quarter
of 2003 for Acetyls' principal products were realized. The increased value in US
dollar terms of foreign currency denominated sales due to the weaker US dollar
also contributed to the increase in net sales. The favorable effect of higher
selling prices was further complemented by an increase in sales volume.
Production costs per ton for VAM and acetic acid in the third quarter of
2003 increased by 13% over the same period in the prior year. These increases
were primarily due to higher feedstock and energy costs, particularly natural
gas and ethylene.
S,D&A expenses in the third quarter of 2003 decreased by $4 million from
the same quarter of 2002, primarily due to lower legal costs.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
For the nine months ended September 30, 2003, operating income for the
Acetyls business segment increased by $15 million from the nine months ended
September 30, 2002. This increase was primarily due to higher average selling
prices ($78 million), lower S,D&A expenses ($5 million) and higher sales volume
($2 million), partially offset by increased manufacturing and other cost of
sales ($70 million).
For the nine months ended September 30, 2003, sales increased by $77
million or 32% from the same period of 2002, primarily due to significantly
higher selling prices. For the nine months ended September 30, 2003, the
aggregate US dollar price for VAM and acetic acid was 29% higher than in the
nine months ended September 30, 2002. Certain worldwide price increases that
were announced during 2002 and the first quarter of 2003 for Acetyls' principal
products were realized. The increased value in US dollar terms of foreign
currency denominated sales due to the weaker US dollar also contributed to the
increase in net sales. The aggregate sales volume for VAM and acetic acid for
the nine
33
months ended September 30, 2003 increased 4% over the comparable period of 2002.
For the nine months ended September 30, 2003, production costs per ton for
VAM and acetic acid increased by 19% from the same period of 2002. These
increases were primarily due to higher feedstock and energy costs, particularly
natural gas and ethylene.
S,D&A costs for the nine months ended September 30, 2003 decreased by $5
million from the same period of 2002, primarily due to lower legal costs.
Specialty Chemicals
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(Millions)
Net sales............................................... $23 $24 $72 $70
Operating (loss) income................................. (1) 2 3 8
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
The Specialty Chemicals segment incurred an operating loss of $1 million
for the three months ended September 30, 2003 compared to operating income of $2
million for the three months ended September 30, 2002, due primarily to lower
selling prices ($2 million) and higher manufacturing and other costs of sales
($2 million), partially offset by lower S,D&A costs ($1 million).
Net sales for the three months ended September 30, 2003 of $23 million were
$1 million, or 4%, lower than in the three months ended September 30, 2002.
Average selling prices for the third quarter of 2003 were 7% lower than the
third quarter of 2002, partially offset by a 3% increase in sales volume. The
combination of competitive pricing and proportionally higher sales volume in
lower-priced product lines contributed to the decrease in average selling prices
in the third quarter of 2003 compared to the same period of 2002.
Manufacturing and other costs of sales were higher in the third quarter of
2003 compared to the same period of the prior year, primarily due to higher raw
material costs in 2003 due to an increase in the cost of CST, the principal raw
material for the business, and the use of a higher-cost alternative raw material
due to the short supply of CST. Although planned downtime and startup issues
that impacted the third quarter of 2002 did not recur in the third quarter of
2003, lower production rates to reduce inventory levels resulted in lower fixed
cost absorption in the 2003 period.
For the three months ended September 30, 2003, S,D&A costs were $1 million
lower than S,D&A costs in the same period of 2002, primarily due to lower
employee-related costs.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
Operating income for the nine months ended September 30, 2003 of $3 million
was $5 million, or 63%, lower than in the nine months ended September 30, 2002.
The decrease was primarily due to lower selling prices ($8 million), partially
offset by higher sales volume ($2 million) and lower S,D&A costs ($1 million).
Net sales of $72 million for the nine months ended September 30, 2003 were
$2 million, or 3%, higher than in the nine months ended September 30, 2002.
Sales volume for the nine months ended September 30, 2003 was 14% greater than
in the nine months ended September 30, 2002, with higher sales volume in most
product lines, reflecting the Company's competitive pricing structure. However,
the new pricing structure and proportionally higher sales volume in lower-priced
product lines contributed to a 10% decrease in average selling prices in the
2003 period.
