SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-30270
CROMPTON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2183153
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One American Lane, Greenwich,Connecticut 06831-2559
(Address of principal executive offices) (Zip Code)
(203) 552-2000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d)of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares of common stock outstanding is as follows:
Class Outstanding at July 31, 2002
Common Stock - $.01 par value 113,647,388
CROMPTON CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Accompanying Notes
Consolidated Statements of Operations
(Unaudited) - Second quarter and
six months ended 2002 and 2001 2
Consolidated Balance Sheets - June 30, 2002
(Unaudited) and December 31, 2001 3
Consolidated Statements of Cash Flows (Unaudited)
- Six months ended 2002 and 2001 4
Notes to Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure of Market
Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
CROMPTON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Second quarter and six months ended 2002 and 2001
(In thousands of dollars, except per share data)
Second quarter ended Six months ended
2002 2001 2002 2001
Net sales $689,734 $724,032 $1,334,572 $1,461,968
Cost of products
sold 474,559 503,002 933,422 1,017,589
Selling, general
and administrative 100,988 105,066 198,197 211,705
Depreciation and
amortization 37,945 46,793 76,024 93,717
Research and
development 21,417 20,669 41,635 41,233
Facility closures,
severance and
related costs 9,283 - 9,283 -
Equity income (1,997) (1,821) (4,261) (7,808)
Operating profit 47,539 50,323 80,272 105,532
Interest expense 26,092 27,731 52,230 56,485
Other expense,
net (a) 38,140 882 35,847 2,697
Earnings (loss) before
income taxes and
cumulative effect
of accounting
change (16,693) 21,710 (7,805) 46,350
Income taxes
(benefit) (10,399) 7,816 (8,266) 16,686
Earnings (loss)
before cumulative
effect of accounting
change (6,294) 13,894 461 29,664
Cumulative effect
of accounting
change - - (298,981) -
Net earnings (loss) $ (6,294) $ 13,894 $ (298,520) $ 29,664
Basic Earnings (Loss) Per Common Share:
Earnings (loss) before
cumulative effect
of accounting
change $ (.06) $ .12 $ - $ .26
Cumulative effect
of accounting
change - - (2.63) -
Net earnings
(loss) $ (.06) $ .12 $ (2.63) $ .26
Diluted Earnings (Loss) Per Common Share:
Earnings (loss) before
cumulative effect
of accounting
change $ (.06) $ .12 $ - $ .26
Cumulative effect
of accounting
change - - (2.58) -
Net earnings
(loss) $ (.06) $ .12 $ (2.58) $ .26
Dividends declared per
common share $ .05 $ .05 $ .10 $ .10
(a) The second quarter and six months ended 2002 include a loss of
$34,705 ($21,117 after-tax) from the sale of the industrial
specialties business.
See accompanying notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001
(In thousands of dollars)
June 30, December 31,
2002 2001
ASSETS
CURRENT ASSETS
Cash $ 20,802 $ 21,506
Accounts receivable 223,554 188,133
Inventories 446,075 491,693
Other current assets 141,662 113,742
Total current assets 832,093 815,074
NON-CURRENT ASSETS
Property, plant and equipment 934,246 1,021,983
Cost in excess of acquired
net assets 600,159 897,404
Other assets 423,949 497,727
$ 2,790,447 $ 3,232,188
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 4,508 $ 29,791
Accounts payable 261,339 234,985
Accrued expenses 296,339 285,329
Income taxes payable 85,848 111,905
Other current liabilities 13,481 20,608
Total current liabilities 661,515 682,618
NON-CURRENT LIABILITIES
Long-term debt 1,255,800 1,392,833
Post-retirement health
care liability 197,261 199,583
Other liabilities 396,800 409,613
STOCKHOLDERS' EQUITY
Common stock 1,192 1,192
Additional paid-in capital 1,049,030 1,051,257
Accumulated deficit (590,213) (280,350)
Accumulated other
comprehensive loss (115,657) (151,839)
Treasury stock at cost (65,281) (72,719)
Total stockholders' equity 279,071 547,541
$ 2,790,447 $ 3,232,188
See accompanying notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended 2002 and 2001
(In thousands of dollars)
Increase (decrease) in cash 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $(298,520) $ 29,664
Adjustments to reconcile net
earnings (loss) to net cash
provided by operations:
Cumulative effect of
accounting change 298,981 -
Loss on sale of business 34,705 -
Facility closures, severance and
related costs 9,283 -
Depreciation and amortization 76,024 93,717
Equity income (4,261) (7,808)
Changes in assets and liabilities, net:
Accounts receivable (75,225) (20,552)
Inventories 32,474 (21,329)
Accounts payable 18,707 80,459
Other 1,195 (58,822)
Net cash provided by operations 93,363 95,329
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of business (a) 80,000 -
Capital expenditures (36,048) (76,635)
Other investing activities 1,090 2,925
Net cash provided by (used in)
investing activities 45,042 (73,710)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term borrowings (144,102) (51,575)
(Payments) proceeds on short-term
borrowings (26,918) 15,645
Proceeds from sale of accounts
receivable 39,193 9,221
Dividends paid (11,343) (11,308)
Other financing activities 3,908 3,680
Net cash used in financing activities (139,262) (34,337)
CASH
Effects of exchange rate changes
on cash 153 (1,011)
Change in cash (704) (13,729)
Cash at beginning of period 21,506 20,777
Cash at end of period $ 20,802 $ 7,048
(a)The industrial specialties business (excluding retained
receivables and payables valued at approximately $10 million)
was sold during the second quarter for $95 million, including
cash proceeds of $80 million and a note receivable of $15
million due February 2003.
