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 March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 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.)
199 Benson Road, Middlebury, Connecticut 06749
(Address of principal executive offices) (Zip Code)
(203) 573-2000
(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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES X NO
The number of shares of common stock outstanding as of the latest
practicable date, is as follows:
Class Outstanding at April 30, 2003
Common Stock - $.01 par value 114,362,788
CROMPTON CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Accompanying Notes
Condensed Consolidated Statements of Operations
(Unaudited) - First quarter ended 2003 and 2002 2
Condensed Consolidated Balance Sheets - March 31,
2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Cash
Flows (Unaudited) - First quarter ended 2003
and 2002 4
Condensed Notes to Consolidated Financial
Statements (Unaudited) 5
Independent Accountants' Review Report 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Certifications 32
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements and Accompanying Notes
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
First quarter ended 2003 and 2002
(In thousands of dollars, except per share data)
2003 2002
Net sales $ 649,751 $ 644,838
Cost of products sold 459,188 458,863
Selling, general and
administrative 98,928 97,209
Depreciation and amortization 36,408 38,079
Research and development 18,438 20,218
Equity income (5,614) (2,264)
Facility closures, severance and
related costs 849 -
Antitrust investigation costs 8,489 -
Operating profit 33,065 32,733
Interest expense 26,715 26,138
Other income, net (902) (2,293)
Earnings before income
taxes and cumulative effect
of accounting change 7,252 8,888
Income taxes 1,005 2,133
Earnings before cumulative
effect of accounting change 6,247 6,755
Cumulative effect of accounting
change (401) (298,981)
Net earnings (loss) $ 5,846 $(292,226)
Basic earnings (loss) per common share:
Earnings before cumulative
effect of accounting change $ .05 $ 0.06
Cumulative effect of
accounting change - (2.63)
Net earnings (loss) $ .05 $ (2.57)
Diluted earnings (loss) per common share:
Earnings before cumulative
effect of accounting change $ .05 $ 0.06
Cumulative effect of
accounting change - (2.58)
Net earnings (loss) $ .05 $ (2.52)
Dividends declared per
common share $ .05 $ .05
See accompanying condensed notes to consolidated financial
statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002
(In thousands of dollars)
March 31, December 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash $ 25,441 $ 16,941
Accounts receivable 213,670 185,983
Inventories 477,547 460,116
Other current assets 94,204 114,094
Total current assets 810,862 777,134
NON-CURRENT ASSETS
Property, plant and equipment 936,141 942,516
Cost in excess of acquired net assets 585,170 584,633
Other assets 542,097 536,532
$ 2,874,270 $ 2,840,815
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 6,537 $ 5,727
Accounts payable 321,743 276,133
Accrued expenses 230,928 267,849
Income taxes payable 123,057 116,111
Other current liabilities 16,966 15,670
Total current liabilities 699,231 681,490
NON-CURRENT LIABILITIES
Long-term debt 1,239,165 1,261,847
Post-retirement health care liability 193,128 193,996
Other liabilities 505,230 503,599
STOCKHOLDERS' EQUITY
Common stock 1,192 1,192
Additional paid-in capital 1,045,393 1,048,304
Accumulated deficit (586,424) (586,555)
Accumulated other comprehensive loss (165,736) (200,426)
Treasury stock at cost (56,909) (62,632)
Total stockholders' equity 237,516 199,883
$ 2,874,270 $ 2,840,815
See accompanying condensed notes to consolidated financial
statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
First quarter ended 2003 and 2002
(In thousands of dollars)
Increase(decrease) in cash 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 5,846 $(292,226)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operations:
Cumulative effect of accounting change,
net of tax 401 298,981
Facility closures, severance and
related costs 849 -
Antitrust investigation costs 8,489 -
Depreciation and amortization 36,408 38,079
Equity income (5,614) (2,264)
Changes in assets and liabilities, net:
Accounts receivable (23,259) (55,348)
Inventories (5,864) 29,696
Accounts payable 41,969 25,950
Other (14,859) (52,735)
Net cash provided by (used in) operations 44,366 (9,867)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14,639) (16,836)
Other investing activities (98) 323
Net cash used in investing activities (14,737) (16,513)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) proceeds on long-term borrowings (25,260) 19,651
Proceeds (payments) on short-term borrowings 431 (14,469)
Proceeds from sale of accounts receivable 8,126 14,111
Dividends paid (5,715) (5,666)
Other financing activities 880 1,628
Net cash (used in) provided by financing
activities (21,538) 15,255
CASH
Effects of exchange rate changes on cash 409 (554)
Change in cash 8,500 (11,679)
Cash at beginning of period 16,941 21,506
Cash at end of period $ 25,441 $ 9,827
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 $17.0 million at March 31, 2003 and $15.9 million at
December 31, 2002.
Accumulated depreciation amounted to $873.3 million at March 31,
2003 and $833.7 million at December 31, 2002.
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 2002 Annual Report on Form 10-K. The
consolidated results of operations for the three months ended
March 31, 2003 are not necessarily indicative of the results
expected for the full year.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
As a result of the cost reduction initiative announced in July
2001 and the relocation of the Company's corporate headquarters
from Greenwich, CT to Middlebury, CT, the Company recorded pre-
tax charges of $114 million and $22.7 million in 2001 and 2002,
respectively, for facility closures, severance and related costs.
In 2003, the Company recorded an additional pre-tax charge of
$0.8 million for facility closures, severance and related costs
primarily for continuing costs associated with the cost reduction
initiative and the relocation of its corporate headquarters.
Effective January 1, 2003, the Company implemented the provisions
of FASB Statement No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," to account for the facility
closures, severance and related costs recorded in 2003. These
charges are 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 11,467 4,918 6,332 22,717
Cash payments (16,480) - (6,285) (22,765)
Non-cash charges (988) (4,918) 459 (5,447)
Balance at
December 31, 2002 24,233 - 11,338 35,571
2003 charge 573 - 276 849
Cash payments (5,690) - (4,620) (10,310)
Non-cash charges (1,110) - (44) (1,154)
Balance at
March 31, 2003 $ 18,006 $ - $ 6,950 $ 24,956
In addition, the Company recorded a pre-tax charge of $0.6
million during the fourth quarter 2002 for additional facility
closure and maintenance costs related to the December 2000
closure of its manufacturing facility in Freeport, Grand Bahama
Island. At March 31, 2003, a reserve of $0.5 million was
remaining.