Manufacturing and other cost of sales for the nine months ended September
30, 2003 were similar to manufacturing and other costs of sales for the same
period in 2002, primarily due to improved production results and higher fixed
cost absorption due to higher production volumes, partially offset by higher raw
material costs. The production issues that occurred in the nine months ended
September 30, 2002 including plant shutdowns, startup issues and high
maintenance costs did not recur in the nine months ended September 30, 2003. Raw
material costs were higher in the 2003 period due to an increase in the cost of
CST, the principal raw material for the business, the use of a
34
higher-cost alternative raw material due to the short supply of CST and higher
costs for raw materials other than CST, including natural gas.
For the nine months ended September 30, 2003, S,D&A costs were $1 million
lower than in the same period of 2002, primarily due to lower employee-related
costs.
Other
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ----------- ---- -----------
(Restated)* (Restated)*
(Millions)
Operating loss.......................................... $(17) $(1) $(26) $--
- ----------
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
Operating loss not identified with the three separate business segments for
the three months ended September 30, 2003 of $17 million was $16 million more
than the $1 million operating loss for the three months ended September 30,
2002, primarily due to $15 million of reorganization and office closure costs
recorded in the third quarter of 2003 as a result of the Company's cost
reduction program announced in July 2003 (see "Cost Reduction Program;
Suspension of Dividend" above).
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
Operating loss not identified with the three separate business segments for
the nine months ended September 30, 2003 was $26 million compared to breakeven
results for the nine months ended September 30, 2002, primarily due to $16
million of reorganization and office closure costs recorded in the nine months
ended September 30, 2003 as a result of the Company's cost-reduction program
(see "Cost Reduction Program; Suspension of Dividend" above), a $5 million
benefit from the reduction of reserves recorded in the second quarter of 2002
due to favorable resolution of environmental claims related to predecessor
businesses reserved for in prior years, and lower income in 2003 from employee
benefit plans related to predecessor businesses.
35
Equistar
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002(1)
---- ----------- ----- -----------
(Restated)* (Restated)*
(Millions)
(Loss) income, as reported by Equistar.................. $(40) $22 $(235) $(132)
==== === ===== =====
(Loss) earnings on Equistar investment, as reported
by the Company....................................... $(12) $ 6 $ (69) $ (39)
==== === ===== =====
- ----------
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
(1) Before cumulative effect of accounting change.
Three Months Ended September 30, 2003 Compared to the Three Months Ended
September 30, 2002
The Company reported a pre-tax loss on its investment in Equistar of $12
million for the third quarter of 2003, a decrease of $18 million compared to
pre-tax income of $6 million for the same quarter of last year.
Equistar reported a net loss in the third quarter of 2003 of $40 million
compared to net income of $22 million in the third quarter of 2002. The $62
million decrease in Equistar's results includes an $11 million charge for the
write-off of a polymer research and development facility in the third quarter of
2003. The remainder of the decrease is due to higher raw material and energy
costs, primarily natural gas, partially offset by higher average selling prices.
Equistar's Petrochemicals segment reported operating income of $66 million
for the third quarter of 2003, a decrease of $30 million compared to the third
quarter of the prior year. The decrease in operating income is due to the
combination of lower product margins and a 5% decrease in sales volume. Product
margins deteriorated as the cost of energy, particularly natural gas, and raw
materials increased more than average sales prices. Revenues for Equistar's
Petrochemicals segment in the third quarter of 2003 were 9% higher than the
third quarter of the prior year primarily due to higher average selling prices,
which were increased in response to the higher cost of production, partially
offset by lower sales volume. Benchmark ethylene selling prices averaged 20%
higher in the third quarter of 2003 compared to the same period in the prior
year, while the benchmark weighted average cost of ethylene production increased
approximately 29% (based on the estimated ratio of crude-oil-based liquid raw
materials and natural gas-based liquid raw materials used in US ethylene
production and is subject to revision by Chemical Marketing Associates,
Incorporated).