See accompanying notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The information in the foregoing consolidated financial
statements is unaudited, but reflects all of the adjustments
which, in the opinion of management, are necessary for a fair
presentation of the results of operations for the interim periods
presented.
Included in accounts receivable are allowances for doubtful
accounts of $20.8 million at June 30, 2002 and $16.9 million at
December 31, 2001.
Accumulated depreciation amounted to $792.5 million at June 30,
2002 and $707.7 million at December 31, 2001.
It is suggested that the interim consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes included in the Company's 2001
Annual Report on Form 10-K.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
Primarily as a result of the cost reduction initiative announced
in July 2001, the Company recorded pre-tax charges of $114
million in 2001 and $9.3 million during second quarter of 2002
for facility closures, severance and related costs, summarized as
follows:
Severance Asset Other
And Write-offs Facility
(In thousands) Related and Closure
Costs Impairments Costs Total
2001 charge $ 45,466 $ 41,847 $ 26,720 $114,033
Cash payments (8,526) - (2,022) (10,548)
Non-cash charges (6,706) (41,847) (13,866) (62,419)
Balance at
December 31, 2001 30,234 - 10,832 41,066
Second quarter 2002
charge (a) 4,904 1,808 2,571 9,283
Cash payments (6,782) - (3,793) (10,575)
Non-cash charges (211) (1,808) (29) (2,048)
Balance at
June 30, 2002 $ 28,145 $ - $ 9,581 $ 37,726
(a) Includes $2,078, primarily severance, related to the
headquarters relocation from Greenwich to Middlebury, CT.
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 141, "Business
Combinations" and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using
the purchase method of accounting. It also specifies criteria
that must be met for intangible assets acquired in a purchase
combination to be recognized apart from goodwill. Statement No.
142 requires that the useful lives of all existing intangible
assets be reviewed and adjusted if necessary. It also requires
that goodwill and intangible assets with indefinite lives no
longer be amortized, but rather be tested for impairment at least
annually. Other intangible assets will continue to be amortized
over their useful lives and reviewed for impairment in accordance
with Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
In accordance with Statement No. 142, the Company discontinued
the amortization of goodwill effective January 1, 2002. The
following is a reconciliation to adjust previously reported
quarterly financial information to exclude goodwill amortization
expense:
(In thousands, except per share data) Second quarter ended 2001
Net Earnings Per Share
Earnings Basic Diluted
Net earnings, as reported $ 13,894 $0.12 $0.12
Goodwill amortization expense 6,526 0.06 0.06
Adjusted net earnings $ 20,420 $0.18 $0.18
Six months ended 2001
Net Earnings Per Share
Earnings Basic Diluted
Net earnings, as reported $ 29,664 $0.26 $0.26
Goodwill amortization expense 13,186 0.12 0.11
Adjusted net earnings $ 42,850 $0.38 $0.37
The Company has reviewed the classification of its intangible
assets and goodwill in accordance with Statement No. 141 and has
concluded that no change in the classification of its intangible
assets and goodwill is required. The Company's intangible assets
(excluding goodwill) are included in "other assets" on the
balance sheet and comprise the following:
(In thousands) June 30, 2002 December 31, 2001
Gross Accumulated Gross Accumulated
Cost Amortization Cost Amortization
Patents $136,735 $ (92,014) $132,923 $ (89,233)
Trademarks 86,871 (28,349) 94,136 (26,988)
Other 78,503 (47,001) 79,250 (44,646)
Total $302,109 $(167,364) $306,309 $(160,867)
The Company has reassessed the useful lives of its intangible
assets as required by Statement No. 142 and determined that the
existing useful lives are reasonable. Amortization expense
related to intangible assets (excluding goodwill) amounted to
$3.1 million and $3.5 million for the second quarter of 2002 and
2001, respectively, and $6.2 million and $6.8 million for the six
months ended June 30, 2002 and 2001, respectively. Estimated
amortization expense (excluding goodwill) for the next five
fiscal years is as follows: $12.4 million (2002), $13.2 million
(2003), $13.4 million (2004), $13.1 million (2005) and $13.3
million (2006).