INVENTORIES
Components of inventories are as follows:
(Unaudited)
(In thousands) March 31, December 31,
2003 2002
Finished goods $ 362,423 $ 354,851
Work in process 21,661 21,839
Raw materials and supplies 93,463 83,426
$ 477,547 $ 460,116
GOODWILL AND INTANGIBLE ASSETS
The Company's intangible assets (excluding goodwill) are included
in "other assets" on the balance sheet and comprise the
following:
(Unaudited)
(In thousands) March 31, 2003 December 31, 2002
Gross Accumulated Gross Accumulated
Cost Amortization Cost Amortization
Patents $143,489 $ (94,377) $142,658 $ (94,597)
Trademarks 87,170 (31,073) 87,027 (30,141)
Other 82,180 (49,594) 82,721 (49,368)
Total $312,839 $(175,044) $312,406 $(174,106)
Amortization expense related to intangible assets amounted to
$3.4 million and $3.1 million for the three months ended March
31, 2003 and 2002, respectively. Estimated amortization expense
as of March 31, 2003 for the next five fiscal years is as
follows: $13.4 million (2003), $13.6 million (2004), $13.0
million (2005), $13.1 million (2006) and $13.3 million (2007).
Goodwill by reportable segment is as follows:
(Unaudited)
(In thousands) March 31, December 31,
2003 2002
Polymer Products
Polymer Additives $ 266,100 $ 266,105
Polymers 17,299 17,299
Polymer Processing Equipment 32,317 31,870
315,716 315,274
Specialty Products
OrganoSilicones 213,980 213,980
Crop Protection 55,474 55,379
269,454 269,359
Total $ 585,170 $ 584,633
In accordance with FASB Statement No. 142, "Goodwill and Other
Intangible Assets," the Company has elected to perform its annual
goodwill impairment procedures for all of its reporting units as
of July 31 of each year, or sooner, if events or circumstances
change that could reduce the fair value of a reporting unit below
its carrying value.
COMMON STOCK
As of March 31, 2003, there were 119,152,254 common shares issued
and 114,338,492 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 following is a reconciliation of the shares used in the
computations:
(In thousands) First quarter ended
2003 2002
Weighted average common shares
outstanding 114,146 113,274
Effect of dilutive stock options and
other equivalents 185 2,527
Weighted average common shares
adjusted for dilution 114,331 115,801
COMPREHENSIVE INCOME (LOSS)
An analysis of the Company's comprehensive income (loss) follows:
(In thousands) First quarter ended
2003 2002
Net earnings (loss) $ 5,846 $(292,226)
Other comprehensive income (expense):
Foreign currency translation
adjustments 35,391 (9,670)
Change in fair value of derivatives (801) 6,983
Other 100 79
Comprehensive income (loss) $ 40,536 $(294,834)
The components of accumulated other comprehensive loss at March
31, 2003 and December 31, 2002 are as follows:
(Unaudited)
March 31, December 31,
(In thousands) 2003 2002
Foreign currency translation
adjustments $ (40,442) $ (75,833)
Minimum pension liability
adjustment (117,866) (117,866)
Other (7,428) (6,727)
Accumulated other
comprehensive loss $(165,736) $(200,426)
STOCK-BASED COMPENSATION
As permitted under FASB Statements No. 123, "Accounting for Stock-
Based Compensation" and No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the Company elected to
continue its historical method of accounting for stock-based
compensation in accordance with APB 25, "Accounting for Stock
Issued to Employees." Under APB 25, compensation expense for
fixed plans is recognized based on the difference between the
exercise price and the stock price on the date of grant. Since
the Company's fixed plan awards have been granted with an
exercise price equal to the stock price on the date of grant, no
compensation expense has been recognized in the statement of
operations for these awards. However, compensation expense has
been recognized for the restricted awards under the Company's
long-term incentive programs in accordance with the provisions of
APB 25, which would be unchanged under FASB Statements No. 123
and No. 148. The following table illustrates the effect on net
earnings (loss) and earnings (loss) per share if the Company had
applied the fair value recognition provisions of Statements No.
123 and No. 148 to all stock-based employee compensation awards.
First quarter ended
(In thousands, except per share data) 2003 2002
Net earnings (loss), as reported $ 5,846 $(292,226)
Add: Stock-based employee
compensation expense included in
net earnings (loss), net of tax 554 1,468
Deduct: Total stock-based employee
compensation determined under fair
value based accounting method for
all awards, net of tax (2,067) (3,759)
Pro forma net earnings (loss) $ 4,333 $(294,517)
Earnings (loss) per share:
Basic - as reported $ 0.05 $ (2.57)
Basic - pro forma $ 0.04 $ (2.60)
Diluted - as reported $ 0.05 $ (2.52)
Diluted - pro forma $ 0.04 $ (2.56)
ASSET RETIREMENT OBLIGATIONS
In June 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
in the period in which a legal obligation is created. Such
liabilities are recorded at fair value, with an offsetting
increase to the carrying value of the related long-lived assets.
In future periods, the liability is accreted to its present value
and the capitalized cost is depreciated over the useful life of
the related asset. Companies are also required to adjust the
liability for changes resulting from the passage of time and/or
revisions to the timing or the amount of the original estimate.
Upon retirement of the long-lived asset, the Company either
settles the obligation for its recorded amount or incurs a gain
or loss. The provisions of Statement No. 143 are effective for
fiscal years beginning after June 15, 2002. Effective January 1,
2003, the Company adopted the provisions of Statement No. 143.
As a result of the implementation of this Statement, the Company
recorded an after-tax charge of $0.4 million ($0.7 million pre-
tax) as a cumulative effect of accounting change. The
depreciation and accretion expenses recorded for the three months
ended March 31, 2003 were not significant.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's activities expose its earnings, cash flows and
financial position to a variety of market risks, including the
effects of changes in foreign currency exchange rates and
interest rates. The Company maintains a foreign currency risk-
management strategy that uses derivative instruments as needed to
mitigate risk against foreign currency movements and to manage
interest rate volatility. In accordance with 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
Company recognizes in earnings changes in the fair value of all
derivatives designated as fair value hedging instruments that are
highly effective, and recognizes in accumulated other
comprehensive loss (AOCL) changes in the fair value of all
derivatives designated as cash flow hedging instruments that are
highly effective. The Company does not enter into derivative
instruments for trading or speculative purposes.
The Company uses interest rate swap contracts, which expire in
2003, as cash flow hedges to convert its $59.4 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.
The Company also has an equity option contract covering 3.2
million shares of the Company's common stock to hedge the expense
variability associated with its obligations under its long-term
incentive plans. In February 2003, the Company settled its
existing equity option contracts for $35.1 million, of which
$33.8 million had been included in accrued expenses at December
31, 2002, and entered into a new equity option contract. The new
contract consists of a sold put option contract with a strike
price of $5.66 and a purchased call option contract with a strike
price of $5.75. The contract has an expiration date of May 11,
2003 and requires net cash settlement. As of March 31, 2003, a
liability of $5.2 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. The amount included in AOCL ($3 million
and $2 million at March 31, 2003 and December 31, 2002,
respectively) is subject to changes in the stock price and is
being amortized ratably to selling, general and administrative
expense (SG&A) 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
SG&A. Based on the March 31, 2003 closing price of the Company's
common stock, the anticipated amortization from AOCL to SG&A for
the next 12 months will be approximately $1.7 million.
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 ended March
31, 2003 and 2002.
