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 September 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 October 31, 2002
Common Stock - $.01 par value 113,778,367
CROMPTON CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Accompanying Notes
Condensed Consolidated Statements of Operations
(Unaudited) - Third quarter and nine
months ended 2002 and 2001 2
Condensed Consolidated Balance Sheets - September 30,
2002 (Unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Cash
Flows (Unaudited) - Nine months ended 2002 and 2001 4
Condensed Notes to Consolidated Financial
Statements (Unaudited) 5
Independent Accountants' Review Report 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure of Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements and Accompanying Notes
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Third quarter and nine months ended 2002 and 2001
(In thousands of dollars, except per share data)
Third quarter ended Nine months ended
2002 2001 2002 2001
Net sales $624,721 $651,921 $1,959,293 $2,113,889
Cost of products sold 418,592 454,608 1,352,014 1,472,197
Selling, general and
administrative 98,463 105,105 296,660 316,810
Depreciation and
amortization 36,198 46,887 112,222 140,604
Research and development 20,022 20,973 61,657 62,206
Facility closures,
severance and
related costs 7,450 95,936 16,733 95,936
Equity (income) loss 793 2,342 (3,468) (5,466)
Operating profit (loss) 43,203 (73,930) 123,475 31,602
Interest expense 25,201 27,277 77,431 83,762
Other expense, net (a) 2,810 1,692 38,657 4,389
Earnings (loss) before
income taxes and
cumulative effect
of accounting change 15,192 (102,899) 7,387 (56,549)
Income taxes (benefit) 2,604 (34,691) (5,662) (18,005)
Earnings (loss) before
cumulative effect of
accounting change 12,588 (68,208) 13,049 (38,544)
Cumulative effect of
accounting change - - (298,981) -
Net earnings (loss) $ 12,588 $(68,208) $ (285,932) $ (38,544)
Basic Earnings (Loss) Per Common Share:
Earnings (loss) before
cumulative effect of
accounting change $ .11 $ (.60) $ .11 $ (.34)
Cumulative effect of
accounting change - - (2.63) -
Net earnings (loss) $ .11 $ (.60) $ (2.52) $ (.34)
Diluted Earnings (Loss) Per Common Share:
Earnings (loss) before
cumulative effect of
accounting change $ .11 $ (.60) $ .11 $ (.34)
Cumulative effect of
accounting change - - (2.58) -
Net earnings (loss) $ .11 $ (.60) $ (2.47) $ (.34)
Dividends declared per
common share $ .05 $ .05 $ .15 $ .15
(a) The nine months ended 2002 include a loss of $34,705 from the
June 28, 2002 sale of the industrial specialties business.
See accompanying condensed notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001
(In thousands of dollars)
September 30, December 31,
2002 2001
ASSETS
CURRENT ASSETS
Cash $ 20,750 $ 21,506
Accounts receivable 171,578 188,133
Inventories 436,152 491,693
Other current assets 125,397 113,742
Total current assets 753,877 815,074
NON-CURRENT ASSETS
Property, plant and equipment 920,450 1,021,983
Cost in excess of acquired
net assets 584,514 897,404
Other assets 418,253 497,727
$ 2,677,094 $ 3,232,188
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 8,530 $ 29,791
Accounts payable 219,328 234,985
Accrued expenses 284,087 285,329
Income taxes payable 64,654 111,905
Other current liabilities 12,582 20,608
Total current liabilities 589,181 682,618
NON-CURRENT LIABILITIES
Long-term debt 1,254,810 1,392,833
Post-retirement health
care liability 195,413 199,583
Other liabilities 370,957 409,613
STOCKHOLDERS' EQUITY
Common stock 1,192 1,192
Additional paid-in capital 1,048,588 1,051,257
Accumulated deficit (583,291) (280,350)
Accumulated other
comprehensive loss (135,949) (151,839)
Treasury stock at cost (63,807) (72,719)
Total stockholders' equity 266,733 547,541
$ 2,677,094 $ 3,232,188
See accompanying condensed notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended 2002 and 2001
(In thousands of dollars)
Increase (decrease) in cash 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(285,932) $ (38,544)
Adjustments to reconcile net 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 16,733 103,071
Depreciation and amortization 112,222 140,604
Equity income (3,468) (5,466)
Changes in assets and liabilities, net:
Accounts receivable (4,178) 28,906
Inventories 36,430 7,564
Accounts payable (20,617) 37,011
Other (33,983) (163,882)
Net cash provided by operations 150,893 109,264
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of business 80,000 -
Capital expenditures (60,534) (101,328)
Other investing activities (1,039) 2,500
Net cash provided by (used in)
investing activities 18,427 (98,828)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term borrowings (144,530) (22,540)
Payments on short-term borrowings (22,837) (12,173)
Proceeds from sale of accounts
receivable 9,723 27,481
Dividends paid (17,009) (16,964)
Other financing activities 5,232 4,319
Net cash used in financing activities (169,421) (19,877)
CASH
Effects of exchange rate changes
on cash (655) (526)
Change in cash (756) (9,967)
Cash at beginning of period 21,506 20,777
Cash at end of period $ 20,750 $ 10,810
See accompanying condensed notes to consolidated financial statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The information in the foregoing consolidated financial
statements is unaudited, but reflects all 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 $19.4 million at September 30, 2002 and $16.9 million
at December 31, 2001.