Equistar's Polymers segment reported an operating loss of $19 million for
the third quarter of 2003 compared to operating income of $6 million for the
third quarter of 2002. The $25 million decrease in operating results includes a
charge of $11 million for the write-off of the polymer research and development
facility in the third quarter of 2003. The remaining decrease in operating
results is due to the combination of lower sales volume and lower product
margins. The lower product margins is due to raw material cost increases that
exceeded the increases in average selling prices. Revenues for Equistar's
Polymers segment in the third quarter of 2003 were 3% higher than the third
quarter of the prior year primarily due to higher average selling prices,
partially offset by an 8% decrease in sales volume. Sales volume in the third
quarter of 2003 was approximately 80 million pounds lower than the comparable
period in the prior year as the result of the sale of the Bayport polypropylene
production facility in the first quarter of 2003.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
The Company reported a pre-tax loss on its investment in Equistar of $69
million for the nine months ended September 30, 2003, an increase of $30 million
compared to a pre-tax loss of $39 million for the nine months ended September
30, 2002. The pre-tax loss for the nine months ended September 30, 2003 included
$6 million representing the Company's share of debt prepayment costs incurred by
Equistar and $4 million representing the Company's share of Equistar's loss on
the sale of assets of its polypropylene production facility in Pasadena, Texas
(see Note 13 to the Consolidated Financial Statements included in this Quarterly
Report).
36
Equistar reported a net loss of $235 million for the nine months ended
September 30, 2003 compared to a loss before the cumulative effect of an
accounting change for goodwill of $132 million for the nine months ended
September 30, 2002. Results for the nine months ended September 30, 2003 include
an $11 million charge for the write-off of a polymer research and development
facility, $19 million of debt prepayment costs, and a loss of $12 million from
the sale of assets, while the results for the nine months ended September 30,
2002 include a $33 million negative impact from certain above-market,
fixed-price feedstock purchase contracts entered into in early 2001 that largely
expired by the end of the first quarter of 2002. During the first nine months of
2003, the chemical industry experienced high and volatile raw material and
energy costs, with rapid increases in early 2003, weak demand and excess
industry capacity. These factors combined to put downward pressure on industry
product margins and sales volume during 2003. These factors also contributed to
Equistar's higher loss for the nine months ended September 30, 2003 compared to
the same period of the prior year, which includes lower sales volume, partially
offset by higher average product margins.
Equistar's Petrochemicals segment reported operating income of $119 million
for the nine months ended September 30, 2003, $32 million less than operating
income of $151 million for the same period in the prior year. Excluding
approximately $33 million of costs in the first nine months of 2002 due to the
above-market, fixed-price feedstock purchase contracts discussed above,
operating income for the first nine months of 2003 was $65 million lower than
the same period of 2002. The lower operating income is primarily due to
significant increases in raw material and energy costs and lower sales volume,
partially offset by increases in average selling prices. In response to
increases in the production cost of ethylene, as a result of significantly
higher energy and raw material costs in the first nine months of 2003 compared
to the first nine months of 2002, Equistar implemented significant sales price
increases for substantially all of its products. Benchmark ethylene and
propylene sales prices averaged 33% and 22% higher, respectively. However, sales
volume decreased 8% due to the industry-wide slowing of demand and the negative
effect of higher selling prices.
Equistar's Polymers segment reported an operating loss of $81 million for
the nine months ended September 30, 2003, $40 million higher than the operating
loss of $41 million for the same period in the prior year. The higher operating
loss includes a charge of $11 million for the write-off of the polymer research
and development facility and a loss of $12 million on the sale of the Bayport
polypropylene production facility. The remaining increase in operating loss for
the nine months ended September 30, 2003 is due to a decrease in sales volume,
partially offset by higher polymer product margins. Revenues for the nine months
ended September 30, 2003 increased 6% from the same period in the prior year due
to higher average selling prices, which increased in response to higher raw
material costs, partially offset by a 15% decrease in sales volume. Sales volume
decreased due to an industry-wide slowing of demand in 2003 and the sale of the
Bayport polypropylene production facility in the first quarter of 2003. Product
margins were higher in the first nine months of 2003 as higher average selling
prices more than offset higher raw material costs.
Liquidity and Capital Resources
The Company has historically financed its activities primarily through cash
generated from its operations and cash distributions from Equistar, as well as
debt financings. Cash generated from operations is to a large extent dependent
on economic, financial, competitive and other factors affecting the Company's
businesses. The amount of cash distributions received from Equistar is affected
by Equistar's results of operations and current and expected future cash flow
requirements. The Company has not received any cash distributions from Equistar
since 2000 and it is unlikely the Company will receive any cash distributions
from Equistar in the next twelve months.