First Quarter Ended
(In thousands) 2003 2002
Fair value hedges (in other income, net) $ (77) $ 54
Cash flow hedges (in AOCL):
Balance at beginning of period $ 2,838 $ 2,546
Interest rate swap contracts (224) (462)
Japanese yen forward contracts - (379)
Equity option contracts-change
in market value 2,323 (8,032)
Equity option contracts-
amortization to SG&A (1,298) 1,890
Balance at end of period $ 3,639 $(4,437)
ANTITRUST INVESTIGATION AND RELATED MATTERS
Antitrust Investigations
The Company and certain of its subsidiaries, together with other
domestic and foreign companies, continue to be the subject of
coordinated criminal investigations being conducted by the United
States Department of Justice (the "DOJ") and the Canadian
Competition Bureau (the "CCB") and a coordinated civil
investigation being conducted by the European Commission
(together with the DOJ and the CCB, the "Governmental
Authorities") with respect to possible antitrust violations
relating to the sale and marketing of certain rubber processing
chemicals, ethylene propylene diene monomer (EPDM) and heat
stabilizers, including tin-based stabilizers and precursors,
mixed metal stabilizers and epoxidized soybean oil (ESBO). The
investigations concern possible anticompetitive practices,
including price fixing and customer or market allocations,
undertaken by the Company and such subsidiaries and certain of
their officers and employees. According to reports in the press,
The Japan Fair Trade Commission (the "JFTC") is conducting an
investigation regarding heat stabilizers, impact modifiers and
processing aids for plastic. The Company has not been contacted
by the JFTC. The Company is actively cooperating with the
Governmental Authorities regarding such investigations. Since
inception of the investigations, the Company has been conducting
its own internal investigation with the assistance of special
counsel. Neither the Company, any of its subsidiaries, nor any
individual has, to date, been charged in connection with the
investigations.
During the fiscal year ended December 31, 2002, the Company had
net sales of rubber processing chemicals, including accelerators,
antioxidants and antiozonants, of $206 million, net sales of EPDM
of $135 million, and net sales of heat stabilizers, including
tin-based stabilizers and precursors, mixed metal stabilizers and
ESBO, of approximately $220 million.
With respect to rubber chemicals, the Company has held
preliminary discussions with the DOJ regarding a possible plea to
violations of antitrust laws. At this time, the Company cannot
predict the outcome of those discussions, including the timing or
the terms of any agreement with the DOJ or the amount of any
fines that may be imposed. Moreover, at this time, the Company
cannot determine the extent to which criminal or civil fines or
other sanctions might be imposed by the other Governmental
Authorities. The Company has met and is continuing to meet with
the Governmental Authorities in an attempt to resolve all matters
relating to the investigations.
With respect to EPDM and heat stabilizers, the Company and its
affiliates that are subject to the investigations have received
from each of the Governmental Authorities verbal or written
assurances of conditional amnesty from prosecution and fines.
The European Commission's grant of conditional amnesty with
respect to heat stabilizers is presently limited to tin-based
stabilizers and their precursors, but the Company expects to be
granted conditional amnesty by the European Commission with
respect to mixed metal stabilizers and ESBO in the near future.
The assurances of conditional amnesty are conditioned upon
several factors, including continued cooperation with the
Governmental Authorities.
As previously stated, the Company is continuing to conduct its
internal investigation of the matters under investigation by the
Governmental Authorities, including a review as to any improper
or criminal conduct by current and former officers and employees
of the Company and its affected subsidiaries. In addition, the
Company and its special counsel assisting in the investigation
are continuing to review all other areas of the Company's
business and products to determine compliance with applicable
antitrust law and with the Company's antitrust guidelines and
policies. In connection with the investigations, a senior
officer of the Company has been placed on paid administrative
leave.
The resolution of any possible antitrust violations against the
Company and certain of its subsidiaries and the resolution of any
civil claims now pending or hereafter asserted against them may
have a material adverse effect on the Company's financial
condition, results of operations and prospects. No assurances
can be given regarding the outcome or timing of these matters.
The Company has incurred antitrust investigation costs of $6.3
million (pre-tax) through December 31, 2002 and, since such date,
$8.5 million (pre-tax) through March 31, 2003. The Company
expects to continue to incur substantial costs until all antitrust
investigations are concluded and civil claims are resolved.
Civil Lawsuits
Federal Class Actions. The Company, individually or together
with certain of its subsidiaries and other companies, has been
named as a defendant in certain direct purchaser class action
lawsuits filed in federal courts during the period from late
March, 2003 through April 18, 2003 involving the sale of rubber
chemicals, EPDM and plastic additives, including heat
stabilizers, impact modifiers and processing aids. With respect
to rubber chemicals, the Company, its subsidiary Uniroyal
Chemical Company, Inc. and other companies have been named as
defendants in two class action lawsuits, both of which were filed
in California, by plaintiffs on behalf of themselves and a class
consisting of all individuals and entities who purchased rubber
chemicals in the United States directly from the defendants,
their predecessors or their controlled subsidiaries from January
1, 1995 to October 10, 2002. With respect to EPDM, the Company,
individually or together with Uniroyal Chemical Company, Inc. and
other companies, has been named as a defendant in five class
action lawsuits, filed in New Jersey, Connecticut, New York and
California, by plaintiffs on behalf of themselves and a class
consisting of all individuals and entities who purchased EPDM in
the United States directly from the defendants, their alleged co-
conspirators, predecessors or controlled subsidiaries during
various periods with the earliest period commencing on January 1,
1994. With respect to plastic additives, the Company and other
companies have been named as defendants in four class action
lawsuits, all of which were filed in the State of Pennsylvania,
by plaintiffs on behalf of themselves and a class consisting of
all individuals and entities who purchased plastic additives in
the United States directly from the defendants, predecessors or
controlled subsidiaries during various periods with the earliest
period commencing on January 1, 1985.
The complaints in these actions principally allege that the
defendants conspired to fix, raise, maintain or stabilize prices
for rubber chemicals, EPDM or plastic additives, as applicable,
sold in the United States in violation of Section 1 of the
Sherman Act and that this illegal conspiracy caused injury to the
plaintiffs who paid artificially inflated prices for such
products as a result of such anticompetitive activities. The
plaintiffs seek, among other things, treble damages of
unspecified amounts, costs (including attorneys' fees) and
injunctive relief preventing further violations of the Sherman
Act.
State Class Actions. With respect to rubber chemicals, the
Company and certain of its subsidiaries along with other
companies, have been named as defendants in twenty putative
indirect purchaser class action lawsuits filed during the period
from October, 2002 through December, 2002 in state courts in
seventeen states and in the District of Columbia. The putative
class in each of the actions comprises all persons within each of
the applicable states and the District of Columbia who purchased
tires other than for resale that were manufactured using rubber
processing chemicals sold by the defendants since 1994. The
complaints principally allege that the defendants agreed to fix,
raise, stabilize and maintain the price of rubber processing
chemicals used as part of the tire manufacturing process in
violation of state antitrust and consumer protection laws and
that this illegal conspiracy caused injury to individuals who
paid more to purchase tires as a result of such anticompetitive
activities. The plaintiffs seek, among other things, treble
damages of an unspecified amount, interest and attorneys' fees
and costs. The Company and its defendant subsidiaries have filed
motions to dismiss on substantive and personal jurisdictional
grounds or answers with respect to each of these actions.