Accumulated depreciation amounted to $824.5 million at September
30, 2002 and $707.7 million at December 31, 2001.
Certain financial information and footnote disclosures included
in the annual financial statements have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. 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. The
consolidated results of operations for the three months ended
September 30, 2002 are not necessarily indicative of the results
expected for the full year.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
The Company recorded pre-tax charges of $114 million in 2001 (of
which $7.1 million is included in cost of products sold as of
September 30, 2001) and $16.7 million during the first nine
months 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
2002 charge 11,318 1,808 3,607 16,733
Cash payments (11,243) - (4,854) (16,097)
Non-cash charges (1,199) (1,808) (18) (3,025)
Balance at
Sept. 30, 2002 $ 29,110 $ - $ 9,567 $ 38,677
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Financial
Accounting Standards Board 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) Third quarter ended 2001
Net Loss Per Share
Loss Basic Diluted
Net loss, as reported $(68,208) $(0.60) $(0.60)
Goodwill amortization expense 6,619 0.06 0.06
Adjusted net loss $(61,589) $(0.54) $(0.54)
Nine months ended 2001
Net Loss Per Share
Loss Basic Diluted
Net loss, as reported $(38,544) $(0.34) $(0.34)
Goodwill amortization expense 19,805 0.17 0.17
Adjusted net loss $(18,739) $(0.17) $(0.17)
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) September 30, 2002 December 31, 2001
Gross Accumulated Gross Accumulated
Cost Amortization Cost Amortization
Patents $139,632 $ (93,385) $132,923 $ (89,233)
Trademarks 87,032 (29,217) 94,136 (26,988)
Other 80,218 (48,078) 79,250 (44,646)
Total $306,882 $(170,680) $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
$3.3 million and $2.7 million for the third quarter of 2002 and
2001, respectively, and $9.5 million for each of the nine months
ended September 30, 2002 and 2001. Estimated amortization
expense for the next five fiscal years is as follows: $12.7
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 (the "Merger") 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.
During the third quarter, the Company reduced goodwill by $15.6
million for certain merger accruals no longer deemed necessary.
The adjustment was allocated to the former Witco business units
consistent with the original goodwill allocation (Polymer
Additives $8.5 million and OrganoSilicones $7.1 million).
Goodwill by reportable segment is as follows:
(In thousands) September 30, December 31,
2002 2001
Polymer Products
Polymer Additives $ 266,517 $ 425,011
Polymers 17,299 17,299
Polymer Processing Equipment 31,150 29,725
314,966 472,035
Specialty Products
OrganoSilicones 214,331 221,465
Crop Protection 55,217 54,922
Other - 148,982
269,548 425,369
Total $ 584,514 $ 897,404
The Company has elected to perform its annual goodwill impairment
procedures for all of its reporting units as of July 31. During
the third quarter, the Company updated its carrying value
calculations and fair value estimates for each of its reporting
units as of July 31, 2002. Based on the comparison of the
carrying values to the estimated fair values, the Company has
concluded that no additional goodwill impairment exists. The
Company will update its review as of July 31, 2003, or sooner, if
events or circumstances change that could reduce the fair value
of a reporting unit below its carrying value.
INVENTORIES
Components of inventories are as follows:
(In thousands) September 30, December 31,
2002 2001
Finished goods $ 332,608 $ 377,463
Work in process 20,337 22,110
Raw materials and supplies 83,207 92,120
$ 436,152 $ 491,693
COMMON STOCK
As of September 30, 2002, there were 119,152,254 common shares
issued and 113,754,992 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 loss per common share equals the basic loss per common
share calculation for the third quarter and nine months of 2001
since common stock equivalents of 1,983,774 and 2,728,590,
respectively, were antidilutive.