During the first quarter, in accordance with the goodwill
impairment provisions of Statement No. 142, the Company allocated
its assets and liabilities, including goodwill, to its reporting
units. Much of the goodwill relates to the 1999 merger with
Witco Corporation and, accordingly, has been allocated to the
former Witco business units. During the second quarter, the
Company completed its reporting unit fair value calculations in
accordance with Statement No. 142. As a result, the Company
recorded a charge of $299 million, or $2.58 per diluted share,
retroactive to January 1, 2002. The charge is reflected in year-
to-date results as a cumulative effect of an accounting change.
Of the $299 million charge, $84 million relates to the divested
industrial specialties business and represents 100 percent of the
goodwill attributed to that business. A further $65 million
relates to 100 percent of the goodwill attributed to the refined
products business which is currently a candidate for divestiture.
The remaining $150 million of the charge represents 43 percent of
the goodwill attributed to the plastic additives business. The
plastic additives business has been one of the businesses most
affected by adverse external factors over the last two years.
Although the business is rebounding and returning to growth, it
is doing so from levels lower than those which existed in 1999
when the business earnings projections that support the
allocation of goodwill were completed.
Goodwill by reportable segment is as follows:
(In thousands) June 30, December 31,
2002 2001
Polymer Products
Polymer Additives $ 274,978 $ 425,011
Polymers 17,299 17,299
Polymer Processing Equipment 31,173 29,725
323,450 472,035
Specialty Products
OrganoSilicones 221,465 221,465
Crop Protection 55,244 54,922
Other - 148,982
276,709 425,369
Total $ 600,159 $ 897,404
INVENTORIES
Components of inventories are as follows:
(In thousands) June 30, December 31,
2002 2001
Finished goods $ 331,791 $ 377,463
Work in process 23,145 22,110
Raw materials and supplies 91,139 92,120
$ 446,075 $ 491,693
COMMON STOCK
As of June 30, 2002, there were 119,152,254 common shares issued
and 113,630,349 common shares outstanding at $.01 par value.
EARNINGS (LOSS) PER COMMON SHARE
The computation of basic earnings (loss) per common share is
based on the weighted average number of common shares
outstanding. The computation of diluted earnings (loss) per
common share is based on the weighted average number of common
and common equivalent shares outstanding. The computation of
diluted earnings (loss) per common share equals the basic
earnings (loss) per common share calculation for the second
quarter of 2002 since common stock equivalents of 2,438,698 were
antidilutive.
The following is a reconciliation of the shares used in the
computations:
(In thousands) Second quarter ended Six months ended
2002 2001 2002 2001
Weighted average common
shares outstanding 113,512 113,113 113,394 113,041
Effect of dilutive stock
options and other
equivalents - 2,991 2,483 3,101
Weighted average common shares
adjusted for dilution 113,512 116,104 115,877 116,142
COMPREHENSIVE INCOME (LOSS)
An analysis of the Company's comprehensive income (loss) follows:
(In thousands) Second quarter ended Six months ended
2002 2001 2002 2001
Net earnings (loss) $ (6,294) $ 13,894 $(298,520) $ 29,664
Other comprehensive
income (expense):
Foreign currency translation
adjustments 40,311 (16,583) 30,641 (38,047)
Change in fair value of
derivatives and other (1,521) (229) 5,541 (531)
Comprehensive income
(loss) $ 32,496 $ (2,918) $(262,338) $ (8,914)
The components of accumulated other comprehensive loss at June
30, 2002 and December 31, 2001 are as follows:
June 30, December 31,
(In thousands) 2002 2001
Foreign currency translation
adjustments $ (75,230) $(105,871)
Minimum pension liability
adjustment (39,403) (39,403)
Fair value of derivatives and other (1,024) (6,565)
Accumulated other comprehensive
loss $(115,657) $(151,839)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging
Activities," and Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (the
"Statements"). In accordance with the Statements, the Company
recognizes changes in the fair value of all derivatives
designated as fair value hedging instruments in earnings, and
recognizes changes in the fair value of all derivatives
designated as cash flow hedging instruments as a component of
accumulated other comprehensive loss (AOCL).
The Company uses interest rate swap contracts, which expire in
2003, as cash flow hedges to convert its $66 million Euro
denominated variable rate debt to fixed rate debt. Each interest
rate swap contract is designated with the principal balance and
the term of the specific debt obligation. These contracts involve
the exchange of interest payments over the life of the contract
without an exchange of the notional amount upon which the
payments are based. The differential to be paid or received as
interest rates change is recognized as an adjustment to interest
expense. In the event of early extinguishment of the designated
debt obligations, any realized or unrealized gain or loss from
the swap would be recognized in earnings coincident with the
extinguishment gain or loss.
