SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2003
Common Stock - $.01 par value 111,207,152
CROMPTON CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Accompanying Notes
Condensed Consolidated Statements of Operations
(Unaudited) - Second quarter and six months
ended 2003 and 2002 2
Condensed Consolidated Balance Sheets - June 30,
2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Cash
Flows (Unaudited) - Six months ended 2003 and 2002 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
Independent Accountants' Review Report 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements and Accompanying Notes
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
Second quarter and six months ended 2003 and 2002
(In thousands of dollars, except per share data)
Second quarter ended Six months ended
2003 2002 2003 2002
Net sales $532,901 $571,489 $1,064,873 $1,102,571
Cost of products sold 394,637 398,097 779,595 778,234
Selling, general and
administrative 84,757 90,401 172,100 177,529
Depreciation and
amortization 27,379 29,072 54,498 58,670
Research and development 12,726 14,388 24,786 27,663
Equity income (2,228) (1,997) (7,842) (4,261)
Facility closures, severance
and related costs 2,686 6,380 3,505 6,380
Antitrust legal costs 12,386 - 20,875 -
Operating profit 558 35,148 17,356 58,356
Interest expense 25,559 26,092 52,274 52,230
Other expense, net 3,827 38,946 4,040 37,385
Loss from continuing
operations before income
taxes and cumulative effect
of accounting change (28,828) (29,890) (38,958) (31,259)
Income tax benefit (9,426) (13,036) (12,838) (12,952)
Loss from continuing
operations before
cumulative effect of
accounting change (19,402) (16,854) (26,120) (18,307)
Earnings from discontinued
operations 10,292 10,560 23,257 18,768
Cumulative effect of
accounting change - - (401) (298,981)
Net loss $ (9,110) $ (6,294) $ (3,264)$ (298,520)
Basic and diluted earnings
(loss) per common share:
Loss from continuing
operations before
cumulative effect of
accounting change $ (0.17) $ (0.15) $ (0.23)$ (0.16)
Earnings from
discontinued operations 0.09 0.09 0.20 0.16
Cumulative effect of
accounting change - - - (2.63)
Net loss $ (0.08) $ (0.06) $ (0.03)$ (2.63)
Dividends declared per
common share $ 0.05 $ 0.05 $ 0.10 $ 0.10
See accompanying notes to condensed consolidated financial
statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002
(In thousands of dollars)
June 30, December 31,
2003 2002
ASSETS
CURRENT ASSETS
Cash $ 18,366 $ 16,941
Accounts receivable 192,293 183,329
Inventories 382,569 353,556
Other current assets 91,755 112,950
Assets held for sale 383,097 392,887
Total current assets 1,068,080 1,059,663
NON-CURRENT ASSETS
Property, plant and equipment 705,158 695,962
Cost in excess of acquired
net assets 586,115 584,633
Other assets 500,701 500,557
$ 2,860,054 $ 2,840,815
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 9,684 $ 3,694
Accounts payable 253,708 268,593
Accrued expenses 234,939 260,718
Income taxes payable 83,446 116,111
Other current liabilities 15,156 15,670
Liabilities held for sale 28,181 29,273
Total current liabilities 625,114 694,059
NON-CURRENT LIABILITIES
Long-term debt 1,286,709 1,253,149
Post-retirement health care
liability 192,004 193,996
Other liabilities 501,397 499,728
STOCKHOLDERS' EQUITY
Common stock 1,192 1,192
Additional paid-in capital 1,045,094 1,048,304
Accumulated deficit (601,252) (586,555)
Accumulated other comprehensive
loss (111,820) (200,426)
Treasury stock at cost (78,384) (62,632)
Total stockholders' equity 254,830 199,883
$ 2,860,054 $ 2,840,815
See accompanying notes to condensed consolidated financial
statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended 2003 and 2002
(In thousands of dollars)
Increase (decrease) in cash 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,264) $(298,520)
Adjustments to reconcile net loss
to net cash provided by operations:
Cumulative effect of accounting change 401 298,981
Loss on sale of business unit - 34,705
Depreciation and amortization 72,407 76,024
Equity income (7,842) (4,261)
Changes in assets and liabilities, net:
Accounts receivable 3,688 (75,225)
Accounts receivable - securitization 14,641 39,193
Inventories (4,832) 32,474
Accounts payable (26,095) 18,707
Other (17,959) 10,478
Net cash provided by operations 31,145 132,556
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of business unit - 80,000
Capital expenditures (32,721) (36,048)
Other investing activities (154) 1,090
Net cash (used in) provided by
investing activities (32,875) 45,042
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) on long-term borrowings 28,113 (144,102)
Proceeds (payments) on short-term borrowings 5,855 (26,918)
Dividends paid (11,433) (11,343)
Treasury stock acquired (22,080) -
Other financing activities 1,036 3,908
Net cash provided by (used in)
financing activities 1,491 (178,455)
CASH
Effects of exchange rate changes on cash 1,664 153
Change in cash 1,425 (704)
Cash at beginning of period 16,941 21,506
Cash at end of period $ 18,366 $ 20,802
See accompanying notes to condensed consolidated financial
statements.
CROMPTON CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
PRESENTATION OF CONDENSED 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.
As a result of the agreement to sell the OrganoSilicones business
unit to General Electric Company announced on April 24, 2003, the
accompanying financial statements reflect the OrganoSilicones
business unit as a discontinued operation. The operations of the
OrganoSilicones business unit have been classified as earnings
from discontinued operations (net of tax) and the estimated
carrying amount of the assets being sold and of the liabilities
being assumed have been reflected as assets and liabilities held
for sale for all periods presented. Refer to the discontinued
operations footnote for further information.
Included in accounts receivable are allowances for doubtful
accounts of $17.8 million at June 30, 2003 and $15.9 million at
December 31, 2002.
Accumulated depreciation amounted to $783.9 million at June 30,
2003 and $723.3 million at December 31, 2002.
Cost of products sold includes all costs incurred in
manufacturing products, including raw materials, direct
manufacturing costs and manufacturing overhead. Cost of products
sold also includes warehousing, distribution, engineering (other
than polymer processing equipment design engineering),
purchasing, and environmental, health and safety functions.
Selling, general and administrative expenses (SG&A) include costs
and expenses related to the following functions and activities:
selling, advertising, customer service, polymer processing
equipment design engineering, shipping and handling costs for out-
bound product shipments, information technology, legal, provision
for doubtful accounts, corporate facilities and corporate
administration. In addition, SG&A also includes accounting,
finance and human resources, excluding direct support in
manufacturing operations which is included as cost of products
sold. Research and development expenses include basic and
applied research and development activities of a technical and
non-routine nature. Costs of products sold, research and
development, and SG&A exclude depreciation and amortization
expenses which are presented on a separate line in the condensed
consolidated statements of operations.