Cash used in operating activities for the nine months ended September 30,
2003 was $47 million compared to $52 million provided by operations for the nine
months ended September 30, 2002. The $99 million change in cash from operating
activities was primarily due to unfavorable movements in trade working capital
(accounts receivable, inventory, and accounts payable) in the first nine months
of 2003 compared to the same period in the prior year ($95 million) and lower
operating income before depreciation and amortization ($4 million). The
unfavorable movements in trade working capital are mostly due to the timing of
vendor payments and higher finished products inventory levels at September 30,
2003 compared to September 30, 2002, reflecting the Company's decision to not
curtail production levels until the third quarter of 2003 in response to product
demand weakness during 2003.
Cash used in investing activities for capital expenditures in the nine
months ended September 30, 2003 was $29 million compared to $43 million used for
capital expenditures in the nine months ended September 30, 2002. The 33%
decrease in capital spending from the nine months ended September 30, 2002
reflects the Company's continued focus on optimization of its asset base.
Capital spending for 2003 is expected to be approximately $50 million.
Cash provided by financing activities was $100 million in the first nine
months of 2003 compared to $2 million used in the first nine months of 2002.
Financing activities in 2003 included $117 million of net debt proceeds, while
37
2002 included $24 million of net debt proceeds. Dividends paid to shareholders
totaled $17 million in the first nine months of 2003 versus $26 million in the
same period of 2002.
The Company expects to realize approximately $20 million of annual
operating expense savings from the cost-reduction program announced on July 21,
2003. The Company expects to record charges totaling $19 million to $21 million
associated with this program. The Company recorded charges primarily for
severance-related costs for departing employees of $15 million and $1 million
in the three months ended September 30, 2003 and June 30, 2003, respectively.
The remaining charges, estimated at $3 million to $5 million, are expected to
be recorded during the next several quarters. Cash payments of $7 million for
the implementation of this program were made in the third quarter of 2003.
The remainder of the cash payments relating to this program, which are estimated
to be $17 million, will be disbursed during the next several quarters.
In addition, in July 2003, the Company announced the suspension of the
payment of dividends on its common stock, as more fully described at "Cost
Reduction Program; Suspension of Dividend" above. The decision to suspend
payment of dividends will decrease the Company's reported cash outflows from
financing activities by approximately $17 million in 2003 versus 2002 and by
approximately $34 million in 2004 versus 2002.
On April 25, 2003, the Company received approximately $107 million in net
proceeds ($109 million in gross proceeds) from the issuance and sale by
Millennium America of $100 million additional principal amount at maturity of
its 9.25% Senior Notes, which are guaranteed by the Company. The net proceeds
were used to repay all of the $85 million of outstanding borrowings at that time
under the Revolving Loans and for general corporate purposes. Under the terms of
this issuance and sale, Millennium America and the Company entered into an
exchange and registration rights agreement with the initial purchasers of the
$100 million additional principal amount of these 9.25% Senior Notes. Pursuant
to this agreement, each of Millennium America and the Company agreed to: (1)
file with the Securities and Exchange Commission on or before July 24, 2003 a
registration statement relating to a registered exchange offer for the notes,
and (2) use its reasonable efforts to cause this exchange offer registration
statement to be declared effective under the Securities Act on or before October
22, 2003. On June 13, 2003, the Company filed a registration statement with the
Securities and Exchange Commission. However, as of November 14, 2003, the
Company has not been able to cause this exchange offer registration statement to
be declared effective. As a result, beginning October 22, 2003, Millennium
America and the Company are obligated to pay additional interest at the
annualized rate of approximately 1.00% to each holder of the $100 million
additional amount of notes. Such additional interest will be paid until such
time as the registration statement becomes effective.
The Company depends on the Credit Agreement and the European revolving
securitization arrangement discussed below as its primary source of liquidity
for its operations and working capital needs. At October 31, 2003, the Company
had $58 million outstanding ($40 million of outstanding borrowings and
outstanding undrawn standby letters of credit of $18 million) under the
Revolving Loans and, accordingly, had $117 million of unused availability under
such facility, and had $47 million outstanding under the Term Loans. At that
date, in addition to letters of credit outstanding under the Credit Agreement,
the Company also had outstanding undrawn standby letters of credit of $6 million
under other arrangements. As these letters of credit mature, the issuers could
require the Company to renew them under the Credit Agreement. If this were to
occur, it would result in a corresponding decrease in availability under the
Credit Agreement. The Company had unused availability under short-term
uncommitted lines of credit, other than the Credit Agreement, of $31 million at
October 31, 2003.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. As of September 30, 2003, the Company was not in
compliance with the Leverage Ratio and Interest Coverage Ratio covenants
described below. Accordingly, the Company obtained a waiver on September 30,
2003, which was then extended on November 10, 2003, of the provisions of these
financial covenants. This waiver, as so extended, expires on December 31, 2003.