The following is a reconciliation of the shares used in the
computations:
(In thousands) Third quarter ended Nine months ended
2002 2001 2002 2001
Weighted average common
shares outstanding 113,692 113,141 113,494 113,075
Effect of dilutive stock
options and other
equivalents 2,417 - 2,461 -
Weighted average common
shares adjusted for
dilution 116,109 113,141 115,955 113,075
COMPREHENSIVE LOSS
An analysis of the Company's comprehensive loss follows:
(In thousands) Third quarter ended Nine months ended
2002 2001 2002 2001
Net earnings (loss) $ 12,588 $(68,208) $(285,932) $(38,544)
Other comprehensive
income (expense):
Foreign currency
translation
adjustments (17,549) 19,110 13,092 (18,937)
Change in fair value
of derivatives (2,777) (6,803) 2,692 (7,301)
Other 34 37 106 4
Comprehensive loss $ (7,704) $(55,864) $(270,042) $(64,778)
The components of accumulated other comprehensive loss at
September 30, 2002 and December 31, 2001 are as follows:
September 30, December 31,
(In thousands) 2002 2001
Foreign currency translation adjustments $ (92,779) $(105,871)
Minimum pension liability adjustment (39,403) (39,403)
Fair value of derivatives 147 (2,545)
Other (3,914) (4,020)
Accumulated other comprehensive loss $(135,949) $(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 $65 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 equity 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 expense variability associated with its
obligations under its long-term incentive plans. The option
contracts 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 February
14, 2003 and require net cash settlement. As of September 30,
2002, a liability of $19.5 million has been included in accrued
expenses to reflect the unrealized loss on these option contracts
based on the quarter-end closing price of the Company's common
stock.
The Company has designated a portion of the equity option
contracts as cash flow hedges of the risk associated with the
unvested, unpaid awards under its long-term incentive plans.
Changes in market value related to the portion of the option
contracts designated and effective as hedges have been recorded
as a component of AOCL, with any ineffective portion recognized
in earnings. The amount included in AOCL is subject to changes
in the stock price and is being amortized ratably to earnings
over the remaining service periods of the hedged long-term
incentive plans. Changes in market value related to the
remaining portion of the option contracts are recognized in
earnings.
During the first quarter of 2002, the Company entered into
Japanese Yen (JPY) forward contracts to hedge its exposure to
variability in 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 have been 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 in 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 and the amortization of (gains)/losses
related to certain cash flow hedges for the quarter and nine
month periods ended September 30, 2002 and 2001.
Third Quarter Ended Nine Months Ended
(In thousands) 2002 2001 2002 2001
Fair value hedges (a) $ 7 $ (37) $ 71 $ (580)
Cash flow hedges (b):
Interest rate swap
contracts $ (224) $ 700 $ (248) $ 1,198
JPY foreign currency
forward contracts (289) - 121 -
Equity option contracts-
change in market value 5,947 7,480 (2,793) 7,480
Equity option contracts-
amortization to
earnings (2,657) (1,377) 228 (1,377)
$ 2,777 $ 6,803 $(2,692) $ 7,301
(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.
ANTITRUST INVESTIGATION AND RELATED LITIGATION
The Company has been contacted by the Antitrust Division of the
United States Department of Justice, the European Commission
Competition Division, and the Competition Bureau of Industry Canada
concerning an investigation into possible collusive dealings
in the rubber chemicals industry. The Company and several of its
employees have been issued grand jury subpoenas in connection with
that investigation, which is still in its early stages. The Company
is cooperating fully with the authorities and is conducting its
own internal investigation.
Following the issuance of the Company's press release relating to
the investigation, the Company and two of its subsidiaries were
named as defendants in eight putative class action lawsuits
alleging violations of state laws that prohibit price fixing and
unfair trade practices. The plaintiffs in these actions generally
request unspecified compensatory damages, attorneys' fees and
costs. The Company believes it has meritorious defenses to the
civil actions and intends to defend them vigorously.
These matters could result in the Company's being subject to
monetary damages, fines, penalties and other sanctions and
expenses. However, because of the early stage of the
investigation, the related litigation and the Company's
internal investigation, the ultimate outcome of these matters
cannot presently be determined. Accordingly, no provision for
any liability that may result therefrom has been made in the
Company's condensed consolidated financial statements.