With respect to EPDM, the Company has been named as a defendant
in one indirect purchaser class action lawsuit, filed on April 7,
2003 in California, by a plaintiff on behalf of itself and a
class consisting of all persons or entities in California who
indirectly purchased EPDM from January 1, 1994 through December
12, 2002. The complaint principally alleges that the Company
conspired to fix, raise, stabilize and maintain the price of EPDM
and allocate markets and customers in the United States and
California in violation of California's Cartwright Act and Unfair
Competition Act and that this illegal conspiracy caused injury to
purchasers who paid more to purchase, indirectly, EPDM as a
result of such anticompetitive activities. The plaintiff seeks,
among other things, treble damages of an unspecified amount,
costs (including attorneys' fees) and disgorgement of profit.
With respect to plastic additives, the Company and other
companies have been named as defendants in a direct purchaser
class action lawsuit, filed on April 8, 2003 in Ohio, by a
plaintiff on behalf of itself and a class consisting of all
individuals and entities that purchased polyvinyl chloride
("PVC") modifiers directly from the defendants in Ohio since
1999. The complaint principally alleges that the defendants and
co-conspirators agreed to fix, raise, stabilize and maintain the
price of PVC modifiers in violation of Ohio's Valentine Act and
that this illegal conspiracy caused injury to purchasers who paid
more to purchase PVC modifiers as a result of such
anticompetitive activities. The plaintiff seeks, among other
things, treble damages of an unspecified amount, costs (including
attorneys' fees) and injunctive relief preventing the defendants
from continuing the unlawful activities alleged in the complaint.
The federal and state class actions described above are in early
procedural stages of litigation and, accordingly, the Company
cannot predict their outcome. The Company and its defendant
subsidiaries believe that they have substantial defenses to these
actions and intend to defend vigorously all such actions.
However, the resolution of any civil claims now pending or
hereafter asserted against the Company or any of its subsidiaries
could have a material adverse effect on the Company's financial
condition, results of operations and prospects.
BUSINESS SEGMENT DATA
(In thousands) First quarter ended
2003 2002
Net Sales
Polymer Products
Polymer Additives $ 301,574 $ 267,235
Polymers 68,183 67,480
Polymer Processing Equipment 41,108 49,805
Eliminations (3,653) (3,319)
407,212 381,201
Specialty Products
OrganoSilicones 117,779 113,756
Crop Protection 60,380 52,472
Other 64,380 97,409
242,539 263,637
Total net sales $ 649,751 $ 644,838
Operating Profit
Polymer Products
Polymer Additives $ 13,513 $ 11,631
Polymers 9,274 8,649
Polymer Processing Equipment 1,078 80
23,865 20,360
Specialty Products
OrganoSilicones 13,979 7,051
Crop Protection 19,651 14,470
Other 448 3,481
34,078 25,002
General corporate expense,
including amortization (15,540) (12,629)
42,403 32,733
Facility closures, severance and
related costs (849) -
Antitrust investigation costs (8,489) -
Total operating profit $ 33,065 $ 32,733
SUBSEQUENT EVENT
On April 24, 2003, the Company entered into an agreement to sell
certain assets and assign certain liabilities of the
OrganoSilicones business unit to a division of General Electric
Company (GE) and to acquire GE's Specialty Chemicals business.
The consideration the Company will receive includes $645 million
in cash and the GE Specialty Chemicals business with an agreed-
upon value of $160 million. In addition, the Company will receive
contingent quarterly payments for three years after the closing
date based on the combined performance of GE's existing Silicones
business and the OrganoSilicones business GE is acquiring from
the Company. The total of such payments will be a minimum of
$105 million and a maximum of $250 million. The agreement
contemplates the sale of assets and assignment of liabilities
with estimated carrying amounts as follows:
(In thousands) March 31, December 31,
2003 2002
Inventory $ 105,738 $ 105,476
Other current assets 2,285 3,450
Property, plant and equipment, net 235,585 240,625
Other assets, principally intangible
assets 34,422 34,446
Total assets to be sold $ 378,030 $ 383,997
Notes payable $ 2,113 $ 2,033
Accounts payable and accrued expenses 13,713 12,843
Long-term debt 8,454 8,472
Other liabilities 3,423 3,348
Total liabilities to be assigned $ 27,703 $ 26,696
The consideration that the Company will receive is subject to
adjustment based on the net assets of the OrganoSilicones
business unit and the GE Specialty Chemicals business as of the
closing date. In addition, within 90 days following closing, the
Company will reimburse GE for retained accounts receivable less
retained accounts payable and accrued liabilities (estimated to
be $26.9 million). The Company expects to write off certain
other assets associated with the OrganoSilicones business unit,
principally goodwill and unsold or retained property, plant and
equipment, with carrying amounts of approximately $222.4 million
and $223.4 million at March 31, 2003 and December 31, 2002,
respectively. The transaction is subject to regulatory approvals
and other customary closing conditions and is expected to be
completed during the third quarter of 2003. For additional
information regarding the terms of the transaction, refer to the
Purchase and Exchange Agreement by and between the Company and
GE, which was filed with the Securities and Exchange Commission
on Form 8-K dated April 25, 2003.
Independent Accountants' Review Report
The Board of Directors and Stockholders
Crompton Corporation
We have reviewed the condensed consolidated balance sheet of
Crompton Corporation and subsidiaries (the Company) as of March
31, 2003, the related condensed consolidated statements of
operations for the three-month period ended March 31, 2003, and
the related condensed consolidated statements of cash flows for
the three-month period ended March 31, 2003. These condensed
consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews 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 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 reviews, 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, 2002, and the related
consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for the year then ended (not
presented herein); and in our report dated January 31, 2003, 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, 2002, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/KPMG LLP
KPMG LLP
Stamford, Connecticut
April 28, 2003
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FIRST QUARTER RESULTS
Overview
Consolidated net sales of $649.8 million for the first quarter of
2003 increased 1% from the comparable period in 2002. Net sales
for the first quarter of 2002 included $40.1 million of sales of
the industrial specialties business unit, which was divested in
June 2002. Excluding these sales, net sales increased 7% as
increased unit volume of 4% and favorable foreign currency
translation of 5% more than offset the impact of lower selling
prices of 2%. International sales, including U.S. exports, were
52% of total sales, up from 48% for the first quarter of 2002.
Gross profit as a percentage of sales was 29.3% for the first
quarter of 2003 as compared to 28.8% for the first quarter of
2002. This increase was due in part to the impact of the
divestiture of the industrial specialties business unit.
Consolidated operating profit for the first quarter of 2003 of
$33.1 million was $0.3 million higher than operating profit for
the first quarter of 2002. A review by operating segment
follows.