Included among the Company's equity investments are a 50%
ownership in Gustafson LLC and a 50% ownership in Gustafson
Partnership. The Company accounts for these investments in
accordance with the equity method. The combined assets and
liabilities of these two investments were $103.6 million and
$31.9 million, respectively, as of June 30, 2003 and were $74.0
million and $26.3 million, respectively, as of December 31, 2002.
The combined net income of the two investments for the six months
ended June 30, 2003 and 2002 were $15.2 million and $8.1 million,
respectively.
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 second quarter and six
months ended June 30, 2003 are not necessarily indicative of the
results expected for the full year.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year
consolidated statement of cash flows, including the
classification of accounts receivable - securitization as part of
net cash provided by operations rather than as part of net cash
provided by (used in) financing activities.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
As a result of the cost reduction initiative that began in 2001
and the relocation of the Company's corporate headquarters from
Greenwich, CT to Middlebury, CT that began in 2002, the Company
recorded pre-tax charges of $3.5 million and $6.4 million for
facility closures, severance and related costs for the first six
months of 2003 and 2002, respectively. The 2003 charge was
primarily for severance costs related to the relocation of the
corporate headquarters. The 2002 charge was mainly for severance
and other facility closure costs associated with the cost
reduction initiative and the relocation of the corporate
headquarters. Effective January 1, 2003, the Company adopted the
provisions of FASB Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The adoption of
FASB Statement No. 146 has not had a material impact on the
Company's accounting for the facility closures, severance and
related costs recorded in 2003.
The reserve for facility closures, severance and related costs is
summarized as follows:
Severance Asset Other
And Write-offs Facility
(In thousands) Related and Closure
Costs Impairments Costs Total
Balance at
December 31, 2001 $ 30,234 $ - $ 10,832 $ 41,066
2002 charge:
Continuing operations 7,211 4,918 5,240 17,369
Discontinued operations 4,256 - 1,092 5,348
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:
Continuing operations 3,260 - 245 3,505
Discontinued operations 15 - 15 30
Cash payments (10,088) - (7,434) (17,522)
Non-cash charges (1,110) - (280) (1,390)
Balance at June 30, 2003 $ 16,310 $ - $ 3,884 $ 20,194
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 June 30, 2003, a reserve of $0.4 million was
remaining.
ACCOUNTS RECEIVABLE PROGRAMS
The Company has an accounts receivable securitization program to
sell up to $150 million of domestic accounts receivable to agent
banks. Accounts receivable sold under this program were $150
million and $136.5 million as of June 30, 2003 and December 31,
2002, respectively. In addition, the Company's European
subsidiaries have two separate programs to sell their eligible
accounts receivable to agent banks. International accounts
receivable sold under these programs were $102 million and $101
million as of June 30, 2003 and December 31, 2002, respectively.
The total costs associated with these programs of $3.2 million
and $4.5 million as of June 30, 2003 and June 30, 2002,
respectively, are included in other expense, net on the
consolidated statements of operations.
Under the domestic program, certain subsidiaries of the Company
sell their receivables to a special purpose entity (SPE) that has
been created as a separate legal entity for the purpose of
acquiring such receivables and selling an undivided interest
therein to agent banks. In accordance with the domestic sale
agreement, the agent banks purchase an undivided ownership
interest in the accounts receivable owned by the SPE. The amount
of such undivided ownership interest will vary based on the level
of eligible accounts receivable as defined in the agreement. In
addition, the agent banks retain a security interest in all of
the receivables owned by the SPE. The balance of the unsold
receivables owned by the SPE is included in the Company's
accounts receivable balance on the consolidated balance sheet.
Under the international programs, certain foreign subsidiaries of
the Company sell eligible accounts receivable directly to agent
banks. During the period, the Company had an obligation to service
the accounts receivable sold under its domestic and international
programs. The Company has treated the transfer of receivables under
its domestic and foreign receivable programs as a sale of
accounts receivable.
INVENTORIES
Components of inventories are as follows:
(Unaudited)
(In thousands) June 30, December 31,
2003 2002
Finished goods $ 279,179 $ 264,078
Work in process 21,692 21,159
Raw materials and supplies 81,698 68,319
$ 382,569 $ 353,556
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) June 30, 2003 December 31, 2002
Gross Accumulated Gross Accumulated
Cost Amortization Cost Amortization
Patents $125,171 $ (92,707) $122,097 $ (91,992)
Trademarks 70,968 (30,464) 70,397 (28,782)
Other 82,509 (50,921) 82,234 (49,232)
Total $278,648 $(174,092) $274,728 $(170,006)
Amortization expense related to intangible assets amounted to
$3.1 million and $2.8 million for the second quarter of 2003 and
2002, respectively, and $6.2 million and $5.6 million for the six
months ended June 30, 2003 and 2002, respectively. Estimated
amortization expense as of June 30, 2003 for the next five fiscal
years is as follows: $12.3 million (2003), $11.7 million (2004),
$10.8 million (2005), $10.5 million (2006) and $10.4 million
(2007).
Goodwill by reportable segment is as follows:
(Unaudited)
(In thousands) June 30, December 31,
2003 2002
Polymer Products
Polymer Additives $ 266,112 $ 266,105
Polymers 17,299 17,299
Polymer Processing Equipment 33,110 31,870
316,521 315,274
Specialty Products
OrganoSilicones 213,980 213,980
Crop Protection 55,614 55,379
269,594 269,359
Total $ 586,115 $ 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. The Company is currently in the process of
performing these impairment procedures.
COMMON STOCK
The Company is authorized to issue 500 million shares of $.01 par
value common stock. There were 119,152,254 common shares issued
at June 30, 2003 and December 31, 2002, of which 7,960,536 and
5,297,885 shares were held as treasury stock at June 30, 2003 and
December 31, 2002, respectively.
Upon maturity of the Company's equity option contract in May
2003, the Company purchased the underlying 3,200,000 shares of
its common stock at a price of $6.90 per share. During the first
half of 2003, the Company issued 537,349 treasury shares,
primarily pursuant to its incentive programs.
EARNINGS (LOSS) PER COMMON SHARE
The computation of basic earnings (loss) per common share is
based on the weighted average number of common shares
outstanding. The computation of diluted earnings (loss) per
common share is based on the weighted average number of common
and common equivalent shares outstanding. The computation of
diluted earnings (loss) per common share equals the basic
earnings (loss) per common share for all periods presented since
common stock equivalents were antidilutive. Common stock
equivalents amounted to 146,500 and 2,438,698 for the second
quarter ended 2003 and 2002, respectively, and 165,596 and
2,482,899 for the six months ended June 30, 2003 and 2002,
respectively.