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 other 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) Third quarter ended Nine months ended
2002 2001 2002 2001
Net Sales
Polymer Products
Polymer Additives $ 285,030 $ 270,911 $ 839,941 $ 867,388
Polymers 67,197 68,923 207,152 229,621
Polymer Processing
Equipment 36,275 40,966 130,732 157,828
Eliminations (3,918) (4,113) (11,208) (10,787)
384,584 376,687 1,166,617 1,244,050
Specialty Products
OrganoSilicones 116,785 107,800 348,786 328,277
Crop Protection 66,656 64,922 189,666 200,558
Other 56,696 102,512 254,224 341,004
240,137 275,234 792,676 869,839
Total net sales $ 624,721 $ 651,921 $1,959,293 $2,113,889
Operating Profit (Loss)
Polymer Products
Polymer Additives $ 25,999 $ 14,445 $ 61,954 $ 48,818
Polymers 10,542 10,944 31,623 36,209
Polymer Processing
Equipment (6,384) (6,719) (9,004) (9,944)
30,157 18,670 84,573 75,083
Specialty Products
OrganoSilicones 18,635 13,736 37,821 38,866
Crop Protection 15,154 15,167 50,239 70,032
Other 1,798 746 7,409 8,994
35,587 29,649 95,469 117,892
General corporate expense,
including amortization (15,091) (19,178) (39,834) (58,302)
Total operating profit
before special items 50,653 29,141 140,208 134,673
Facility closures,
severance and
related costs (7,450) (103,071) (16,733) (103,071)
Total operating
profit (loss) $ 43,203 $ (73,930) $ 123,475 $ 31,602
Independent Accountants' Review Report
The Board of Directors and Stockholders
Crompton Corporation
We have reviewed the accompanying condensed consolidated balance
sheet of Crompton Corporation and subsidiaries (the Company) as
of September 30, 2002, and the related condensed consolidated
statements of operations for the three-month and nine-month
periods and cash flows for the nine-month period ended September
30, 2002 and 2001. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the
consolidated balance sheet of Crompton Corporation and
subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in
our report dated January 31, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2001, is fairly
stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/KPMG LLP
Stamford, Connecticut
October 22, 2002
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
THIRD QUARTER RESULTS
Overview
(In thousands) Third quarter ended
Adjusted
2002 2001 2001 (a)
Net sales $ 624,721 $ 651,921 $ 606,723
Cost of products sold 418,592 447,473 (b) 412,549
Selling, general & admin. 98,463 105,105 98,208
Depreciation & amortization 36,198 46,887 43,817
Research & development 20,022 20,973 19,423
Equity loss 793 2,342 1,273
Operating profit before
special items 50,653 29,141 31,453
Facility closures, severance
and related costs (7,450) (103,071)(b) (103,071)
Operating profit (loss) $ 43,203 $ (73,930) $ (71,618)
(a) Adjusted 2001 excludes the operating results of the industrial
specialties business (sold June 28, 2002) and the operating
results of the industrial colors and nitrile rubber businesses
(sold December 2001).
(b) Adjusted for facility closure costs of $7,135 included in cost
of products sold in the condensed consolidated statements of
operations.
Consolidated net sales of $624.7 million for the third quarter of
2002 decreased 4% from the comparable period in 2001. After
adjusting for divested businesses, net sales increased 3%
primarily as a result of an increase in unit volume of 4% and
favorable foreign currency translation of 2%, partially offset by
lower selling prices of 3%. International sales, including U.S.
exports, were 51% of total sales, up slightly from 50% for the
third quarter of 2001.
Gross margin as a percentage of sales was 33% for the third
quarter of 2002 as compared to 31.4% (excluding special items)
for the third quarter of 2001. After adjusting for divested
businesses, gross margin as a percentage of sales was 32% for the
third quarter of 2001. The increase of one percentage point was
primarily due to lower raw material and energy costs plus cost
savings, partially offset by reduced selling prices.
Consolidated operating profit of $43.2 million compared to a loss
of $73.9 million for the third quarter of 2001. After adjusting
for special items and divested businesses, consolidated operating
profit of $50.7 million increased 61% versus the adjusted third
quarter of 2001. Net earnings for the third quarter were $12.6
million, or $0.11 per common share, as compared to a net loss of
$68.2 million, or $0.60 per common share for the third quarter of
2001. After adjusting to exclude the facility closures,
severance and related costs ($4.6 million after-tax in 2002 and
$68.3 million after-tax in 2001), net earnings were $17.2
million, or $0.15 per common share in 2002 and $0.1 million, or
breakeven per common share in 2001. The increases in operating
profit as adjusted and net earnings before the above mentioned
special items were primarily due to the increase in gross profit
and the implementation of the goodwill non-amortization provision
of FASB Statement No. 142.