The Company also has option contracts that effectively allow it
to buy and sell shares of its common stock at various strike
prices. The Company originally entered into these contracts to
hedge the cash flow variability associated with its obligations
under its long-term incentive plans. The option contracts
related to these long-term incentive plans consist of written put
option contracts and purchased call option contracts (covering
3.2 million shares of common stock, with a weighted average
strike price of $16.14 per share for the put contracts and $16.32
per share for the call contracts). These contracts have an
expiration date of July 2, 2002 (subsequently extended to
February 14, 2003) and require net cash settlement. As of June
30, 2002, a liability of $10.9 million has been included in
accrued expenses to reflect the unrealized loss on these option
contracts based on the quarter-end closing stock price of the
Company's common stock.
Through June 30, 2001, these option contracts were recorded on
the balance sheet at fair value with changes in market price
recorded in earnings. Effective July 2, 2001, due to anticipated
volatility in the stock price, the Company designated a portion
of its option contracts as cash flow hedges of the risk
associated with the unvested, unpaid awards under its long-term
incentive plans. In accordance with the Statements, the changes
in market value from July 2, 2001 through June 30, 2002, related
to the option contracts designated and effective as hedges, have
been recorded as a component of AOCL, with any ineffective
portion recorded to other expense. The amount included in AOCL
is subject to changes in the stock price and will be amortized
ratably to earnings over the remaining service periods of the
hedged long-term incentive plans.
During the first quarter of 2002, the Company entered into
Japanese Yen (JPY) denominated foreign currency forward contracts
as hedges of its exposure to variability in expected future cash
flows attributable to changes in foreign exchange rates. These
contracts are designated as cash flow hedges of forecasted JPY
denominated sales. Changes in the fair value of these forward
contracts will be recorded on the balance sheet with the
effective portion deferred as a component of AOCL and the
ineffective portion recognized in earnings. The component
deferred to AOCL will be recognized in earnings in the same
period in which the forecasted transactions are recognized.
The following table summarizes the (gains)/losses resulting from
changes in the market value of the Company's fair value and cash
flow hedging instruments for the quarter and six month periods
ended June 30, 2002 and 2001.
2002 2001
Six Six
Second Months Second Months
(In thousands) Quarter Ended Quarter Ended
Fair value hedges (a) $ 10 $ 64 $ 3 $ (543)
Cash flow hedges (b):
Interest rate swap
contracts $ 438 $ (24) $ (92) $ 498
JPY foreign currency
forward contracts 790 410 - -
Option contracts 286 (5,855) - -
$ 1,514 $(5,469) $ (92) $ 498
(a)Changes in the market value of fair value hedges are included
in other expense, net.
(b)Changes in the market value of cash flow hedges are recorded
as a component of AOCL.
BUSINESS SEGMENT DATA
On April 12, 2002, the Company announced certain modifications
within its financial reporting segments to reflect the current
management and operating structure in its portfolio of
businesses. First, a reclassification of Petroleum Additives
from the "Other" category to the Polymer Additives segment. This
change reflects the similarity of product and product enhancing
characteristics of these additives, as well as shared
manufacturing processes and facilities. Second, a
reclassification of Industrial Specialties (divested in June
2002) from the Crop Protection segment to the "Other" category,
where it joins Crompton's divestment candidate Refined Products.
Third, a reclassification of Glycerine and Fatty Acids from the
"Other" category into plastic additives (included in the Polymer
Additives segment). This change recognizes that glycerine and
fatty acids are a by-product of in-house production for use in
the plastic additives business. Fourth, a reclassification of
trilene (a minor product line with less than $3.4 million in
annual sales) from petroleum additives (included in the Polymer
Additives segment) to EPDM (included in the Polymers segment).
The former classification was predicated on the product's use in
lubricant applications, while the new designation is consistent
with the chemistry of trilene, which is a liquid form of EPDM.
The following segment information reflects these modifications.
(In thousands) Second quarter ended Six months ended
2002 2001 2002 2001
Net Sales
Polymer Products
Polymer Additives $ 287,676 $ 287,538 $ 554,911 $ 596,477
Polymers 72,475 78,436 139,955 160,698
Polymer Processing
Equipment 44,652 58,116 94,457 116,862
Eliminations (3,971) (2,750) (7,290) (6,674)
400,832 421,340 782,033 867,363
Specialty Products
OrganoSilicones 118,245 108,587 232,001 220,477
Crop Protection 70,538 75,562 123,010 135,636
Other 100,119 118,543 197,528 238,492
288,902 302,692 552,539 594,605
Total net sales $ 689,734 $ 724,032 $1,334,572 $1,461,968
(In thousands) Second quarter ended Six months ended
2002 2001 2002 2001
Operating Profit (Loss)
Polymer Products
Polymer Additives $ 24,324 $ 15,672 $ 35,955 $ 34,373
Polymers 12,432 10,976 21,081 25,265
Polymer Processing
Equipment (2,700) (4,282) (2,620) (3,225)
34,056 22,366 54,416 56,413
Specialty Products
OrganoSilicones 12,135 13,760 19,186 25,130
Crop Protection 20,615 28,974 35,085 54,865
Other 2,130 4,555 5,611 8,248
34,880 47,289 59,882 88,243
General corporate expense,
including
amortization (12,114) (19,332) (24,743) (39,124)
Total operating profit before
special items 56,822 50,323 89,555 105,532
Facility closures, severance and
related costs (9,283) - (9,283) -
Total operating
profit $ 47,539 $ 50,323 $ 80,272 $ 105,532
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER RESULTS
Overview
Consolidated net sales of $689.7 million for the second quarter
of 2002 decreased 5% from the comparable period in 2001. The
decrease was primarily the result of a decline in unit volume
(-2%), lower selling prices (-3%) and the divestiture of the
industrial colors business in the fourth quarter of 2001 (-1%),
partially offset by favorable foreign currency translation (+1%).