The Company is seeking an amendment to the Credit Agreement to revise these
financial covenants, among other things. Based on its discussions with the agent
banks and the lending banks under the Credit Agreement, the Company believes
that it will be able to obtain this amendment prior to the expiration of the
waiver. However, the amendment will not become effective unless the Company
obtains at least $110 million of long-term financing in the capital markets
prior to the expiration of the current waiver. The funds so obtained would be
used to repay secured Term Loans of approximately $47 million and to enable
the Company to terminate its European accounts receivable securitization
program of approximately $60 million. The Company believes that it will be able
to obtain the requisite financing on or before December 31, 2003, at which time
the amendment to the
38
Credit Agreement referred to above would become effective. If the Company is not
able to obtain the requisite financing on or before December 31, 2003, the
Company believes that it would be able to extend the current waiver to provide
additional time to obtain such financing or otherwise amend or refinance the
Credit Agreement. In addition, the Company had at October 31, 2003,
approximately $125 million of cash and cash equivalents held primarily by
foreign subsidiaries, which the Company would be able to utilize to provide
liquidity in the near-term until it is able to obtain the requisite financing,
or amend or refinance the Credit Agreement. If the Credit Agreement is
terminated and refinanced, the collateral currently securing the Credit
Agreement would be released and available to secure other debt of the Company
or its subsidiaries. The Company expects that it will incur additional costs
in the form of fees and interest in connection with any such waiver, amendment
or refinancing, and that additional restrictions will be imposed on the Company
as a result thereof. The total amount of debt outstanding under the Credit
Agreement at September 30, 2003 of $94 million, which includes $47 million of
Term Loans and $47 million of Revolving Loans, is classified as a current
liability at September 30, 2003 because the current waiver expires at
December 31, 2003.
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. To permit the Company to be in compliance, these covenants were amended
in the fourth quarter of 2001, in the second quarter of 2002, and in the second
quarter of 2003. The amendment in the second quarter of 2002 was conditioned
upon consummation of the June 2002 offering of the $100 million additional
principal amount of the 9.25% Senior Notes and repayment of the Credit Agreement
debt described above and in Note 8 to the Consolidated Financial Statements
included in this Quarterly Report. The April 2003 amendment was not conditioned
on the sale of 9.25% Senior Notes. Under the covenants, as amended in April of
2003, the Company is required to maintain a Leverage Ratio of no more than 5.25
to 1.00 for the fourth quarter of 2003; 5.00 to 1.00 for the first and second
quarters of 2004; 4.75 to 1.00 for the third and fourth quarters of 2004; and
4.00 to 1.00 for the first quarter of 2005 and thereafter; and an Interest
Coverage Ratio of no less than 2.25 to 1.00 for the fourth quarter of 2003; 2.50
to 1.00 for the first, second, third and fourth quarters of 2004; and 3.00 to
1.00 for the first quarter of 2005 and thereafter. 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; and (x) 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.
Millennium America also has outstanding $500 million aggregate principal
amount of 7.00% Senior Notes and $250 million aggregate principal amount of
7.625% Senior Debentures that are fully and unconditionally guaranteed by the
Company. The indenture under which the 7.00% Senior Notes and 7.625% 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 ("CNTA"), as defined, of Millennium America and its consolidated
subsidiaries. Accordingly, based upon CNTA and secured borrowing levels at
September 30, 2003, any reduction in CNTA below approximately $1.5 billion would
decrease the Company's availability under the Revolving Loans by 15% of any such
reduction. CNTA was approximately $2.1 billion at September 30, 2003. The 7.00%
Senior Notes and the 7.625% Senior Debentures can be accelerated by the holders
thereof if any other debt in excess of $20 million is in default and is
accelerated.