(In thousands) Third quarter ended
2001
As As
2002 Reported Adjusted (a)
Net Sales
Polymer Products
Polymer Additives $ 285,030 $ 270,911 $ 270,911
Polymers 67,197 68,923 68,923
Polymer Processing
Equipment 36,275 40,966 40,966
Eliminations (3,918) (4,113) (4,113)
384,584 376,687 376,687
Specialty Products
OrganoSilicones 116,785 107,800 107,800
Crop Protection 66,656 64,922 64,922
Other 56,696 102,512 57,314
240,137 275,234 230,036
Total net sales $ 624,721 $ 651,921 $ 606,723
Operating Profit (Loss)
Polymer Products
Polymer Additives $ 25,999 $ 14,445 $ 14,445
Polymers 10,542 10,944 12,357
Polymer Processing
Equipment (6,384) (6,719) (6,719)
30,157 18,670 20,083
Specialty Products
OrganoSilicones 18,635 13,736 13,736
Crop Protection 15,154 15,167 15,167
Other 1,798 746 1,645
35,587 29,649 30,548
General corporate expense,
including amortization (15,091) (19,178) (19,178)
Total operating profit
before special items 50,653 29,141 31,453
Facility closures, severance
and related costs (7,450) (103,071)(b) (103,071)
Total operating
profit (loss) $ 43,203 $ (73,930) $ (71,618)
(a) Adjusted 2001 excludes the operating results of the industrial
specialties business (sold June 28, 2002) and the operating
results of the industrial colors and nitrile rubber businesses
(sold December 2001).
(b) Includes facility closure costs of $7,135 included in cost of
products sold in the condensed consolidated statements of
operations.
Polymer Products
Polymer additives sales of $285.0 million were up 5% from the
prior year due to an increase in unit volume of 7% and favorable
foreign currency translation of 2%, partially offset by a decline
in selling prices of 4%. Plastic and petroleum additives sales
rose 5% and 2%, respectively, due primarily to increased demand
in certain key markets. Urethane additives sales were down 3%
due primarily to the loss of some low margin business. Rubber
additives sales rose 15% as lost market share was partially
regained, although at substantially lower prices. Operating
profit of $26.0 million was up 80% from the prior year due mainly
to higher unit volume and reduced product costs, partially offset
by lower selling prices.
Polymers sales of $67.2 million were down 3% from the prior year
as lower selling prices of 5% were partially offset by favorable
foreign currency translation of 2%. EPDM sales declined 12% due
mainly to lower prices and reduced automotive market volume.
Urethane polymers sales were up 8% due primarily to increased
demand from domestic and European markets. Operating profit of
$10.5 million was down 4% from the prior year. However, after
adjusting prior year results to exclude the divested nitrile
rubber business, operating profit was down 15% mainly as a result
of lower EPDM selling prices and unit volume, partially offset by
lower raw material and energy costs.
Polymer processing equipment sales of $36.3 million were down 11%
from the prior year as depressed demand for capital equipment
resulted in a 13% unit volume decline, partially offset by
favorable foreign currency translation of 2%. The operating loss
of $6.4 million was favorable by 5% compared to the prior year as
significant cost reductions more than offset the impact of lower
sales and a $2.0 million warranty claim settlement. The backlog
at the end of September of $74 million increased $9 million from
the end of June, but was down $9 million from the end of 2001.
Specialty Products
OrganoSilicones sales of $116.8 million were up 8% from the prior
year as a 9% increase in unit volume (primarily international)
and favorable foreign currency translation of 4% were partially
offset by a decline in selling prices of 5%. Operating profit of
$18.6 million was up 36% from the prior year due primarily to
higher unit volume and reduced product costs, partially offset by
lower selling prices.
Crop protection sales of $66.7 million were up 3% from the prior
year mainly as a result of favorable foreign currency
translation. Operating profit of $15.2 million was essentially
unchanged from the prior year.
Other sales of $56.7 million were down 45% from the prior year,
of which 44% was attributable to the divestiture of the
industrial colors and industrial specialties businesses.
Operating profit of $1.8 million increased $1.1 million due
primarily to the absence of a prior year operating loss of $0.9
million related to the divested businesses.
Other
Selling, general and administrative expenses decreased 6% versus
the third quarter of 2001. This decrease was primarily due to
the divestitures of the industrial specialties and the industrial
colors businesses. Depreciation and amortization decreased 23%
primarily due to the implementation of the goodwill non-
amortization provision of FASB Statement No. 142, reduced
depreciation expense resulting from the fourth quarter 2001
impairment charge and from the divestitures of the industrial
specialties and industrial colors businesses. Research and
development costs decreased 5% due primarily to the divestitures
of the industrial specialties and industrial colors businesses.
Interest expense decreased 8% due mainly to the decrease in
outstanding debt. 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
(In thousands) Nine months ended
Adjusted
2002 2001 2001 (a)
Net sales $ 1,959,293 $ 2,113,889 $ 2,048,184
Cost of products sold 1,352,014 1,465,062 (b) 1,417,219
Selling, general & admin. 296,660 316,810 305,581
Depreciation & amortization 112,222 140,604 136,280
Research & development 61,657 62,206 60,432
Equity income (3,468) (5,466) (8,437)
Operating profit before
special items 140,208 134,673 137,109
Facility closures, severance
and related costs (16,733) (103,071)(b) (103,071)
Operating profit $ 123,475 $ 31,602 $ 34,038
(a) Adjusted 2001 excludes the third quarter operating results of
the industrial specialties business (sold June 28, 2002) and nine
months of operating results of the industrial colors and nitrile
rubber businesses (sold December 2001).