The following is a reconciliation of the shares used in the
computations:
(In thousands) Second quarter ended Six months ended
2003 2002 2003 2002
Weighted average common
shares outstanding 112,639 113,512 113,389 113,394
Effect of dilutive stock
options and other
equivalents - - - -
Weighted average common shares
adjusted for dilution 112,639 113,512 113,389 113,394
COMPREHENSIVE INCOME (LOSS)
An analysis of the Company's comprehensive income (loss) is as
follows:
(In thousands) Second quarter ended Six months ended
2003 2002 2003 2002
Net loss $ (9,110) $ (6,294) $(3,264) $(298,520)
Other comprehensive
income (expense):
Foreign currency translation
adjustments 47,046 40,311 82,437 30,641
Minimum pension liability
adjustments 3,254 - 3,254 -
Change in fair value of
derivatives 3,616 (1,514) 2,815 5,469
Other - (7) 100 72
Comprehensive income (loss) $ 44,806 $ 32,496 $85,342 $(262,338)
The components of accumulated other comprehensive loss at June
30, 2003 and December 31, 2002 are as follows:
(Unaudited)
June 30, December 31,
(In thousands) 2003 2002
Foreign currency translation
adjustments $ 6,604 $ (75,833)
Minimum pension liability adjustment (114,612) (117,866)
Change in fair value of derivatives
and other (3,812) (6,727)
Accumulated other comprehensive loss $(111,820) $(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
loss and 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.
Second quarter ended Six months ended
(In thousands,
except per share data) 2003 2002 2003 2002
Net loss, as reported $ (9,110) $(6,294) $(3,264) $(298,520)
Add: Stock-based
employee
compensation
expense included
in net loss, net
of tax (237) 1,468 317 2,936
Deduct: Total stock-based employee
compensation
determined under
fair value based
accounting method
for all awards,
net of tax (874) (3,552) (2,941) (7,311)
Pro forma net loss $(10,221) $(8,378) $(5,888) $(302,895)
Loss per share:
Basic and diluted
- as reported $ (0.08) $ (0.06) $ (0.03) $ (2.63)
Basic and diluted
- pro forma $ (0.09) $ (0.07) $ (0.05) $ (2.67)
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 Company's
asset retirement obligations are primarily the result of the
legal obligation to remove leasehold improvements upon
termination of leases at several of the Company's facilities.
Such obligations have been recorded at fair value, which the
Company estimated by discounting projected cash flows using a
rate of 8.5%. The depreciation and accretion expenses recorded
for the second quarter and six months ended June 30, 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 used interest rate swap contracts, which expired in
July 2003, as cash flow hedges to convert its $62.5 million Euro
denominated variable rate debt to fixed rate debt. Each interest
rate swap contract was designated with the principal balance and
the term of the specific debt obligation. These contracts
involved the exchange of interest payments over the life of the
contract without an exchange of the notional amount upon which
the payments were based. The differential to be paid or received
as interest rates change was recognized as an adjustment to
interest expense. The fair value of these contracts included in
AOCL at June 30, 2003 was $23,000.
The Company also had equity option contracts 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 consisted 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 Company had designated a portion of the
equity option contract as a cash flow hedge of the risk
associated with the unvested, unpaid awards under its long-term
incentive plans (LTIP). Changes in market value related to the
portion of the option contracts designated and effective as
hedges were recorded as a component of AOCL. The amount included
in AOCL was subject to changes in the stock price and was being
amortized ratably to selling, general and administrative expense
(SG&A) over the remaining service periods of the hedged LTIP.
Changes in market value related to the remaining portion of the
option contracts were recognized in SG&A. During the quarter,
the Company determined that one of its LTIP programs was not
achievable and accordingly amortized $3 million from AOCL to
SG&A, which represented the unamortized balance of the deferred
loss on the portion of the option contract that related to this
plan. On May 11, 2003 the contract expired and resulted in a
favorable net cash settlement of $3.7 million. As of June 30,
2003, all of the deferred losses relating to this contract had
been amortized to SG&A.
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 six
months ended June 30, 2003 and 2002.
Second quarter ended Six Months Ended
(In thousands) 2003 2002 2003 2002
Fair value hedges
(in other income,
net) $ 7 $ 10 $ (70) $ 64
Cash flow hedges
(in AOCL):
Balance at beginning
of period $ 3,639 $(4,437) $ 2,838 $ 2,546
Interest rate swap
contracts (636) 438 (860) (24)
Japanese yen forward
contracts - 790 - 410
Equity option
contracts-change
in market value (487) (708) 1,836 (8,740)
Equity option contracts-
amortization of gain/
(loss) to SG&A (2,493) 994 (3,791) 2,885
Balance at end of period $ 23 $(2,923) $ 23 $(2,923)
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. 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
resolution of the criminal investigations. 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,
$20.9 million (pre-tax) through June 30, 2003. The Company
expects to continue to incur substantial costs until all
antitrust investigations are concluded and civil claims are
resolved.
Civil Lawsuits
Federal Antitrust 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
July 31, 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 seven class action
lawsuits, all 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 during various periods, with the earliest
period commencing on January 1, 1994. With respect to EPDM, the
Company, individually or together with Uniroyal Chemical Company,
Inc. and other companies, has been named as a defendant in eleven
pending class action lawsuits filed in California, Connecticut,
New Jersey and New York, 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. A motion for transfer and
consolidation of these cases is pending before the Multidistrict
Litigation Panel. With respect to plastic additives, the Company
and other companies have been named as defendants in seven class
action lawsuits, all of which were filed in 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 Antitrust Class Actions.
With respect to rubber chemicals, the Company and certain of its
subsidiaries along with other companies, have been named as
defendants in nineteen pending putative indirect purchaser class
action lawsuits filed during the period from October, 2002
through December, 2002 in state courts in sixteen 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 three indirect purchaser class action lawsuits, filed during
the period from April, 2003 through May, 2003 in California. The
putative class in each of the actions comprises all persons or
entities in California who indirectly purchased EPDM during
various periods with the earliest period commencing on January 1,
1994. The complaints principally allege 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 plaintiffs seek,
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 Company has filed joint motions to dismiss with respect to
this action.
Federal Securities Class Actions.
The Company and certain of its officers and directors have been
named as defendants in two securities class action lawsuits,
filed during the period from July 18, 2003 to July 31, 2003 in
California and Connecticut by plaintiffs on behalf of themselves
and a class consisting of all purchasers of the Company's stock
during the period from October 26, 1998 through October 8, 2002.
The complaints principally allege that the defendants caused the
Company's shares to trade at artificially inflated levels through
the issuance of false and misleading financial statements in
violation of federal securities laws by inflating profits as a
result of engaging in an illegal price-fixing conspiracy with
respect to rubber chemicals, and that this wrongful conduct
caused injury to the plaintiffs who paid artificially inflated
prices in connection with their purchase of the Company's
publicly traded securities. The plaintiffs seek, among other
things, damages of unspecified amounts, interest and attorneys'
fees and costs.
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.
DISCONTINUED OPERATIONS
On April 24, 2003, the Company entered into an agreement to sell
certain assets and assign certain liabilities of the
OrganoSilicones business unit to the Specialty Materials division
of General Electric Company (GE) and to acquire GE's Specialty
Chemicals business. The transaction closed on July 31, 2003 and
the Company received $633 million in cash and acquired the GE
Specialty Chemicals business with an agreed-upon value of $160
million. The Company expects to receive an additional $12 million
of cash proceeds upon the transfer of certain foreign assets. 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 that GE acquired from the Company. The
total of such payments will be a minimum of $105 million and a
maximum of $250 million. The Company has used proceeds from this
transaction to reduce indebtedness. On July 31, 2003, the
Company reduced the borrowings under its domestic credit facility
to zero and in August of 2003, the Company repurchased $250
million of its 8.5% notes and paid down $62.5 million of its
EURIBOR based bank loans.