International sales, including U.S. exports, were 49% of total
sales, unchanged from second quarter of 2001.
Gross margin as a percentage of sales was 31.2% for the second
quarter of 2002 as compared to 30.5% for the second quarter of
2001. The increase was primarily due to lower raw material and
energy costs and cost savings initiatives, partially offset by
reduced selling prices and unfavorable product mix.
Consolidated operating profit was $47.5 million as compared to
$50.3 million for the second quarter of 2001. Consolidated
operating profit included a $9.3 million special charge for
facility closures, severance and related costs. Excluding this
charge, consolidated operating profit increased 12.9% versus the
second quarter of 2001. The net loss for the second quarter was
$6.3 million, or $0.06 per common share, as compared to net
earnings of $13.9 million, or $0.12 per common share for the
first quarter of 2001. After adjusting to exclude the facility
closures, severance and related costs ($5.9 million after-tax)
and the loss on the sale of the industrial specialties business
($21.1 million after-tax), net earnings were $20.7 million, or
$0.18 per common share. The increases in operating profit and
net earnings before the above mentioned special items were
primarily due to the increase in gross profit, including the
impact of the Company's cost savings initiatives, and the
implementation of the goodwill non-amortization provision of FASB
Statement No. 142.
Polymer Products
Polymer additives sales of $287.7 million were essentially
unchanged from the prior year as a 2% increase in unit volume and
favorable foreign currency translation of 1% were offset by a 3%
decline in prices. Plastic and petroleum additives sales
increased 3% and 5%, respectively, due mainly to greater demand
in several key markets, partially offset by lower prices.
Urethane additives sales were down 8% due primarily to the loss
of some low margin business on the basis of price and weakness in
the fiberglass market. Rubber additives sales declined 7% due
equally to lower unit volume and prices. Operating profit of
$24.3 million was up 55% from the prior year due primarily to
reduced product costs, including raw material and energy,
partially offset by lower selling prices.
Polymers sales of $72.5 million were down 8% from the prior year
as a result of a decline in prices and unit volume of 5% and 3%,
respectively. EPDM sales declined 18% as weak global demand
continues to keep unit volume and selling prices below prior year
levels. Urethane polymer sales rose 6% due mainly to continued
penetration of the golf ball market. Operating profit of $12.4
million was up 13% versus the second quarter of 2001 as the
elimination of last year's loss on the divested nitrile joint
venture and reduced raw material and energy costs, more than
offset the impact of lower unit volume and lower selling prices.
Polymer processing equipment sales of $44.7 million declined 23%
from the prior year due to a 25% decline in unit volume, driven
by extremely low demand for capital equipment, offset in part by
favorable foreign currency translation of 2%. Despite the lower
sales, the operating loss of $2.7 million was favorable versus
the prior year by $1.6 million due to the successful
implementation of cost reduction initiatives. Backlog at the end
of June was $65 million, down $18 million from the end of 2001.
Specialty Products
OrganoSilicones sales of $118.2 million rose 9% from the prior
year due to a 13% increase in unit volume, driven by an increase
in European demand for sulphur silanes and other products, and a
favorable foreign currency translation of 1%, offset in part by a
5% decrease in prices. Despite higher sales, operating profit of
$12.1 million was down 12% from the prior year due primarily to
lower selling prices and an unfavorable sales mix.
Crop protection sales of $70.5 million were down 7% from the
prior year due to a decline in unit volume primarily in Europe
and Canada. A combination of drought conditions (Canada), high
customer inventory levels, competitive pricing and poor crop
economics all contributed to the shortfall. Operating profit of
$20.6 million declined 29% from the prior year as a result of
lower unit volume, an unfavorable sales mix and lower joint
venture equity income of $1.0 million.
Other sales of $100.1 million declined 16% from the prior year
with 8% due to the divested colors business and the remainder due
to lower unit volume of 19% in the industrial specialties
business (divested June 28, 2002), partially offset by higher
unit volume of 2% in the refined products business. Operating
profit of $2.1 million was down 53% from the prior year due
primarily to the colors divestment and the impact of lower
industrial specialties sales.