(b) Adjusted for facility closure costs of $7,135 included in cost
of products sold in the condensed consolidated statements of
operations.
Consolidated net sales of $1.96 billion for the first nine months
of 2002 decreased 7% from the comparable period in 2001. After
adjusting for divested businesses, net sales decreased 4% due
primarily to lower selling prices of 3% and a decline in unit
volume of 2%, partially offset by favorable foreign currency
translation of 1%. International sales, including U.S. exports,
were 49% of total sales, unchanged from the first nine months of
2001.
Gross margin as a percentage of sales was 31% for the first nine
months of 2002 as compared to 30.7% (excluding special items) for
the first nine months of 2001. After adjusting for the divested
businesses, gross margin as a percentage of sales was 30.8% for
the first nine months of 2001. The increase was due primarily to
lower raw material and energy costs and cost savings, partially
offset by reduced selling prices.
Consolidated operating profit of $123.5 million compared to $31.6
million for the first nine months of 2001. After adjusting for
special items and divested businesses, consolidated operating
profit of $140.2 million increased 2% versus the first nine
months of 2001. The net loss for the first nine months of $285.9
million, or $2.47 per diluted common share, compared to a net
loss of $38.5 million, or $0.34 per common share, for the first
nine months of 2001. After adjusting to exclude the facility
closures, severance and related costs ($10.5 million after-tax in
2002 and $68.3 million after-tax in 2001), 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 $44.7 million, or $0.39 per common share, in
2002 and $29.8 million, or $0.26 per common share, in 2001. The
significant increase in net earnings before the above mentioned
special items was primarily due to the impact of the Company's
cost savings initiatives and the implementation of the goodwill
non-amortization provision of FASB Statement No. 142, partially
offset by the impact of lower unit volume. Lower raw material
and energy costs essentially offset the impact of lower selling
prices.
(In thousands ) Nine months ended
2001
As As
2002 Reported Adjusted (a)
Net Sales
Polymer Products
Polymer Additives $ 839,941 $ 867,388 $ 867,388
Polymers 207,152 229,621 229,621
Polymer Processing
Equipment 130,732 157,828 157,828
Eliminations (11,208) (10,787) (10,787)
1,166,617 1,244,050 1,244,050
Specialty Products
OrganoSilicones 348,786 328,277 328,277
Crop Protection 189,666 200,558 200,558
Other 254,224 341,004 275,299
792,676 869,839 804,134
Total net sales $ 1,959,293 $ 2,113,889 $ 2,048,184
Operating Profit (Loss)
Polymer Products
Polymer Additives $ 61,954 $ 48,818 $ 48,818
Polymers 31,623 36,209 39,852
Polymer Processing
Equipment (9,004) (9,944) (9,944)
84,573 75,083 78,726
Specialty Products
OrganoSilicones 37,821 38,866 38,866
Crop Protection 50,239 70,032 70,032
Other 7,409 8,994 7,787
95,469 117,892 116,685
General corporate expense,
including amortization (39,834) (58,302) (58,302)
Total operating profit
before special items 140,208 134,673 137,109
Facility closures, severance
and related costs (16,733) (103,071)(b) (103,071)
Total operating profit $ 123,475 $ 31,602 $ 34,038
(a) Adjusted 2001 excludes the third quarter operating results of
the industrial specialties business (sold June 28, 2002) and nine
months of operating results of the industrial colors and nitrile
rubber businesses (sold December 2001).
(b) Includes facility closure costs of $7,135 included in cost of
products sold in the condensed consolidated statements of
operations.
Polymer Products
Polymer additives sales of $839.9 million were down 3% from the
prior year due primarily to a decline in selling prices of 3% and
a decrease in unit volume of 1%, partially offset by favorable
foreign currency translation of 1%. Urethane additives sales
declined 10% due primarily to the loss of some low margin
business and weakness in the fiberglass market. Rubber additives
sales were down 8% due mainly to lower selling prices. Plastic
additives sales declined 1% mainly as a result of lower prices.
Petroleum additives sales were up 1% due primarily to increased
demand, partially offset by reduced selling prices. Operating
profit of $62.0 million rose 27% from the prior year due
primarily to reduced product costs, including raw material and
energy, partially offset by lower selling prices.