The agreement contemplates the sale of assets and assignment of
liabilities with estimated carrying amounts as follows:
(In thousands) June 30, December 31,
2003 2002
Inventory $ 107,843 $ 106,560
Other current assets 2,292 3,798
Property, plant and
equipment, net 239,069 246,554
Other assets 33,893 35,975
Total assets held for sale $ 383,097 $ 392,887
(In thousands) June 30, December 31,
2003 2002
Notes payable $ 3,454 $ 2,033
Accounts payable and accrued
expenses 12,255 14,671
Long-term debt 7,946 8,698
Other liabilities 4,526 3,871
Total liabilities held
for sale $ 28,181 $ 29,273
The revenues, operating profit and pre-tax earnings from
discontinued operations for all periods presented are as follows:
(In thousands) Second quarter ended Six months ended
2003 2002 2003 2002
Net sales $ 113,346 $ 118,245 $ 231,125 $ 232,001
Pre-tax earnings from
discontinued
operations $ 13,797 $ 13,197 $ 31,179 $ 23,454
Income taxes (3,505) (2,637) (7,922) (4,686)
Earnings from
discontinued
operations $ 10,292 $ 10,560 $ 23,257 $ 18,768
The consideration that the Company will receive is subject to
adjustment based on the change in certain net assets of the
OrganoSilicones business unit and the GE Specialty Chemicals
business between December 31, 2002 and 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 $21.0
million). The Company expects to write off certain other assets
associated with the OrganoSilicones business unit, principally
goodwill, with carrying amounts of approximately $222.2 million
and $223.1 million at June 30, 2003 and December 31, 2002,
respectively. 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.
BUSINESS SEGMENT DATA
The Company evaluates a segment's performance based on several
factors, of which a primary measure is operating profit. In
computing operating profit (loss) by segment, the following items
have not been deducted: (1) general corporate expense, (2)
amortization, (3) unabsorbed overhead expense from discontinued
operations (4) facility closures, severance and related costs,
and (5) antitrust legal costs. As these cost items are not
reported to the chief operating decision maker for purposes of
allocating resources among reporting segments or assessing
segment performance, they have been excluded from the Company's
presentation of segment operating profit. General corporate
expense includes costs and expenses that are of a general
corporate nature or managed on a corporate basis, including
amortization expense. These costs are primarily for corporate
administration services, costs related to corporate headquarters
and management compensation plan expenses related to executives
and corporate managers. Unabsorbed overhead expense from
discontinued operations represents corporate costs that were
previously allocated to the OrganoSilicones business unit.
Facility closures, severance and related costs are costs related
to the Company's cost reduction initiative that began in 2001 and
the relocation of the corporate headquarters that began in 2002.
Such costs are primarily for severance and related costs and
other facility closure costs. The antitrust legal costs are
primarily for legal costs associated with antitrust
investigations and related civil lawsuits.
(In thousands) Second quarter ended Six months ended
2003 2002 2003 2002
Net Sales
Polymer Products
Polymer Additives $ 294,562 $ 287,676 $ 596,136 $ 554,911
Polymers 70,282 72,475 138,465 139,955
Polymer Processing
Equipment 40,640 44,652 81,748 94,457
Eliminations (3,523) (3,971) (7,176) (7,290)
401,961 400,832 809,173 782,033
Specialty Products
Crop Protection 71,581 70,538 131,961 123,010
Other 59,359 100,119 123,739 197,528
130,940 170,657 255,700 320,538
Total net sales $ 532,901 $ 571,489 $1,064,873 $1,102,571
Operating Profit
Polymer Products
Polymer Additives $ 6,914 $ 24,324 $ 20,427 $ 35,955
Polymers 4,875 12,432 14,149 21,081
Polymer Processing
Equipment 982 (2,700) 2,060 (2,620)
12,771 34,056 36,636 54,416
Specialty Products
Crop Protection 14,203 20,615 33,854 35,085
Other (605) 2,130 (157) 5,611
13,598 22,745 33,697 40,696
General corporate expense,
including amortization (6,172) (11,809) (21,381) (24,142)
Unabsorbed overhead expense
from discontinued
operations (4,567) (3,464) (7,216) (6,234)
Facility closures,
severance and
related costs (2,686) (6,380) (3,505) (6,380)
Antitrust legal costs (12,386) - (20,875) -
Total operating profit $ 558 $ 35,148 $ 17,356 $ 58,356
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 June
30, 2003, the related condensed consolidated statements of
operations for the three-month and six-month periods ended June
30, 2003 and 2002, and the related condensed consolidated
statements of cash flows for the six-month periods ended June 30,
2003 and 2002. 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
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
July 30, 2003
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
SECOND QUARTER RESULTS
Overview
Consolidated net sales of $532.9 million for the second quarter
of 2003 decreased 7% from $571.5 million for the comparable
period of 2002. The decrease was primarily a result of the
divestiture of the industrial specialties business unit in June
2002. In addition, favorable foreign currency translation of 5%
was offset by decreased unit volume of 4%. International sales,
including U.S. exports, were 50% of total sales, up from 46% for
the second quarter of 2002. The increase was primarily due to
the strengthening of the Euro versus the U.S. dollar. For
further discussion of sales, see the following discussion of
segment results.
The net loss for the second quarter of 2003 was $9.1 million, or
$0.08 per share, as compared to a net loss of $6.3 million, or
$0.06 per share in the second quarter of 2002. The net loss
included earnings from discontinued operations of $10.3 million
for the second quarter of 2003 as compared to earnings of $10.6
million for the comparable period of 2002. The loss from
continuing operations of $19.4 million, or $0.17 per share,
compared to a loss of $16.9 million, or $0.15 per share, for the
second quarter of 2002. The loss from continuing operations for
the second quarter of 2003 included pre-tax charges of $12.4
million for antitrust legal costs and $2.7 million for facility
closures, severance and related costs. The loss from continuing
operations for the second quarter of 2002 included pre-tax
charges of $34.7 million for the loss on the sale of the
industrial specialties business unit and $6.4 million for
facility closures, severance and related costs. The second
quarter losses from continuing operations for 2003 and 2002 also
included pre-tax overhead expenses previously absorbed by the
OrganoSilicones business unit of $4.6 million and $3.5 million,
respectively.