Net earnings for the first quarter were $5.8 million, or $0.05
per common share, as compared to a net loss of $292.2 million, or
$2.52 per diluted common share for the first quarter of 2002.
Net earnings for the first quarter of 2003 included charges for
facility closures, severance and related costs of $0.8 million
($0.5 million after-tax), antitrust investigation costs of $8.5
million ($5.2 million after-tax) and a cumulative effect of
accounting change related to the implementation of FASB Statement
No. 143, "Asset Retirement Obligations" ($0.4 million after-tax).
After-tax amounts are calculated based on the applicable
statutory tax rates. The net loss for the first quarter of 2002
included a cumulative effect of accounting change of $299 million
for the impairment of goodwill.
Net sales and operating profit by reportable segment are
summarized in the following table.
(In thousands) First quarter ended
2003 2002
Net Sales
Polymer Products
Polymer Additives $ 301,574 $ 267,235
Polymers 68,183 67,480
Polymer Processing Equipment 41,108 49,805
Eliminations (3,653) (3,319)
407,212 381,201
Specialty Products
OrganoSilicones 117,779 113,756
Crop Protection 60,380 52,472
Other 64,380 97,409
242,539 263,637
Total net sales $ 649,751 $ 644,838
(In thousands) First quarter ended
2003 2002
Operating Profit
Polymer Products
Polymer Additives $ 13,513 $ 11,631
Polymers 9,274 8,649
Polymer Processing Equipment 1,078 80
23,865 20,360
Specialty Products
OrganoSilicones 13,979 7,051
Crop Protection 19,651 14,470
Other 448 3,481
34,078 25,002
General corporate expense,
including amortization (15,540) (12,629)
42,403 32,733
Facility closures, severance
and related costs (849) -
Antitrust investigation costs (8,489) -
Total operating profit $ 33,065 $ 32,733
Polymer Products
Polymer additives sales of $301.6 million were up 13% from the
comparable period of the prior year as a result of an increase in
unit volume of 9% and favorable foreign currency translation of
6%, partially offset by a 2% decline in selling prices. Plastic,
urethane and petroleum additives sales rose 17%, 19% and 5%,
respectively, due primarily to increased demand and favorable
foreign currency translation. Rubber additives sales were up 3%
due mainly to increased demand and favorable foreign currency
translation, offset in part by lower selling prices. Operating
profit of $13.5 million was up 16% from the prior year due mainly
to higher unit volume and reduced manufacturing costs, offset in
part by increased raw material costs and lower selling prices.
Polymers sales of $68.2 million were up 1% from the comparable
period of the prior year as a 3% increase in unit volume and
favorable foreign currency translation of 3%, more than offset a
5% decline in selling prices. EPDM sales were down 8% due mainly
to lower selling prices resulting from industry overcapacity.
Urethanes sales were up 11% due primarily to increased unit
volume demand and favorable foreign currency translation.
Operating profit of $9.3 million was up 7% from the prior year
due primarily to increased unit volume and the absence of
unfavorable prior year variances attributable to reduced plant
throughput, offset in part by reduced selling prices and higher
raw material costs in the EPDM business.
Polymer processing equipment sales of $41.1 million were down 17%
from the first quarter of 2002 as depressed capital equipment
demand was offset in part by favorable foreign currency
translation of 4% and improved selling prices of 2%. Despite
lower sales, operating profit of $1.1 million was $1.0 million
higher than the prior year mainly as a result of lower operating
costs and improved product selling prices. The backlog at the
end of March was $76 million, equal to year-end 2002.
Specialty Products
OrganoSilicones sales of $117.8 million were up 4% from the
comparable period of the prior year due to favorable foreign
currency translation of 7% and higher unit volume of 3%,
partially offset by a 6% decline in selling prices. Operating
profit of $14.0 million was up 98% from the prior year mainly as
a result of increased unit volume and lower costs (including the
benefit of facility expansions in Sistersville, West Virginia and
Termoli, Italy), offset in part by reduced selling prices.
Crop protection sales of $60.4 million were up 15% from the first
quarter of 2002 due to a 9% increase in unit volume, mainly
attributable to increased domestic and European demand, and
favorable foreign currency translation of 6%. Operating profit
of $19.7 million was up 36% from the prior year, primarily as a
result of increased unit volume and higher joint venture equity
income of $3.3 million, offset in part by an unfavorable sales
mix.
Other sales of $64.4 million were 34% lower than the prior year
due primarily to the divestiture of the industrial specialties
business in June 2002. Sales for the remaining refined products
business were up 12% due to favorable foreign currency
translation, higher selling prices and increased unit volume.
Operating profit of $0.4 million was down 87% from the first
quarter of 2002 due mainly to the divestment of industrial
specialties and higher refined products raw material costs that
were partially recovered through increased selling prices.
Other
Selling, general and administrative expenses increased 2% versus
the first quarter of 2002. The change was primarily due to
unfavorable foreign currency translation and losses associated
with the Company's equity option contracts, partially offset by
cost savings and the elimination of expenses related to the
divested industrial specialties business unit.
Depreciation and amortization decreased 4% primarily due to
reduced depreciation expense related to the divested industrial
specialties business unit. Research and development costs
decreased 9% due primarily to the divestiture of the industrial
specialties business unit and to a reduction in spending on less
critical projects. Equity income increased $3.4 million mainly
due to increased earnings associated with the Gustafson seed
treatment joint venture. Interest expense increased 2% primarily
due to a purchase accounting adjustment related to the merger of
Crompton and Knowles Corporation and Witco Corporation in 1999
that was fully amortized as a credit to interest expense through
2002. The effective tax rate decreased to 14% from 24% in the
comparable quarter of 2002 primarily due to differences in the
relative mix of earnings and losses among the various
jurisdictions in which the Company operates.
LIQUIDITY AND CAPITAL RESOURCES
On April 24, 2003, the Company entered into an agreement to sell
its OrganoSilicones business unit to a division of General
Electric Company (GE) and to acquire GE's Specialty Chemicals
business. At closing, the Company will receive $645 million in
cash and the GE Specialty Chemicals business with an agreed upon
value of $160 million. In addition, the Company will receive
contingent quarterly payments for three years after the closing
date. The total of such payments will be a minimum of $105
million and a maximum of $250 million. The transaction is
subject to regulatory approvals and other customary conditions
and is expected to close in the third quarter of 2003. See the
"Subsequent Event" note to the Condensed Consolidated Financial
Statements included in this Form 10-Q.
The March 31, 2003 working capital balance of $111.6 million
increased $16 million from the year-end 2002 balance of $95.6
million, and the current ratio increased to 1.2 from 1.1. The
increases in working capital and the current ratio were primarily
due to increases in accounts receivable and inventories and a
decrease in accrued expenses, partially offset by an increase in
accounts payable. Average days sales in receivables increased
slightly to 30 days for the first three months of 2003, versus 29
days for the first three months of 2002. Excluding the accounts
receivable securitization programs, average days sales in
receivables were 62 days for the first three months of 2003,
which was unchanged from the first three months of 2002. Average
inventory turnover increased slightly to 3.9 from 3.8 for the
same period of 2002.