Polymers sales of $207.2 million were down 10% from the prior
year due equally to lower prices and reduced unit volume. EPDM
sales declined 17% due primarily to lower unit volume and lower
selling prices resulting from industry overcapacity. Urethane
polymers sales were down 1% due primarily to lower prices.
Operating profit of $31.6 million was down 13% from the first
nine months of 2001. After adjusting 2001 for the divested
nitrile rubber business, operating profit declined 21% due mainly
to lower selling prices and reduced unit volumes, partially
offset by lower product costs, including raw materials and
energy.
Polymer processing equipment sales of $130.7 million declined 17%
from the prior year as spending for capital equipment remains at
depressed levels. The operating loss of $9.0 million was
favorable versus the prior year by 9%, as cost reductions and the
benefit of plant consolidations exceeded the impact of lower
sales.
Specialty Products
OrganoSilicones sales of $348.8 million were up 6% over the first
nine months of 2001 as an increase in unit volume of 10% and
favorable foreign currency translation of 1%, was partially
offset by a 5% decline in prices. The growth in unit volume was
mainly associated with increased demand in Europe, particularly
for sulfur silanes, and higher sales in Asia Pacific. Despite
higher sales, operating profit of $37.8 million was down 3% from
the prior year due primarily to lower selling prices and an
unfavorable product mix, partially offset by the impact of
increased unit volume and lower product costs.
Crop protection sales of $189.7 million were 5% lower than the
prior year as a decline in unit volume of 6% was partially offset
by favorable foreign currency translation of 1%. The decline in
unit volume was primarily international. Operating profit of
$50.2 million was down 28% from the prior year mainly as a result
of reduced unit volume, an unfavorable product mix, lower joint
venture equity income of $4.8 million and a non-recurring prior
year pension gain of $4.7 million.
Other sales of $254.2 million declined 25% from the prior year.
After adjusting 2001 to exclude the impact of the divested
industrial specialties and industrial colors businesses, sales
were down 8%. Of this decline, 5% related to a decline in
industrial specialties sales prior to the divestiture at the end
of June. The remaining 3% related to lower unit volume in
refined products. Operating profit of $7.4 million was 18% lower
than the prior year. On an adjusted basis, operating profit was
down 5% due mainly to lower industrial specialties earnings
realized prior to the divestiture.
Other
Selling, general and administrative expenses decreased 6% versus
the first nine months of 2001. This decrease was primarily due
to the Company's cost savings initiatives and the divestitures of
the industrial specialties and the industrial colors businesses.
Depreciation and amortization decreased 20% primarily due to the
implementation of the goodwill non-amortization provision of FASB
Statement No. 142, reduced depreciation expense resulting from
the fourth quarter 2001 impairment charge and from the
divestitures of the industrial specialties and industrial colors
businesses. Research and development costs decreased slightly
due to the impact of the divested businesses exceeding the
increase in new product development. Equity income decreased
37%, primarily as a result of lower earnings from the Company's
Gustafson seed treatment joint venture, partially offset by the
elimination of the 2001 equity loss on the Company's nitrile
rubber joint venture (sold in December 2001). Interest expense
decreased 8% due mainly to the decrease in outstanding debt. 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 September 30, 2002 working capital balance of $164.7 million
increased $32.2 million from the year-end 2001 balance of $132.5
million, and the current ratio increased to 1.3 from 1.2. The
increases in working capital and the current ratio were primarily
due to an increase in other current assets and decreases in notes
payable, accounts payable and income taxes payable, partially
offset by decreases in accounts receivable and inventory. Days
sales in receivables decreased to 27 days for the first nine
months of 2002, versus 40 days for the first nine 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 63 days from 69 days for the first nine
months of 2001. Inventory turnover increased to 3.9 from 3.5 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 $150.9 million increased $41.6
million from $109.3 million for the first nine months of 2001.
The increase was primarily the result of a larger decrease in
inventory as compared to 2001 and a $50 million federal income
tax refund resulting from a recent change in tax legislation,
partially offset by a decrease in accounts payable and an
increase in accounts receivable. The Company's debt to total
book capital ratio increased to 83% from 72% at year-end 2001.
The increase is due to the decrease in stockholders' equity
resulting principally from the cumulative effect of accounting
change of $299 million related to the implementation of FASB
Statement No. 142 recorded as of January 1, 2002. The Company's
future liquidity needs are expected to be financed from
operations.
The Company has a five-year senior unsecured credit facility of
$400 million available through October 2004. Borrowings on this
facility are at various rate options to be determined on the date
of borrowing. Borrowings under this agreement amounted to $10
million at September 30, 2002 and carried an interest rate of 4%.