Gross profit as a percentage of sales was 25.9% for the second
quarter of 2003 as compared to 30.3% for the second quarter of
2002. Gross profit decreased by $35.1 million primarily due to
increased raw material and energy costs of $18.2 million,
unfavorable unit volume/mix of $10.9 million, the divestiture of
the industrial specialties business unit in June 2002 of $10.9
million and an unfavorable impact of $5.4 million from higher
environmental costs and the absence of prior year vendor
settlement credits (primarily polymer additives and crop
protection), offset in part by reduced manufacturing costs
attributable to cost saving initiatives of $5.6 million and
favorable foreign currency translation of $5.1 million. The
reporting segments which were most adversely affected by the
increased raw material and energy costs were polymer additives
and polymers, while the largest reductions in unit volume/mix
were reported in crop protection, polymer additives and polymer
processing equipment. The unit volume impact on polymer
processing equipment was essentially offset by favorable selling
prices. All segments, particularly polymer additives, benefited
from cost reduction initiatives and favorable foreign currency
translation.
In addition to reporting depreciation and amortization on a
separate line in the statement of operations, the gross profit of
the Company may not be comparable to those of other entities
since certain companies include shipping and handling expenses in
cost of products sold, while other companies, including Crompton
Corporation, include such expenses in selling, general and
administrative expenses. The amounts of such costs included in
selling, general and administrative expenses by the Company were
$21.3 million and $18.5 million for the second quarters of 2003
and 2002, respectively.
Operating profit for the second quarter of 2003 of $0.6 million
compared to operating profit of $35.1 million for the comparable
period of 2002. The $34.6 million decrease was primarily due to
lower gross profit of $35.1 million and antitrust legal costs of
$12.4 million, offset in part primarily by lower selling, general
and administrative costs of $5.6 million and lower facility
closures, severance and related costs of $3.7 million.
Polymer Products
Polymer additives sales of $294.6 million were up 2% from the
prior year due to favorable foreign currency translation of 5%,
offset in part by a decline in unit volume of 2% and lower
selling prices of 1%. Plastic additives sales increased 5% due
mainly to favorable foreign currency translation. Urethane and
petroleum additives sales rose 11% and 7%, respectively, due
primarily to favorable foreign currency translation and increased
demand. Rubber additives sales declined 15% mainly as a result
of lower selling prices and reduced unit volume. Operating
profit of $6.9 million was down 72% from the prior year due
primarily to higher raw material costs, an unfavorable sales mix,
lower selling prices, an environmental charge of $1.3 million and
the absence of a prior year vendor settlement credit of $1.2
million.
Polymers sales of $70.3 million were down 3% from the second
quarter of 2002 as a result of lower selling prices of 5% and
reduced unit volume of 1%, partially offset by favorable foreign
currency translation of 3%. EPDM sales declined 2% mainly as a
result of the negative impact of industry overcapacity on selling
prices, offset in part by higher unit volume and favorable
foreign currency translation. Urethanes sales were down 4% due
mainly to reduced demand, partially offset by favorable foreign
currency translation. Operating profit of $4.9 million was down
61% from the prior year mainly as a result of lower EPDM selling
prices, higher raw material costs and reduced unit volume in
urethanes.
Polymer processing equipment sales of $40.6 million were down 9%
from the prior year due to reduced demand for capital equipment,
offset in part by an improvement in selling prices of 5% and
favorable foreign currency translation of 5%. Operating profit
of $1.0 million was up $3.7 million from the prior year due
primarily to lower operating expenses and favorable selling
prices, partially offset by lower unit volume. The backlog at
the end of June 2003 was $75 million, down $1 million from the
end of 2002.
Specialty Products
Crop protection sales of $71.6 million were up 1% from the prior
year due to favorable foreign currency translation of 5%, offset
by a decline in unit volume of 4%. Operating profit of $14.2
million was down 31% from the second quarter of 2002 mainly as a
result of lower unit volume, an unfavorable sales mix resulting
from increased sales of resale products and the absence of a
prior year vendor settlement credit of $1.6 million.
Other sales of $59.4 million were down 41% from the prior year
due mainly to the divestment of the industrial specialties
business in June 2002. Refined products sales were up 2% as
higher selling prices and favorable foreign currency translation
more than offset lower unit volume. The operating loss of $0.6
million was unfavorable versus the prior year by $2.7 million due
primarily to the divestiture of the industrial specialties
business and increased environmental-related expenses of $2.6
million, partially offset by higher selling prices.
Discontinued Operations
Sales included in discontinued operations of $113.3 million were
down 4% from the prior year due to a decline in selling prices of
6% and lower unit volume of 4%, offset in part by favorable
foreign currency translation of 6%. Earnings from discontinued
operations of $10.3 million (net of income taxes of $3.5 million)
were 3% lower than the prior year of $10.6 million (net of income
taxes of $2.6 million), mainly as a result of reduced selling
prices and lower unit volume, partially offset by lower operating
expenses and the absence of a prior year pre-tax charge for
facility closures, severance and related costs of $2.9 million.
General Corporate Expense
General corporate expense includes costs and expenses that are of
a general corporate nature or managed on a corporate basis,
including amortization expense. These costs are primarily for
corporate administration services, costs related to corporate
headquarters and management compensation plan expenses related to
executives and corporate managers. General corporate expense of
$6.2 million decreased $5.6 million from the second quarter of
2002 due primarily to a gain on the Company's equity derivative
contract of $5.2 million that matured in May, 2003.
Unabsorbed Overhead Expense from Discontinued Operations
Unabsorbed overhead expense from discontinued operations
represents corporate costs which were previously absorbed by the
OrganoSilicones business unit.
Other
Selling, general and administrative expenses of $84.8 million
decreased 6% versus the second quarter of 2002. The decrease was
primarily due to a gain on the Company's equity derivative
contract of $5.2 million and the elimination of expenses related
to the divested industrial specialties business unit of $5.3
million, partially offset by unfavorable foreign currency
translation of approximately $4 million. Depreciation and
amortization of $27.4 million decreased 6% primarily due to
reduced depreciation expense related to the divested industrial
specialties business unit. Research and development costs of
$12.7 million decreased 12% due primarily to the divested
industrial specialties business unit. Equity income increased
$0.2 million to $2.2 million mainly due to increased earnings
associated with the Gustafson seed treatment joint venture.
Facility closures, severance and related costs were $2.7 million
as compared to $6.4 million in the second quarter of 2002. These
costs were primarily for severance and were the result of the
cost reduction initiative that began in 2001 and the relocation
of the Company's corporate headquarters that began in 2002.
The Company incurred antitrust legal costs of $12.4 million
during the second quarter of 2003 and did not incur any antitrust
legal costs for the comparable period of 2002. Such costs were
primarily for legal costs associated with antitrust
investigations and related civil lawsuits.
Interest expense decreased 2% primarily due to a decrease in
interest rates on the Company's borrowings.
Other expense, net, of $3.8 million for the second quarter of
2003 decreased from $38.9 million for the comparable period of
2002. The decrease is primarily a result of the $34.7 million
loss reported in 2002 for the sale of the industrial specialties
business unit.
The effective income tax benefit rate decreased to 33% from 44%
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.