Other
Selling, general and administrative expenses decreased 4% versus
the second quarter of 2001. This decrease was primarily due to
lower sales activity, the Company's cost savings initiatives and
the 2001 divestiture of the industrial colors business.
Depreciation and amortization decreased 19% primarily due to the
implementation of the goodwill non-amortization provision of FASB
Statement No. 142 and reduced depreciation expense resulting from
the fourth quarter 2001 impairment charge related to the rubber
additives and trilene businesses. Research and development costs
rose 4% as emphasis on new product development increased.
Interest expense decreased 6% mainly due to the decrease in the
debt balance outstanding. The effective tax rate, before special
items, decreased to 24% from 36% in the comparable quarter of
2001 primarily due to the impact of the goodwill non-amortization
provision of FASB Statement No. 142.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales of $1.33 billion for the first six months
of 2002 decreased 9% from the comparable period in 2001. The
decrease was primarily the result of a decline in unit volume
(-5%), lower selling prices (-3%) and the divestiture of the
industrial colors business in the fourth quarter of 2001 (-1%).
International sales, including U.S. exports, were 48% of total
sales, down slightly from 49% for the first six months of 2001.
Gross margin as a percentage of sales was 30.1% for the first six
months of 2002 as compared to 30.4% for the first six months of
2001. The decrease was primarily due to the first quarter impact
of reduced selling prices and higher manufacturing costs
attributable to reduced plant throughput, partially offset by
lower raw material and energy costs and cost savings initiatives.
Consolidated operating profit was $80.3 million as compared to
$105.5 million for the first six months of 2001. Consolidated
operating profit, excluding the $9.3 million charge for facility
closures, severance and related costs, was $89.6 million for the
first six months of 2002. The net loss for the first six months
was $298.5 million, or $2.58 per diluted common share, as
compared to net earnings of $29.7 million, or $0.26 per common
share for the first six months of 2001. After adjusting to
exclude the facility closures, severance and related costs ($5.9
million after-tax), the loss on the sale of the industrial
specialties business ($21.1 million after-tax) and the cumulative
effect of accounting change ($299 million), net earnings were
$27.5 million. The decreases in operating profit and net
earnings before the above mentioned special items were primarily
due to the impact of lower sales and decreased equity income,
partially offset by the impact of the Company's cost savings
initiatives and the implementation of the goodwill non-
amortization provision of FASB Statement No. 142.
Polymer Products
Polymer additives sales of $554.9 million declined 7% from the
prior year due to a 4% reduction in unit volume and a 3% decrease
in prices. Rubber additives sales were down 16% due mainly to
lower unit volume attributable to a generally weaker automotive
market and business lost as a result of a third quarter 2001
price increase. Urethane additives sales declined 13% due
primarily to stronger prior year economic conditions and the loss
of some low margin business on the basis of price. Plastic
additives sales were down 4% mainly as a result of lower prices.
Petroleum additives sales were up 1% due to increased demand in
certain markets, partially offset by lower prices. Operating
profit of $36 million was up 5% from the prior year as the
savings from lower product costs, including raw material and
energy, more than offset the impact of lower selling prices.
Polymers sales of $140 million were down 13% from the first six
months of 2001 as a result of a decline in unit volume of 8% and
a 5% decrease in prices. EPDM sales declined 19% as industry
overcapacity resulted in unit volume and prices that were below
prior year levels. Urethane polymer sales were down 5% due
mainly to stronger prior year economic conditions,
notwithstanding second quarter growth in the golf ball market.
Operating profit of $21.1 million was 17% less than the prior
year due primarily to the impact of lower unit volume and
depressed selling prices, partially offset by lower raw material
and energy costs and the elimination of last year's loss on the
divested nitrile joint venture.
Polymer processing equipment sales of $94.5 million were down 19%
from the prior year due to lower unit volume resulting from the
significant cutback in capital equipment spending. The operating
loss of $2.6 million was favorable compared to the prior year by
$0.6 million as cost savings, resulting mainly from a reduction
in workforce and plant consolidation more than offset the impact
of lower sales.
Specialty Products
OrganoSilicones sales of $232 million were up 5% from the first
six months of 2001 as a result of a 10% increase in unit volume
mainly attributable to greater European demand, particularly
sulfur silanes, partially offset by a 5% reduction in prices.
Despite higher sales, operating profit of $19.2 million was down
24% from the prior year mainly as a result of lower selling
prices and an unfavorable product mix.
Crop protection sales of $123 million were down 9% from the prior
year due to lower unit volume. Volume was adversely affected by
Canadian drought conditions, new competitor registrations, high
customer inventory levels, competitive pricing and poor crop
economics. Operating profit of $35.1 million declined 36% from
the first six months of 2001 due mainly to lower unit volume,
lower joint venture equity income of $5.3 million and a prior
year non-recurring pension gain of $4.7 million.