The Company had a 364-day senior unsecured revolving credit
facility of $125 million which expired in September 2002. The
Company did not renew this facility due to the availability under
its five-year facility.
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 September 30, 2002, $142 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 $122 million of accounts receivable to
agent banks. As of September 30, 2002, $105 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. Proceeds will be used to pay down debt.
The Company is on schedule to relocate its corporate headquarters
from Greenwich to Middlebury, CT by the end of 2002 and to
sublease the Greenwich facility. The Company estimates pre-tax
charges of approximately $10 to $12 million relating to the move
and expects to have pre-tax savings of $8 to $10 million per
year, which will begin to be realized in 2003.
Capital expenditures for the first nine months of 2002 amounted
to $60.5 million as compared to $101.3 million during the same
period of 2001. The decrease is primarily due to a reduction in
spending and the completion in 2001 of facility expansions for
OrganoSilicones 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.
As discussed in the condensed notes to the consolidated financial
statements, the Company has been contacted by U.S., Canadian and
European Union authorities concerning an investigation into possible
collusive dealings in the rubber chemicals industry. In addition,
related putative civil class actions have recently been filed. The
Company is cooperating fully with the authorities and is conducting
its own internal investigation. These matters could result in the
Company's being subject to monetary damages, fines, penalties and other
sanctions and expenses. However, because of the early stage of the
investigation, the related litigation and the Company's internal
investigation, the ultimate outcome of these matters cannot presently
be determined. The Company cannot predict at this stage whether an
adverse outcome of these matters would have a material adverse effect
on its results of operations.
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 Condensed 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.
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.
In June 2002, the FASB issued Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." Statement
No. 146 requires companies to record exit or disposal costs when
they are incurred and to initially measure these costs at fair
value. Statement No. 146 also requires that recorded liabilities
be adjusted in future periods to reflect changes in timing or
estimated cash flows. The purpose of this Statement is to spread
out the reporting of expenses related to exit and disposal
activities over the period in which they are incurred. The
provisions of Statement No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. The
Company is currently in compliance with existing accounting
requirements and will adopt the provisions of Statement No. 146
effective January 1, 2003.
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 September
30, 2002, the Company's reserves for environmental remediation
activities totaled $132 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 $1,255
million at September 30, 2002. The fair market value of such
debt as of September 30,2002 was $1,205 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.
ITEM 4. Controls and Procedures
(a) Within 90 days of the filing date of this quarterly report, an
evaluation was performed under the supervision and with the
participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's
controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
design and operation of the Company's controls and procedures are
effective.
(b) There have been no significant changes in the Company's
controls or in other factors that could significantly affect
these controls subsequent to the evaluation date.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company has been contacted by the Antitrust Division of the
United States Department of Justice, the European Commission
Competition Division, and the Competition Bureau of Industry Canada
concerning an investigation into possible collusive dealings in the
rubber chemicals industry. The Company and several of its employees
have been issued grand jury subpoenas in connection with that
investigation, which is still in its early stages. The Company is
cooperating fully with the authorities and is conducting its own
internal investigation.
The Company, Flexsys, N.V., Bayer A.G. and several of their
respective subsidiaries have been named as defendants in
eight civil actions in seven jurisdictions, in each case on
behalf of a putative class of purchasers of tires that were
manufactured using rubber chemicals sold by the defendants.
The complaints generally allege that the defendants violated
state antitrust or related statutes by agreeing to fix prices
of rubber chemicals, and seek actual or treble damages in an
unspecified amount, attorneys' fees and costs. The Company
believes it has meritorious defenses to the civil actions and
intends to defend them vigorously.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.1 Form of Employment Agreement dated as of
July 29, 2002, by and between the Registrant
and various of its executive officers
(filed herewith).
10.2 Amendment dated as of October 22, 2002, to
the Crompton Corporation Benefit Equalization
Plan (filed herewith).
(b) A report on Form 8-K was filed on October 8, 2002,
reporting on item 5 (Other Events and Regulation FD
Disclosure) and item 7 (Financial Statements and
Exhibits).
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: November 12, 2002 /s/Michael F. Vagnini
Michael F. Vagnini
Vice President and Controller
(Principal Accounting Officer)
Date: November 12, 2002 /s/Barry J. Shainman
Barry J. Shainman
Secretary
CROMPTON CORPORATION
Certifications
I, Peter Barna, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crompton
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/Peter Barna
Peter Barna
Senior Vice President and
Chief Financial Officer
CROMPTON CORPORATION
Certifications
I, Vincent A. Calarco certify that:
1. I have reviewed this quarterly report on Form 10-Q of Crompton
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/Vincent A. Calarco
Vincent A. Calarco
President and
Chief Executive Officer