YEAR-TO-DATE RESULTS
Overview
Consolidated net sales of $1,064.9 million for the first six
months of 2003 decreased 3% from $1,102.6 million for the
comparable period of 2002. The decrease was primarily a result
of the divestiture of the industrial specialties business unit in
June 2002 of 7% and lower selling prices of 1%, partially offset
by favorable foreign currency translation of 5%. International
sales, including U.S. exports, were 50% of total sales, up from
46% for the first six months of 2002. The increase was primarily
due to the strengthening of the Euro versus the U.S. dollar. For
further discussion of sales, see the following discussion of
segment results.
The net loss for the first six months of 2003 was $3.3 million,
or $0.03 per share, as compared to a net loss of $298.5 million,
or $2.63 per share for the first six months of 2002. The net
loss included earnings from discontinued operations of $23.3
million and $18.8 million for the first six months of 2003 and
2002, respectively. The net loss for the first six months of
2003 also included a cumulative effect of accounting change of
$0.4 million, related to the implementation of FASB Statement No.
143, "Asset Retirement Obligations" and the first six months of
2002 also included a cumulative effect of accounting change for
the impairment of goodwill of $299 million. The loss from
continuing operations of $26.1 million, or $0.23 per share,
compared to a loss of $18.3 million, or $0.16 per share, for the
first half of 2002. The loss from continuing operations for the
first six months of 2003 included pre-tax charges of $20.9
million for antitrust legal costs and $3.5 million for facility
closures, severance and related costs. The loss from continuing
operations for the first six months of 2002 included pre-tax
charges of $34.7 million for the loss on the sale of the
industrial specialties business unit and $6.4 million for
facility closures, severance and related costs. The losses from
continuing operations for the first six months of 2003 and 2002
also included pre-tax overhead expenses previously absorbed by
the OrganoSilicones business unit of $7.2 million and $6.2
million, respectively.
Gross profit as a percentage of sales was 26.8% for the first six
months of 2003 as compared to 29.4% for the first six months of
2002. Gross profit decreased by $39.1 million primarily due to
an increase in raw material and energy costs of $28.4 million,
the divestiture of the industrial specialties business unit in
June 2002 of $21.3 million, lower selling prices of $7.8 million,
an unfavorable unit volume/mix of $4.9 million and an unfavorable
impact of $5.4 million from higher environmental costs and the
absence of prior year vendor settlement credits (primarily
polymer additives and crop protection). These negative factors
were offset in part by favorable foreign currency translation of
$11.3 million, savings attributable to cost reduction initiatives
of $9.6 million and reduced manufacturing costs due to increased
plant throughput of $12.4 million. The business segments most
adversely affected by the increased raw material and energy
costs, and benefits resulting from higher plant throughput were
polymer additives, polymers and the refined products portion of
other. The polymer additives and polymers segments contributed
equally to the reduction in selling prices, offset in part by
improvements in the refined products portion of other and polymer
processing equipment. The impact of favorable foreign currency
and cost reductions from savings initiatives benefited all the
segments, particularly polymer additives.
In addition to reporting depreciation and amortization on a
separate line in the statement of operations, the gross profit of
the Company may not be comparable to those of other entities
since certain companies include shipping and handling expenses in
cost of products sold, while other companies, including Crompton
corporation, include such expenses in selling, general and
administrative expenses. The amounts of such costs included in
selling, general and administrative expenses by the Company were
$39.4 million and $36.9 million for the first six months of 2003
and 2002, respectively.
Operating profit for the first six months of 2003 of $17.4
million compared to an operating profit of $58.4 million for the
comparable period of 2002. The $41.0 million decrease is
primarily a result of a decrease in gross profit of $39.1 million
and antitrust legal costs of $20.9 million, partially offset by
lower selling, general and administrative expenses of $5.4
million, reduced depreciation and amortization of $4.2 million,
increased equity income of $3.6 million, lower research and
development costs of $2.9 million, and lower facility closures,
severance and related costs of $2.9 million.
Polymer Products
Polymer additives sales of $596.1 million were up 7% from the
prior year as a result of favorable foreign currency translation
of 5% and higher unit volume of 3%, offset in part by lower
selling prices of 1%. Plastic, urethane and petroleum additives
sales rose 11%, 15% and 6%, respectively, due primarily to
favorable foreign currency translation and higher unit volume.
Rubber additives sales were down 6% due mainly to lower selling
prices, partially offset by favorable foreign currency
translation. Operating profit of $20.4 million was down 43% from
the prior year due primarily to higher raw material costs, lower
selling prices, an environmental charge of $1.3 million and the
absence of a prior year vendor settlement credit of $1.2 million,
offset in part by the impact of increased unit volume.
Polymers sales of $138.5 million were down 1% from the prior year
due to lower selling prices of 5%, partially offset by favorable
foreign currency translation of 3% and increased unit volume of
1%. EPDM sales declined 5% due mainly to lower selling prices
resulting from industry overcapacity, offset in part by increased
demand and favorable foreign currency translation. Urethanes
sales were up 3% due primarily to favorable foreign currency
translation. Operating profit of $14.1 million declined 33% from
the comparable period of the prior year due mainly to lower EPDM
selling prices and higher raw material costs, partially offset by
the absence of unfavorable prior year variances attributable to
reduced plant throughput.
Polymer processing equipment sales of $81.7 million were down 13%
from the prior year due to depressed demand for capital
equipment, offset in part by favorable foreign currency
translation of 5% and improved selling prices of 3%. Operating
profit of $2.1 million was up $4.7 million over the first six
months of the prior year due mainly to lower operating expenses
and improved selling prices, partially offset by lower unit
volume.
Specialty Products
Crop protection sales of $132.0 million were up 7% from the prior
year due to favorable foreign currency translation of 5% and
increased unit volume of 2%. Operating profit of $33.9 million
was down 4% from the prior year mainly as a result of a prior
year vendor settlement credit of $1.6 million and an unfavorable
sales mix, offset in part by higher joint venture equity income
of $3.5 million and the impact of increased unit volume.
Other sales of $123.7 million were down 37% from the prior year
due primarily to the June 2002 divestiture of the industrial
specialties business. Sales of the remaining refined products
business rose 7% due mainly to favorable foreign currency
translation and increased selling prices. The operating loss of
$0.2 million was unfavorable compared to the prior year by $5.8
million, with $3.4 million of the decline being attributable to
the divestiture of the industrial specialties business unit and
the remainder due mainly to higher raw material costs and
increased environmental-related expenses of $3.3 million, offset
in part by increased selling prices.
Discontinued Operations
Sales included in discontinued operations of $231.1 million were
0.4% lower than the prior year as a decline in selling prices of
6% and lower unit volume of 1% was almost entirely offset by
favorable foreign currency translation. Earnings from
discontinued operations of $23.3 million (net of income taxes of
$7.9 million) were 24% higher than the prior year of $18.8
million (net of income taxes of $4.7 million), due mainly to
lower operating expenses and the absence of a prior year pre-tax
charge for facility closures, severance and related costs of $2.9
million, partially offset by lower selling prices.