Net cash provided by operations of $44.4 million increased $54.3
million from $9.9 million net cash used in operations for the
first three months of 2002. The increase was primarily the
result of a smaller increase in accounts receivable and a larger
increase in accounts payable as compared to 2002, federal tax
refunds related to prior years and the collection of a note
receivable, partially offset by an increase in inventories. The
Company's debt to total book capital ratio decreased to 84% as of
March 31, 2003 from 86% at year-end 2002. The decrease is due to
the decrease in total debt and an increase in stockholders'
equity. The Company's future liquidity needs are expected to be
financed from operations, as well as available accounts
receivable securitization programs and credit facilities.
The Company has a five-year senior unsecured credit facility of
$400 million which is scheduled to mature in October 2004.
Borrowings on this facility are at various rate options to be
determined on the date of borrowing. There were no outstanding
borrowings under this facility at March 31, 2003.
In addition, the Company has an accounts receivable
securitization program to sell up to $150 million of domestic
accounts receivable to agent banks. As of March 31, 2003, $124
million of domestic accounts receivable had been sold under this
program. In addition, the Company's European subsidiaries have
two separate programs to sell their eligible accounts receivable
to agent banks. As of March 31, 2003, $122 million of
international accounts receivable had been sold under these
programs.
The Company has standby letters of credit and guarantees with
various financial institutions. At March 31, 2003, the Company
had $55.3 million of outstanding letters of credit and guarantees
primarily related to its environmental remediation liabilities,
insurance obligations and a potential tax exposure.
During the first quarter of 2003, the Company recorded $0.8
million for facility closures, severance and related costs. This
charge was primarily due to continuing costs related to the July
2001 cost reduction initiative and the relocation of the
corporate headquarters from Greenwich, CT to Middlebury, CT,
which was substantially completed during the fourth quarter of
2002. The Company estimates that pre-tax charges relating to the
corporate relocation will approximate $13 million, of which
approximately $9.7 million has been expensed to facility
closures, severance and related costs through March 31, 2003.
The Company expects to realize pre-tax savings from the
relocation of approximately $4 million in 2003 and total pre-tax
savings of approximately $8 million per year beginning in 2004.
Capital expenditures for the first three months of 2003 amounted
to $14.6 million as compared to $16.8 million during the same
period of 2002. The decrease is primarily due to timing with
respect to certain capital spending projects. Capital
expenditures are expected to approximate $100 to $115 million in
2003, primarily for the Company's replacement needs and
improvement of domestic and foreign facilities.
ANTITRUST INVESTIGATION COSTS AND RELATED MATTERS
The Company and certain of its subsidiaries, together with other
domestic and foreign companies, are the subject of coordinated
criminal investigations being conducted by the United States
Department of Justice and the Canadian Competition Bureau and a
coordinated civil investigation being conducted by the European
Commission with respect to possible antitrust violations relating
to the sale and marketing of certain rubber processing chemicals,
ethylene propylene diene monomer (EPDM) and heat stabilizers. In
addition, the Company, individually or together with certain of
its subsidiaries and other companies, has been named as a
defendant in certain federal and state class action lawsuits
involving the sale of rubber chemicals, EPDM and plastic
additives, including heat stabilizers, impact modifiers and
processing aids. The resolution of any possible antitrust
violations against the Company and certain of its subsidiaries
and the resolution of any civil claims now pending or hereafter
asserted against them may have a material adverse effect on the
Company's financial condition, results of operations and
prospects. See "Item 1. Legal Proceedings" of this Form 10-Q
for additional information regarding such matters.
CRITICAL ACCOUNTING AREAS
Preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the
amounts and disclosures reported in the consolidated financial
statements. The Company's estimates are based on historical
experience and currently available information. Management's
Discussion and Analysis of Financial Condition and Results of
Operations and the Accounting Policies Footnote in the Company's
Annual Report, incorporated by reference in Form 10-K for the
fiscal year ended December 31, 2002, describe the significant
accounting estimates and policies used in preparation of the
Consolidated Financial Statements. Actual results in these areas
could differ from management's estimates. There have been no
significant changes in the Company's critical accounting
estimates during the first quarter of 2003.
ACCOUNTING DEVELOPMENTS
In June 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
in the period in which a legal obligation is created. Such
liabilities are recorded at fair value, with an offsetting
increase to the carrying value of the related long-lived assets.
In future periods, the liability is accreted to its present value
and the capitalized cost is depreciated over the useful life of
the related asset. Companies are also required to adjust the
liability for changes resulting from the passage of time and/or
revisions to the timing or the amount of the original estimate.
Upon retirement of the long-lived asset, the Company either
settles the obligation for its recorded amount or incurs a gain
or loss. The provisions of Statement No. 143 are effective for
fiscal years beginning after June 15, 2002. Effective January 1,
2003, the Company adopted the provisions of Statement No. 143.
As a result of the implementation of this Statement, the Company
recorded an after-tax charge of $0.4 million ($0.7 million pre-
tax) as a cumulative effect of accounting change.
Effective January 1, 2003, the Company adopted the provisions of
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 provisions of Statement No. 146 are effective for exit or
disposal activities initiated after December 31, 2002. The
Company has adopted the provisions of Statement No. 146 as of
January 1, 2003 and has recorded its first quarter 2003 charge
for facility closures, severance and related costs in accordance
with this Statement.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." Interpretation No. 45 requires the guarantor to
recognize a liability for the non-contingent component of a
guarantee; that is, the obligation to stand ready to perform in
the event that specified triggering events or conditions occur.
The initial measurement of this liability is the fair value of
the guarantee at its inception. The recognition and measurement
provisions of Interpretation No. 45 are effective for all
guarantees entered into or modified after December 31, 2002.
Interpretation No. 45 also requires additional disclosures
related to guarantees in interim and annual financial statements.
The Company implemented the new disclosure requirements of
Interpretation No. 45 at December 31, 2002 and will apply the
recognition and measurement provisions for all guarantees entered
into or modified after December 31, 2002. To date the Company
has not entered into any new guarantees that meet the recognition
and measurement provisions of Interpretation No. 45.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation
No. 46 requires existing unconsolidated variable interest
entities (VIEs) to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among the
parties involved. The Interpretation applies immediately to VIEs
created after January 31, 2003 and to VIEs in which an enterprise
holds a variable interest that was acquired before February 1,
2003, the Interpretation applies for periods beginning after June
15, 2003. The Company has no unconsolidated VIEs and therefore
its condensed consolidated financial statements are in compliance
with the requirements of Interpretation No. 46 at March 31, 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.