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) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making
39
other types of restricted payments, including certain types of investments, if
such restricted payments would exceed a "restricted payments basket." Although
the Company has no intention at the present time to pay dividends or make
distributions, repurchase its common stock or make other restricted payments,
the Company would be prohibited by this covenant from making any such payments
at the present time. The indenture also requires the calculation of 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 quarters. If this ratio
were to cease to be greater than 2.25 to 1.00, there would be certain
restrictions on the Company's ability to incur additional indebtedness and pay
dividends, repurchase capital stock or make certain other restricted payments.
However, if the 9.25% Senior Notes were to receive investment grade credit
ratings from both Standard & Poor's ("S&P") and Moody's Investor Services, Inc.
("Moody's") and meet certain other requirements as specified in the indenture,
certain of these covenants would no longer apply. The 9.25% Senior Notes can
be accelerated by the holders thereof if any other debt in excess of $30
million is in default and is accelerated.
At September 30, 2003, the Company was in compliance with all covenants in
the indentures governing the 9.25% Senior Notes, the 7.00% Senior Notes and the
7.625% Senior Debentures.
The Company, as well as the Senior Notes, are rated BB- by S&P with a
stable outlook. The Company has received a senior implied rating of Ba2 and the
Senior Notes are rated Ba3 by Moody's. Moody's currently has the Company on
CreditWatch for possible downgrade and has assigned a negative outlook. These
ratings are non-investment grade ratings. On March 7, 2003, S&P lowered the
Company's credit rating from investment grade rating BBB- to non-investment
grade rating BB+ with a negative outlook, reflecting S&P's concern regarding the
Company's ability to generate the cash flow necessary to substantially improve
its financial profile during a period of economic uncertainties and higher raw
material costs. On July 22, 2003, S&P again lowered the Company's credit rating
from BB+ to BB, citing the Company's July 2003 announcement regarding weak sales
volume and competitive pricing pressures in the titanium dioxide business for
the second quarter of 2003, as well as lingering economic uncertainties and the
potential for additional raw material pressures in the petrochemical industry as
factors that are likely to further delay the Company's efforts to restore its
financial profile. On August 6, 2003, S&P announced that it had placed the
Company's credit ratings on CreditWatch with negative implications, citing the
Company's August 6, 2003 announcement regarding restatements of financial
statements. On September 22, 2003, S&P, lowered the Company's credit rating to
BB- from BB citing the Company's subpar financial profile and
weaker-than-expected prospects for reducing its substantial debt burden over the
next couple of years. At that time, S&P also removed the Company's credit
ratings from CreditWatch and revised its current outlook from negative to
stable. Moody's affirmed the Company's non-investment grade rating on June 19,
2002, but revised its ratings outlook to negative from stable, reflecting
Moody's concern over the Company's cash flow performance in the fourth quarter
of 2001 and the first quarter of 2002. On July 23, 2003, Moody's announced that
it had placed the Company's credit ratings under review for possible downgrade
due to Moody's concern that weaker North American demand for titanium dioxide
combined with pricing pressure could translate into weaker credit metrics and
less free cash flow for the near term. On August 13, 2003, Moody's announced
that it had lowered the Company's senior implied rating to Ba2, and the Senior
Notes' rating to Ba3, citing the Company's high leverage, modest coverage of
interest expense, weaker than anticipated TiO[u]2 demand and potential covenant
compliance issues. The ratings remain under review by Moody's for possible
downgrade pending Moody's analysis of announced accounting errors and related
financial statement restatements, and the Company's current outlook for its
business. As a result of the non-investment grade ratings by both S&P and
Moody's, the Company was required to provide, in April 2003, a $2.5 million
letter of credit, which remains outstanding, to secure its obligations under a
real estate lease, resulting in an equal reduction of availability under the
Revolving Loans. Furthermore, the Company could be required to cash
collateralize the mark-to-market positions of certain derivative instruments
which expire in January 2004, dependent upon the market value of these
instruments. Based on the current market value of the instruments, the Company
is not required to place any funds on deposit with the counterparty to these
transactions. In addition, these actions by Moody's and S&P could heighten
concerns of the Company's creditors and suppliers which could result in these
creditors and suppliers placing limitations on credit extended to the Company
and demands from creditors for additional credit restrictions or security.