General Corporate Expense
General corporate expense includes costs and expenses that are of
a general corporate nature or managed on a corporate basis,
including amortization expense. These costs are primarily for
corporate administration services, costs related to corporate
headquarters and management compensation plan expenses related to
executives and corporate managers. The decrease for the first
six months of 2003 versus the comparable period of 2002 of $2.8
million was primarily due to decreased expenses related to the
Company's long-term incentive plans.
Unabsorbed Overhead Expense from Discontinued Operations
Unabsorbed overhead expense from discontinued operations
represents corporate costs which were previously absorbed by the
OrganoSilicones business unit.
Other
Selling, general and administrative expenses of $172.1 million
decreased 3% versus the first six months of 2002. The decrease
was primarily due to the elimination of expenses related to the
divested industrial specialties business unit of $10.8 million
and cost savings of $4.9 million, partially offset by unfavorable
foreign currency translation of approximately $9 million.
Depreciation and amortization of $54.5 million decreased 7%
primarily due to reduced depreciation expense related to the
divested industrial specialties business unit. Research and
development costs of $24.8 million decreased 10% due primarily to
the divestiture of the industrial specialties business unit.
Equity income increased $3.6 million to $7.8 million mainly due
to increased earnings associated with the Gustafson seed
treatment joint venture.
Facility closures, severance and related costs were $3.5 million
as compared to $6.4 million for the first six months of 2002.
These costs were primarily for severance and were the result of
the cost reduction initiative that began in 2001 and the
relocation of the Company's corporate headquarters that began in
2002.
The Company incurred antitrust legal costs of $20.9 million for
the first six months of 2003 and did not incur any antitrust
investigation costs for the comparable period of 2002. Such
costs were primarily for legal costs associated with antitrust
investigations and related civil lawsuits.
Interest expense was unchanged for the first six months of 2003
as compared to the first six months of 2002.
Other expense, net, of $4.0 million for the first six months of
2003 decreased from $37.4 million for the comparable period in
2002. The decrease is primarily a result of the $34.7 million
loss reported in 2002 for the sale of the industrial specialties
business unit.
The effective income tax benefit rate decreased to 33% from 41%
for the comparable period 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. The transaction closed on July 31, 2003, and the
Company received $633 million in cash and acquired the GE
Specialty Chemicals business with an agreed upon value of $160
million. The Company expects to receive an additional $12
million of cash proceeds upon the transfer of certain foreign
assets. 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 Company has used proceeds from this
transaction to reduce indebtedness. On July 31, 2003, the
Company reduced the borrowings under its domestic credit facility
to zero and in August of 2003, the Company repurchased $250
million of its 8.5% notes and paid down $62.5 million of its
EURIBOR based bank loans. For more information, see the
Discontinued Operations footnote included in the Notes to
Condensed Consolidated Financial Statements in this Form 10-Q.
The June 30, 2003 working capital balance of $443 million
increased $77 million from the year-end 2002 balance of $366
million, and the current ratio increased to 1.7 from 1.5. The
increases in working capital and the current ratio were primarily
due to increases in accounts receivable and inventories and
decreases in accounts payable, accrued expenses and income taxes
payable, partially offset by a decrease in other current assets.
Average days sales in receivables from continuing operations
increased to 26 days for the first six months of 2003, versus 23
days for the first six months of 2002. Excluding the accounts
receivable securitization programs, average days sales in
receivables from continuing operations decreased slightly to 64
days for the first six months of 2003, versus 65 days for the
first six months of 2002. Average inventory turnover from
continuing operations of 4.1 was unchanged from the same period
of 2002.
Net cash provided by operations of $31.1 million decreased $101.4
million from $132.6 million net cash provided by operations for
the first six months of 2002. The decrease was primarily the
result of a decrease in earnings after adjustment in 2002 for the
loss on the sale of a business unit and the cumulative effect of
accounting change, a smaller increase in proceeds from accounts
receivable securitization, an increase in inventory and a
decrease in accounts payable as compared to 2002, and a $50
million federal income tax refund in 2002, partially offset by a
decrease in accounts receivable as compared to 2002. The
Company's debt to total book capital ratio decreased to 84% as of
June 30, 2003 from 86% at year-end 2002. The decrease is due to
an increase in stockholders' equity, partially offset by an
increase in debt. The Company's future liquidity needs are
expected to be financed from operations.
The Company has a five-year credit facility, which is scheduled
to mature in October 2004. At June 30, 2003, borrowings
available under this credit facility were $400 million. Pursuant
to an amendment to the credit facility agreement dated June 26,
2003, available borrowings under this facility were reduced to
$300 million upon completion of the sale of the OrganoSilicones
business unit to GE on July 31, 2003. Borrowings on this
facility are at various rate options to be determined on the date
of borrowing. Borrowings under this agreement amounted to $217.8
million at June 30, 2003 and carried a weighted average interest
rate of 3.6%. On April 1, 2003, the Company utilized its credit
facility to repay its 6.6% notes due in 2003 of $165 million. On
July 31, 2003, the Company utilized a portion of the proceeds
from the transaction with GE to reduce the borrowings under the
credit facility to zero. The Company is required to report to
the lenders, on a quarterly basis, compliance with certain
financial covenants. Under the covenants, the Company is
required to maintain a leverage ratio (adjusted total debt to
adjusted earnings before interest, taxes, depreciation and
amortization ("Bank EBITDA"), with the adjustments to both debt
and earnings being made in accordance with the terms of the
revolving credit facility agreement) and an interest coverage
ratio (Bank EBITDA to interest expense). The Company also
provides a security interest in certain domestic personal
property not to exceed 10% of consolidated net tangible assets.
In connection with the June 26, 2003 amendment to the credit
facility agreement, the Company's leverage ratio covenant was
modified. The Company was in compliance with the financial
covenants of its credit facility at June 30, 2003. The Company's
five-year credit facility and the amendments thereto have been
previously filed as exhibits to the Company's filings with the
Securities and Exchange Commission.
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 June 30, 2003, $150
million of 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 June 30, 2003, $102 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 June 30, 2003, the Company
had $56.1 million of outstanding letters of credit and guarantees
primarily related to its environmental remediation liabilities,
insurance obligations and a potential tax exposure.
For the first six months of 2003, as a result of the Company's
cost reduction initiative that began in 2001 and the relocation
of the corporate headquarters that began in 2002, the Company
recorded a charge for facility closures, severance and related
costs of $3.5 million. This charge is primarily for severance
costs for the remaining Greenwich employees who elected
severance as a result of the relocation of the corporate
headquarters. The Company estimates costs to complete this
corporate relocation will range from $3 to $5 million in 2003
and expects the relocation to be completed by the end of the
year. The Company's cost reduction initiative continues to be
an ongoing program and the Company intends to continue its
efforts to further reduce operating costs. The Company does not
expect the future costs related to this cost reduction
initiative to be significant. As of June 30, 2003, the Company
had accruals of $16.3 million for severance and related costs,
$3.9 million for other facility closure costs and $0.4 million
for facility closure and maintenance costs related to the
Freeport facility. The Company expects future cash payments
from these reserves to approximate $13 million in the second
half of 2003, $7 million in 2004 and $0.6 million in 2005. For
further information, refer to the Facility Closures, Severance
and Related Costs footnote included in the Notes to Condensed
Consolidated Financial Statements.