Other sales of $197.5 million were down 17% from the prior year
with 9% due to the divested colors business and the balance due
to lower unit volume. Refined products was down 5% due mainly to
lower unit volume. Sales for industrial specialties, which was
sold effective June 28, 2002, were down 15% due to lower unit
volume. Operating profit of $5.6 million declined 32% from the
prior year due mainly to the colors divestment and lower
industrial specialties sales, partially offset by reduced raw
material and energy costs.
Other
Selling, general and administrative expenses decreased 6% versus
the first six months of 2001. This decrease was primarily due to
lower sales activity, the Company's cost savings initiatives and
the 2001 divestiture of the industrial colors business.
Depreciation and amortization decreased 19% primarily due to the
implementation of the goodwill non-amortization provision of FASB
Statement No. 142 and reduced depreciation expense resulting from
the fourth quarter 2001 impairment charge related to the rubber
additives and trilene businesses. Research and development costs
increased 1%. Equity income decreased 45% primarily as a result
of lower earnings from the Company's Gustafson seed treatment
joint venture. Interest expense decreased 8% mainly due to the
decrease in the debt balance outstanding. The effective tax
rate, before special items, decreased to 24% from 36% in the
comparable period of 2001 primarily due to the impact of the
goodwill non-amortization provision of FASB Statement No. 142.
LIQUIDITY AND CAPITAL RESOURCES
The June 30, 2002 working capital balance of $170.6 million
increased $38.1 million from the year-end 2001 balance of $132.5
million, and the current ratio increased to 1.3 from 1.2. The
higher level of working capital was due primarily to the net
effect of increases in accounts receivable, other current assets
and accounts payable, and decreases in income taxes payable and
inventory. Days sales in receivables decreased to 28 days for
the first six months of 2002, versus 41 days for the first six
months of 2001, primarily due to improved collection efforts and
the impact of accounts receivable securitization programs.
Excluding the accounts receivable securitization programs, days
sales in receivables decreased to 62 days from 68 days in the
first six months of 2001. Inventory turnover increased to 4.0
from 3.6 for the same period of 2001 primarily as a result of the
Company's ongoing efforts to reduce its inventory investment.
Net cash provided by operations of $93.4 million decreased $1.9
million from the net cash provided by operations of $95.3 million
for the first six months of 2001. The decrease was primarily the
result of a larger increase in accounts receivable and less of an
increase in accounts payable as compared to 2001, partially
offset by a decrease in inventory and a $50 million federal
income tax refund resulting from a recent change in tax
legislation. The Company's debt to total book capital ratio
increased to 82% from 72% at year-end 2001. The increase is due
primarily to the decrease in stockholders' equity resulting
principally from the loss recorded as of June 30, 2002, partially
offset by a decrease in accumulated other comprehensive loss.
The Company's future liquidity needs are expected to be financed
from operations.
The Company has a 364-day senior unsecured revolving credit
facility of $125 million available through September 2002 and a
five-year senior unsecured credit facility of $400 million
available through October 2004. Borrowings on these facilities
are at various rate options to be determined on the date of
borrowing. Borrowings under these agreements amounted to $10
million at June 30, 2002 and carried an interest rate of 4%.
In addition, the Company has an accounts receivable
securitization program to sell up to $200 million of domestic
accounts receivable to agent banks. As of June 30, 2002, $157
million of domestic accounts receivable had been sold under these
programs. In addition, the Company's European subsidiaries have
two separate agreements to sell up to $120 million of accounts
receivable to agent banks. As of June 30, 2002, $120 million of
international accounts receivable had been sold under these
programs.
On June 28, 2002, the Company sold its industrial specialties
business (excluding retained accounts receivable and accounts
payable valued at approximately $10 million) for $95 million,
including cash proceeds of $80 million and a note receivable of
$15 million due February 2003. The sale resulted in a pre-tax
loss of $34.7 million. The proceeds from this transaction were
used to pay down debt.
The Company is continuing work on the divestiture of its refined
products business. The Company anticipates that the divestiture
will be completed in the coming months, with proceeds used to
pay down debt.
The Company is on schedule to relocate its corporate headquarters
from Greenwich to Middlebury, CT during the second half of 2002
and to sublease the Greenwich facility. The Company estimates
pre-tax charges of approximately $10 to $12 million relating to
the move (approximately 50% non-cash), and expects to have pre-
tax savings of $8 to $10 million per year.
Capital expenditures for the first six months of 2002 amounted to
$36 million as compared to $76.6 million during the same period
of 2001. The decrease is primarily due to a reduction in
spending and the completion in 2001 of OrganoSilicones facility
expansions in Sistersville, West Virginia and Termoli, Italy.
Capital expenditures are expected to approximate $100 million in
2002, primarily for the Company's replacement needs and
improvement of domestic and foreign facilities.