Each quarter, the Company evaluates and reviews estimates for
future remediation, and maintenance and management costs directly
related to remediation, 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 March 31, 2003,
the Company's reserves for environmental remediation activities
totaled $126.2 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 resolution of these
environmental matters could have a material adverse effect on the
Company's consolidated results of operations or financial
condition in any given fiscal period if a 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, the completion of
the announced transaction with GE, the outcome and timing of
antitrust investigations and related civil lawsuits to which the
Company is subject, pension and other post-retirement benefit
plan assumptions, 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, 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 our estimates and assumptions and on currently available
information. The forward-looking statements include information
concerning our possible or assumed future results of operations,
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 filed and
such information will not necessarily be updated by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Refer to the Market Risk and 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, 2002. Also refer to the Derivative Instruments and
Hedging Activities Condensed 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 $1,239
million at March 31, 2003. The fair market value of such debt as
of March 31, 2003 was $1,274 million, which has been determined
primarily based on quoted market prices.
There have been no other significant changes in market risk since
December 31, 2002.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
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 disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c)). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design
and operation of the Company's disclosure controls and
procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in the Company's
internal controls or in other factors that could
significantly affect these controls subsequent to the
evaluation date, including any corrective action with regard
to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Environmental Liabilities
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, or may 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. For information relating to
the Company's environmental matters, see the Environmental
Matters section of "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations" of Part I of
this Form 10-Q and "Item 3. Legal Proceedings" in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
Antitrust Investigations and Related Matters
Antitrust Investigations
The Company and certain of its subsidiaries, together with other
domestic and foreign companies, continue to be the subject of
coordinated criminal investigations being conducted by the United
States Department of Justice (the "DOJ") and the Canadian
Competition Bureau (the "CCB") and a coordinated civil
investigation being conducted by the European Commission
(together with the DOJ and the CCB, the "Governmental
Authorities") with respect to possible antitrust violations
relating to the sale and marketing of certain rubber processing
chemicals, ethylene propylene diene monomer (EPDM) and heat
stabilizers, including tin-based stabilizers and precursors,
mixed metal stabilizers and epoxidized soybean oil (ESBO). The
investigations concern possible anticompetitive practices,
including price fixing and customer or market allocations,
undertaken by the Company and such subsidiaries and certain of
their officers and employees. According to reports in the press,
The Japan Fair Trade Commission (the "JFTC") is conducting an
investigation regarding heat stabilizers, impact modifiers and
processing aids for plastic. The Company has not been contacted
by the JFTC. The Company is actively cooperating with the
Governmental Authorities regarding such investigations. Since
inception of the investigations, the Company has been conducting
its own internal investigation with the assistance of special
counsel. Neither the Company, any of its subsidiaries, nor any
individual has, to date, been charged in connection with the
investigations.
During the fiscal year ended December 31, 2002, the Company had
net sales of rubber processing chemicals, including accelerators,
antioxidants and antiozonants, of $206 million, net sales of EPDM
of $135 million, and net sales of heat stabilizers, including
tin-based stabilizers and precursors, mixed metal stabilizers and
ESBO, of approximately $220 million.
With respect to rubber chemicals, the Company has held
preliminary discussions with the DOJ regarding a possible plea to
violations of antitrust laws. At this time, the Company cannot
predict the outcome of those discussions, including the timing or
the terms of any agreement with the DOJ or the amount of any
fines that may be imposed. Moreover, at this time, the Company
cannot determine the extent to which criminal or civil fines or
other sanctions might be imposed by the other Governmental
Authorities. The Company has met and is continuing to meet with
the Governmental Authorities in an attempt to resolve all matters
relating to the investigations.
With respect to EPDM and heat stabilizers, the Company and its
affiliates that are subject to the investigations have received
from each of the Governmental Authorities verbal or written
assurances of conditional amnesty from prosecution and fines.
The European Commission's grant of conditional amnesty with
respect to heat stabilizers is presently limited to tin-based
stabilizers and their precursors, but the Company expects to be
granted conditional amnesty by the European Commission with
respect to mixed metal stabilizers and ESBO in the near future.
The assurances of conditional amnesty are conditioned upon
several factors, including continued cooperation with the
Governmental Authorities.
As previously stated, the Company is continuing to conduct its
internal investigation of the matters under investigation by the
Governmental Authorities, including a review as to any improper
or criminal conduct by current and former officers and employees
of the Company and its affected subsidiaries. In addition, the
Company and its special counsel assisting in the investigation
are continuing to review all other areas of the Company's
business and products to determine compliance with applicable
antitrust law and with the Company's antitrust guidelines and
policies. In connection with the investigations, a senior
officer of the Company has been placed on paid administrative
leave.
The resolution of any possible antitrust violations against the
Company and certain of its subsidiaries and the resolution of any
civil claims now pending or hereafter asserted against them may
have a material adverse effect on the Company's financial
condition, results of operations and prospects. No assurances
can be given regarding the outcome or timing of these matters.
The Company has incurred antitrust investigation costs of $6.3
million (pre-tax) through December 31, 2002 and, since such date,
$8.5 million (pre-tax) through March 31, 2003. The Company expects
to continue to incur substantial costs until all antitrust
investigations are concluded and civil claims are resolved.
Civil Lawsuits
Federal Class Actions. The Company, individually or together
with certain of its subsidiaries and other companies, has been
named as a defendant in certain direct purchaser class action
lawsuits filed in federal courts during the period from late
March, 2003 through April 18, 2003 involving the sale of rubber
chemicals, EPDM and plastic additives, including heat
stabilizers, impact modifiers and processing aids. With respect
to rubber chemicals, the Company, its subsidiary Uniroyal
Chemical Company, Inc. and other companies have been named as
defendants in two class action lawsuits, both of which were filed
in California, by plaintiffs on behalf of themselves and a class
consisting of all individuals and entities who purchased rubber
chemicals in the United States directly from the defendants,
their predecessors or their controlled subsidiaries from January
1, 1995 to October 10, 2002. With respect to EPDM, the Company,
individually or together with Uniroyal Chemical Company, Inc. and
other companies, has been named as a defendant in five class
action lawsuits, filed in New Jersey, Connecticut, New York and
California, by plaintiffs on behalf of themselves and a class
consisting of all individuals and entities who purchased EPDM in
the United States directly from the defendants, their alleged co-
conspirators, predecessors or controlled subsidiaries during
various periods with the earliest period commencing on January 1,
1994. With respect to plastic additives, the Company and other
companies have been named as defendants in four class action
lawsuits, all of which were filed in the State of Pennsylvania,
by plaintiffs on behalf of themselves and a class consisting of
all individuals and entities who purchased plastic additives in
the United States directly from the defendants, predecessors or
controlled subsidiaries during various periods with the earliest
period commencing on January 1, 1985.
The complaints in these actions principally allege that the
defendants conspired to fix, raise, maintain or stabilize prices
for rubber chemicals, EPDM or plastic additives, as applicable,
sold in the United States in violation of Section 1 of the
Sherman Act and that this illegal conspiracy caused injury to the
plaintiffs who paid artificially inflated prices for such
products as a result of such anticompetitive activities. The
plaintiffs seek, among other things, treble damages of
unspecified amounts, costs (including attorneys' fees) and
injunctive relief preventing further violations of the Sherman
Act.