Since March 2002, the Company has been transferring its interest in certain
European trade receivables to an unaffiliated third party as its basis for
issuing commercial paper under a revolving securitization arrangement (annually
renewable for a maximum of five years on April 30 of each year, at the option of
the third party), with maximum availability of 70 million euros, which is
treated, in part, as a sale under accounting principles generally accepted in
the United States of America. Accordingly, transferred trade receivables that
qualify as a sale, $58 million and $61 million outstanding at September 30, 2003
and December 31, 2002, respectively, were removed from the Company's
Consolidated Balance Sheets. The Company continues to carry its retained
interest in a portion of the transferred assets that do not qualify as a sale,
$9 million and $9 million at September 30, 2003 and December 31, 2002,
respectively, in Trade receivables, net in its Consolidated Balance Sheets at
amounts that approximate net realizable value based upon
40
the Company's historical collection rate for these trade receivables. Unused
availability under this arrangement at September 30, 2003 was 12 million euros.
For the nine months ended September 30, 2003 and 2002, cumulative gross proceeds
from this securitization arrangement were $253 million and $159 million,
respectively. Cash flows from this securitization arrangement are reflected as
operating activities in the Consolidated Statements of Cash Flows. The cost of
sale associated with this arrangement was $1 million and $2 million for the
three months and nine months ended September 30, 2003, respectively, and $1
million and $2 million for the three months and nine months ended September 30,
2002, respectively. Administration and servicing of the trade receivables under
the arrangement remains with the Company. Servicing liabilities associated with
the transaction are not significant. In the event the Company's unsecured
long-term debt is downgraded to a rating of either B2 by Moody's or B by S&P,
the counterparty would have the right to terminate the securitization
arrangement. As discussed above, the Company currently anticipates that it will
terminate the securitization arrangement on or before December 31, 2003.
The Company uses gold as a component in a catalyst at its La Porte, Texas
facility. In April 1998, the Company entered into an agreement that provided the
Company with the right to use gold owned by a third party for a five-year term.
In April 2003, the Company renewed this agreement for a one-year term and
simultaneously entered into a forward purchase agreement in order to mitigate
the risk of change in the market price of gold. The renewed agreement required
the Company to either deliver the gold to the counterparty at the end of the
term or pay to the counterparty an amount equal to its then-current value. The
renewed agreement provided that if the Company was downgraded below BB by S&P or
Ba2 by Moody's, the third party could require the Company to purchase the gold
at its then-current value. After discussions with the counterparty to the
agreement as to whether the counterparty had the right to require the Company to
purchase the gold due to Moody's August 13, 2003 announcement referenced above,
the Company determined to terminate the renewed agreement and purchase the gold
for its then-current market value. On August 28, 2003, the Company paid the
counterparty $14 million, net of $1 million of proceeds from the termination of
its forward purchase contract. The Company's obligation under this agreement was
$14 million at December 31, 2002, and was included in Other short-term
borrowings. The change in value of the gold and the Company's obligation under
this agreement, which is included in Selling, development and administrative
expense, was a loss of $1 million for each of the three months and nine months
ended September 30, 2003, a loss of $2 million for the nine months ended
September 30, 2002, and for the three months ended September 30, 2002 was not
significant. The change in value of the forward purchase agreement was a gain of
$1 million for each of the three months and nine months ended September 30,
2003, which is included in Selling, development and administrative expense.
In July 2003, the Company paid $19 million to the Internal Revenue Service
relating to a preliminary settlement of federal tax for audit years 1989
through 1992.
The Company's focus for the remainder of 2003 and for the near-term future
is to sustain the benefits of cost reduction efforts achieved to date, achieve
further benefits from cost reduction actions announced in the third quarter of
2003, and manage working capital and capital spending to levels deemed
reasonable given the current state of business performance. The Company believes
these efforts, along with the borrowing availability under the Credit Agreement
(as it may be amended or refinanced), the successful completion of the Credit
Agreement amendment and long-term financing discussed above, and considering the
suspension of the payment of dividends on the Company's common stock announced
in the third quarter of 2003, will be sufficient to fund the Company's cash
requirements until 2006. At that time, the Company must repay or refinance the
7% Senior Notes and renegotiate or refinance the Credit Agreement (as it may be
amended or refinanced).