ACCOUNTING DEVELOPMENTS
Effective January 1, 2002, the Company adopted the provisions of
Financial Accounting Standards Board (FASB) Statement No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and
Other Intangible Assets." The Company implemented the
provisions of Statement No. 141 during the first quarter and
completed the implementation of Statement No. 142 during the
second quarter. For further details, see the Goodwill and
Intangible Assets footnote included in the Notes to Consolidated
Financial Statements (Unaudited) section of this Form 10Q.
In August 2001, the FASB issued Statement No. 143, "Accounting
for Asset Retirement Obligations." Statement No. 143 requires
companies to record a liability for asset retirement obligations
associated with the retirement of long-lived assets. Such
liabilities should be recorded at fair value in the period in
which a legal obligation is created. The provisions of Statement
No. 143 are effective for fiscal years beginning after June 15,
2002. The Company is in the process of reviewing the provisions
of Statement No. 143 and does not expect it to have a material
impact on its earnings and financial position.
Effective January 1, 2002, the Company adopted the provisions of
Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company reviewed the provisions of
Statement No. 144 and concluded that it is in compliance with the
provisions of this Statement and there is no implementation
impact.
ENVIRONMENTAL MATTERS
The Company is involved in claims, litigation, administrative
proceedings and investigations of various types in a number of
jurisdictions. A number of such matters involve claims for a
material amount of damages and relate to or allege environmental
liabilities, including clean-up costs associated with hazardous
waste disposal sites, natural resource damages, property damage
and personal injury. The Company and some of its subsidiaries
have been identified by federal, state or local governmental
agencies, and by other potentially responsible parties (each a
"PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or comparable
state statutes, as a PRP with respect to costs associated with
waste disposal sites at various locations in the United States.
In addition, the Company is involved with environmental
remediation and compliance activities at some of its current and
former sites in the United States and abroad.
The Company continually evaluates and reviews estimates for
future remediation and other costs to determine appropriate
environmental reserve amounts. For each site, a determination is
made of the specific measures that are believed to be required to
remediate the site, the estimated total cost to carry out the
remediation plan, the portion of the total remediation costs to
be borne by the Company and the anticipated time frame over which
payments toward the remediation plan will occur. As of June 30,
2002, the Company's reserves for environmental remediation
activities totaled $137.5 million. It is possible that the
Company's estimates for environmental remediation liabilities may
change in the future should additional sites be identified,
further remediation measures be required or undertaken, the
interpretation of current laws and regulations be modified or
additional environmental laws and regulations be enacted.
The Company intends to assert all meritorious legal defenses and
all other equitable factors which are available to it with
respect to the above matters. The Company believes that the
resolution of these environmental matters will not have a
material adverse effect on its consolidated financial position.
While the Company believes it is unlikely, the resolution of
these environmental matters could have a material adverse effect
on the Company's consolidated results of operations in any given
year if a significant number of these matters are resolved
unfavorably.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-Q are forward-looking
statements that involve risks and uncertainties, including, but
not limited to, general economic conditions, energy and raw
material prices and availability, production capacity, changes in
interest rates and foreign currency exchange rates, changes in
technology, market demand and customer requirements, expected
restructuring activities and cost reductions, the enactment of
more stringent environmental laws and regulations, and other
risks and uncertainties detailed in the Company's filings with
the Securities and Exchange Commission. These statements are
based on currently available information and the Company's actual
results may differ significantly from the results discussed.
Forward-looking information is intended to reflect opinions as of
the date this Form 10-Q was issued and such information will not
necessarily be updated by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Refer to the Market Risk & Risk Management Policies section of
Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Derivative Instruments and Hedging
Activities Note to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. Also refer to the Derivative Instruments and
Hedging Activities Note to Consolidated Financial Statements
(Unaudited) included in this Form 10-Q.
The fair market value of long-term debt is subject to interest
rate risk. The Company's long-term debt amounted to $1,256
million at June 30, 2002. The fair market value of such debt was
$1,247 million which has been determined primarily based on
quoted market prices.
There have been no other significant changes in market risk since
December 31, 2001.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
2.1 Purchase Agreement between Crompton Corporation
(and its affiliates named herein) and Akzo Nobel
Surface Chemistry L.L.C. (and its affiliates named
herein) dated as of June 28, 2002.
4.1 Third Amendment dated as of May 8, 2002, to the Five-
Year Credit Agreement dated as of October 28,
1999, by and among the Registrant, certain
subsidiaries of the Registrant, various banks,
J.P. Morgan Chase Bank (formally known as The
Chase Manhattan Bank), as Syndication Agent,
Citicorp USA, Inc. (as successor to Citibank,
N.A.), as Administrative Agent and Bank of
America, N.A. and Deutsche Bank Securities Inc.
(formerly known as Deutsche Banc Alex Brown Inc.),
as Co-Documentation Agents.
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
CROMPTON CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CROMPTON CORPORATION
(Registrant)
Date: August 13, 2002 /s/Peter Barna
Peter Barna
Senior Vice President and
Chief Financial Officer
Date: August 13, 2002 /s/Barry J. Shainman
Barry J. Shainman
Secretary