State Class Actions. With respect to rubber chemicals, the
Company and certain of its subsidiaries along with other
companies, have been named as defendants in twenty putative
indirect purchaser class action lawsuits filed during the period
from October, 2002 through December, 2002 in state courts in
seventeen states and in the District of Columbia. The putative
class in each of the actions comprises all persons within each of
the applicable states and the District of Columbia who purchased
tires other than for resale that were manufactured using rubber
processing chemicals sold by the defendants since 1994. The
complaints principally allege that the defendants agreed to fix,
raise, stabilize and maintain the price of rubber processing
chemicals used as part of the tire manufacturing process in
violation of state antitrust and consumer protection laws and
that this illegal conspiracy caused injury to individuals who
paid more to purchase tires as a result of such anticompetitive
activities. The plaintiffs seek, among other things, treble
damages of an unspecified amount, interest and attorneys' fees
and costs. The Company and its defendant subsidiaries have filed
motions to dismiss on substantive and personal jurisdictional
grounds or answers with respect to each of these actions.
With respect to EPDM, the Company has been named as a defendant
in one indirect purchaser class action lawsuit, filed on April 7,
2003 in California, by a plaintiff on behalf of itself and a
class consisting of all persons or entities in California who
indirectly purchased EPDM from January 1, 1994 through December
12, 2002. The complaint principally alleges that the Company
conspired to fix, raise, stabilize and maintain the price of EPDM
and allocate markets and customers in the United States and
California in violation of California's Cartwright Act and Unfair
Competition Act and that this illegal conspiracy caused injury to
purchasers who paid more to purchase, indirectly, EPDM as a
result of such anticompetitive activities. The plaintiff seeks,
among other things, treble damages of an unspecified amount,
costs (including attorneys' fees) and disgorgement of profit.
With respect to plastic additives, the Company and other
companies have been named as defendants in a direct purchaser
class action lawsuit, filed on April 8, 2003 in Ohio, by a
plaintiff on behalf of itself and a class consisting of all
individuals and entities that purchased polyvinyl chloride
("PVC") modifiers directly from the defendants in Ohio since
1999. The complaint principally alleges that the defendants and
co-conspirators agreed to fix, raise, stabilize and maintain the
price of PVC modifiers in violation of Ohio's Valentine Act and
that this illegal conspiracy caused injury to purchasers who paid
more to purchase PVC modifiers as a result of such
anticompetitive activities. The plaintiff seeks, among other
things, treble damages of an unspecified amount, costs (including
attorneys' fees) and injunctive relief preventing the defendants
from continuing the unlawful activities alleged in the complaint.
The federal and state class actions described above are in early
procedural stages of litigation and, accordingly, the Company
cannot predict their outcome. The Company and its defendant
subsidiaries believe that they have substantial defenses to these
actions and intend to defend vigorously all such actions.
However, the resolution of any civil claims now pending or
hereafter asserted against the Company or any of its subsidiaries
could have a material adverse effect on the Company's financial
condition, results of operations and prospects.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on April
29, 2003.
(b) Proxies for the Annual Meeting of Stockholders were
solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, as amended; there was
no solicitation in opposition to the nominees for the
Board of Directors as listed in the proxy statement;
and such nominees were elected.
(c) A brief description of each matter voted upon at the
Annual Meeting, and the results of the voting, are as
follows:
1. Election of Class III directors to serve for a
term expiring in 2006:
NAME FOR WITHHELD
Vincent A. Calarco 94,008,335 3,547,636
Roger L. Headrick 94,204,411 3,351,560
Patricia K. Woolf 93,668,084 3,887,887
2. Approval of the selection by the Board of
Directors of KPMG LLP as independent auditors for
2003:
FOR AGAINST ABSTAIN
91,424,663 5,956,109 175,199
3. A shareholder proposal urging the Board of
Directors to amend the by-laws to require that an
independent director serve as Chairman of the
Board of Directors:
FOR AGAINST ABSTAIN
23,407,631 59,674,754 435,834
There were 14,037,752 broker non-votes in regard
to the above proposal.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.1 Purchase and Exchange Agreement by and between
Crompton Corporation and General Electric Company,
Dated April 24, 2003 (incorporated by reference to
Exhibit 99.2 to Crompton Corporation's Form 8-K dated
April 25, 2003).
10.2 Amendment Number 4 dated as of April 15, 2003, to
the Receivables Purchase Agreement dated as of
December 11, 1998, by and among the Registrant (as
successor to Crompton & Knowles), as Initial
Collection Agent, and certain of its subsidiaries,
as Sellers, Crompton & Knowles Receivables
Corporation, as Buyer, and ABN AMRO Bank N.V., as
Agent (filed herewith).
10.3 Letter Agreement dated as of April 15, 2003, to the
Receivables Purchase Agreement dated as of December
11, 1998, by and among the Registrant (as successor
to Crompton & Knowles), as Initial Collection
Agent, and certain of its subsidiaries, as Sellers,
Crompton & Knowles Receivables Corporation, as
Buyer, and Crompton Europe B.V., Crompton B.V. and
ABN AMRO Bank N.V. as Agent (filed herewith).
99.1 Certification of Periodic Financial Reports by
Crompton Corporation's Chief Executive Officer
(filed herewith).
99.2 Certification of Periodic Financial Reports by
Crompton Corporation's Chief Financial Officer
(filed herewith).
(b) The following Reports on Form 8-K have been filed during
the first quarter and through the date of this filing:
(i) Report on Form 8-K dated February 14, 2003, reporting
on Item 5 (Other Events and Regulation FD Disclosure)
and Item 7 (Financial Statements and Exhibits);
(ii) Report on Form 8-K dated April 24, 2003, reporting on
Item 5 (Other Events and Regulation FD Disclosure)
and Item 7 (Financial Statements and Exhibits);
(iii) Report on Form 8-K dated April 25, 2003,
reporting on Item 5 (Other Events and Regulation FD
Disclosure) and Item 7 (Financial Statements and
Exhibits); and
(iv) Report on Form 8-K dated April 29, 2003, reporting on Item
7 (Financial Statements and Exhibits) and Items 9 and 12
(Regulation FD Disclosure and Disclosure of Results of
Operations and Financial Condition).*
* In accordance with General Instruction B of Form 8-K, the
report submitted to the Securities and Exchange Commission
under Items 9 and 12 of Form 8-K is not deemed to be
"filed" for purposes of Section 18 of the Securities
Exchange Act of 1934 (the "Exchange Act"), and we are not
subject to the liabilities of that section. We are not
incorporating, and will not incorporate by reference, such
report into any filing under the Securities Act of 1933 or
the Exchange Act.
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: May 12, 2003 /s/Michael F. Vagnini
Michael F. Vagnini
Vice President and Controller
(Principal Accounting Officer)
Date: May 12, 2003 /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: May 12, 2003 /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: May 12, 2003 /s/Vincent A. Calarco
Vincent A. Calarco
President and
Chief Executive Officer