41
The maturities of the Company's Long-term debt through 2008 and thereafter
are as follows:
October 1-
December 31,
2003 2004 2005 2006 2007 2008 Thereafter Total
------------ ---- ---- ---- ---- ---- ---------- ------
(Millions)
Revolving Loans................ $-- $47 $-- $ -- $-- $ -- $ -- $ 47
Term Loans..................... -- 47 -- -- -- -- -- 47
7.00% Senior Notes............. -- -- -- 500 -- -- -- 500
7.625% Senior Debentures....... -- -- -- -- -- -- 250 250
9.25% Senior Notes............. -- -- -- -- -- 475 -- 475
Other Long-term debt........... 2 5 5 5 2 1 4 24
--- --- --- ---- --- ---- ---- ------
Maturities of Long-term debt... $ 2 $99 $ 5 $505 $ 2 $476 $254 1,343
=== === === ==== === ==== ====
Non-cash components of
debt........................ 20
------
Total Long-term debt........... 1,363
Less: Current maturities of
long-term debt.............. (99)
------
Total Long-term debt $1,264
======
Critical Accounting Policies
The preparation of the Company's financial statements requires management
to apply accounting principles generally accepted in the United States of
America to the Company's specific circumstances and 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 reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
There have been no revisions to the critical accounting policies discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002, as amended by Amendment No. 1 on Form 10-K/A filed with the Securities and
Exchange Commission on November 12, 2003.
Recent Accounting Developments
See Note 4 to the Consolidated Financial Statements included in this
Quarterly Report for a discussion of recent accounting developments.
42
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Note 9 to the 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.
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms
of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Company's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
The Company carried out an evaluation as of the end of the period covered
by this quarterly report on Form 10-Q under the supervision and with
the participation of the Company's management, including the Company's
principal executive officer and the Company's principal financial officer,
of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the evaluation, the Company's
principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective as of the
end of the period.
(b) In light of the restatements described in Note 2 to the Consolidated
Financial Statements included in this Quarterly Report, the Company is
considering whether any changes to enhance the Company's internal control
processes and procedures are warranted. There were no significant changes
in the Company's internal controls over financial reporting that occurred
during the most recent fiscal quarter covered by this quarterly report that
have materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments with respect to the Company's
legal proceedings previously reported in the Annual Report on Form 10-K for the
year ended December 31, 2002, as amended, and the Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2003, as amended, and June 30, 2003 and no
termination of any proceeding required to be disclosed in response to this Item
1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10.1 Form of Separation and Consulting Agreement by and among Millennium
Chemicals Inc., Millennium America Holdings Inc. and William M.
Landuyt, dated September 1, 2003**'D'
10.2 Form of Separation and Consulting Agreement by and among Millennium
Chemicals Inc., Millennium Inorganic Chemicals Inc. and each of Peter
P. Hanik and David L. Vercollone, dated August 1, 2003.**'D'
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. **
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. **
32.1 Certificate of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. ** (Furnished, not filed, in
accordance with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).
32.2 Certificate of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. ** (Furnished, not filed, in
accordance with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).
99.1 Information relevant to forward-looking statements.**
(b) Reports on Form 8-K.
Current Reports on Form 8-K dated August 21, 2003, August 22, 2003,
September 16, 2003, November 10, 2003 and November 12, 2003 were filed
during the quarter ended September 30, 2003 and through the date hereof.
Such Current Reports either filed or furnished information to the
Securities and Exchange Commission.
** Filed herewith.
'D' Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c).
44
SIGNATURE
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: November 14, 2003 By: /s/ JOHN E. LUSHEFSKI
----------------------------------
John E. Lushefski
Executive Vice President and Chief
Financial Officer
(as duly authorized officer and
principal financial officer)
45
Exhibit Index
Exhibit
Number Description of Document
- ------- -----------------------
10.1 Form of Separation and Consulting Agreement by and among Millennium
Chemicals Inc., Millennium America Holdings Inc. and William M. Landuyt,
dated September 1, 2003.
10.2 Form of Separation and Consulting Agreement by and among Millennium
Chemicals Inc., Millennium Inorganic Chemicals Inc. and each of Peter
P. Hanik and David L. Vercollone, dated August 1, 2003.
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (Furnished, not filed,
in accordance with Item 601(b)(32)(ii) of Regulation S-K, 17
CFR 229.601(b)(32)(ii)).
32.2 Certificate of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (Furnished, not filed,
in accordance with Item 601(b)(32)(ii) of Regulation S-K, 17
CFR 229.601(b)(32)(ii)).
99.1 Information relevant to forward-looking statements.
46
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as................................ 'SS'
Characters normally expressed as subscript shall be preceded by......... [u]
The dagger symbol shall be expressed as................................. 'D'