The Company expected to realize approximately $60 million of
annual pre-tax cost savings as a result of the 2001 cost
reduction initiative, which it achieved as of December 31, 2002.
In 2002, approximately $45 million of these savings were
realized in cost of products sold, $9 million in selling,
general and administrative expenses (SG&A), $1 million in
research and development and $2 million in depreciation expense.
For the first six months of 2003, the Company realized
approximately $14.5 million of additional savings, of which
approximately $9.6 million was in cost of products sold and $4.9
million was in SG&A. As a result of this continuing cost
reduction initiative, the Company expects to realize additional
savings of approximately $8 million to $12 million for the
second half of 2003, of which approximately $2 million will be
in SG&A and the remainder will be in cost of products sold. The
Company also expects to realize cost savings of approximately $4
million by the end of 2003 and an additional $4 million in 2004,
primarily in SG&A, as a result of the relocation of its
corporate headquarters. All cost savings, both estimated and
actual, are reported net of any increased expenses or the impact
of reduced revenues.
During the second half of 2003, the Company intends to implement
a new cost reduction program to eliminate, at a minimum, the
overhead expenses previously absorbed by the OrganoSilicones
business unit. The Company expects to incur future costs
related to this program.
Capital expenditures for the first six months of 2003 amounted to
$32.7 million as compared to $36 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 $85 to $100 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 Company and certain of its officers and
directors have also been named as defendants in certain
securities class action lawsuits in connection with the Company's
presentation of profits involving rubber chemicals in certain of
its financial statements. 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 "Part II, 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, with the exception of the
Company's customer rebate program which has been summarized
below. 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
six months of 2003.
Customer Rebates
The Company accrues for the estimated cost of customer rebates as
a reduction of sales. Customer rebates are primarily based on
customers achieving defined sales targets over a specified period
of time. The Company estimates the cost of these rebates based
on the likelihood of the rebate being achieved and recognizes the
cost ratably as a deduction from sales as such sales are
recognized. Rebate programs are monitored on a regular basis and
adjusted as required.
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
adoption of Statement No. 146 has not had a material impact on
the company's accounting for facility closures, severance and
related costs as of June 30, 2003.
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 June 30, 2003.
In April 2003, the FASB issued Statement No. 149, "Amendment of
Statement No. 133 on Derivative Instruments and Hedging
Activities." Statement No. 149 amends and clarifies accounting
and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement No.
149 is effective for contracts entered into or modified, and for
hedging relationships designated, after June 30, 2003. The
Company will ensure that it applies the provisions of Statement
No. 149 to contracts and hedging relationships entered into after
June 30, 2003.
In May 2003, the FASB issued Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." Statement No. 150 establishes standards
for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some
circumstances). The guidance in Statement No. 150 is generally
effective for all financial instruments entered into or modified
after May 31, 2003. Otherwise, it is effective at the beginning
of the first interim period beginning after June 15, 2003. The
Company will ensure that it applies the provisions of Statement
No. 150 to all financial instruments modified or entered into
after the effective date of this Statement.
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 June 30, 2003, the
Company's reserves for environmental remediation activities
totaled $125.5 million. It is possible that the Company's
estimates for environmental remediation liabilities may change in
the future should additional sites be identified, further
remediation measures be required or undertaken, the
interpretation of current laws and regulations be modified or
additional environmental laws and regulations be enacted.
The Company intends to assert all meritorious legal defenses and
all other equitable factors which are available to it with
respect to the above matters. The 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 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 Note to Condensed 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 $1,287
million at June 30, 2003. The fair market value of such debt as
of June 30, 2003 was $1,364 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
The Company's management has evaluated, with the
participation of the Company's Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)), as of the end of the
period covered by this quarterly report. Based on that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of the
end of the period covered by this quarterly report.
(b) Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over
financial reporting that occurred during the fiscal quarter
covered by this quarterly report that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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. 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
resolution of the criminal investigations. 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,
$20.9 million (pre-tax) through June 30, 2003. The Company
expects to continue to incur substantial costs until all
antitrust investigations are concluded and civil claims are
resolved.
Civil Lawsuits
Federal Antitrust 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
July 31, 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 seven class action
lawsuits, all 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 during various periods, with the earliest
period commencing on January 1, 1994. With respect to EPDM, the
Company, individually or together with Uniroyal Chemical Company,
Inc. and other companies, has been named as a defendant in eleven
pending class action lawsuits filed in California, Connecticut,
New Jersey and New York, 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. A motion for transfer and
consolidation of these cases is pending before the Multidistrict
Litigation Panel. With respect to plastic additives, the Company
and other companies have been named as defendants in seven class
action lawsuits, all of which were filed in 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 Antitrust Class Actions.
With respect to rubber chemicals, the Company and certain of its
subsidiaries along with other companies, have been named as
defendants in nineteen pending putative indirect purchaser class
action lawsuits filed during the period from October, 2002
through December, 2002 in state courts in sixteen 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 three indirect purchaser class action lawsuits, filed during
the period from April, 2003 through May, 2003 in California. The
putative class in each of the actions comprises all persons or
entities in California who indirectly purchased EPDM during
various periods with the earliest period commencing on January 1,
1994. The complaints principally allege 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 plaintiffs seek,
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 Company has filed joint motions to dismiss with respect to
this action.
Federal Securities Class Actions.
The Company and certain of its officers and directors have been
named as defendants in two securities class action lawsuits,
filed during the period from July 18, 2003 to July 31, 2003 in
California and Connecticut by plaintiffs on behalf of themselves
and a class consisting of all purchasers of the Company's stock
during the period from October 26, 1998 through October 8, 2002.
The complaints principally allege that the defendants caused the
Company's shares to trade at artificially inflated levels through
the issuance of false and misleading financial statements in
violation of federal securities laws by inflating profits as a
result of engaging in an illegal price-fixing conspiracy with
respect to rubber chemicals, and that this wrongful conduct
caused injury to the plaintiffs who paid artificially inflated
prices in connection with their purchase of the Company's
publicly traded securities. The plaintiffs seek, among other
things, damages of unspecified amounts, interest and attorneys'
fees and costs.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
31.1 Certification of Periodic Financial Reports by
Crompton Corporation's Chief Executive Officer
(Section 302) (filed herewith).
31.2 Certification of Periodic Financial Reports by
Crompton Corporation's Chief Financial Officer
(Section 302) (filed herewith).
32.1 Certification of Periodic Financial Reports by
Crompton Corporation's Chief Executive Officer
(Section 906) (filed herewith).
32.2 Certification of Periodic Financial Reports by
Crompton Corporation's Chief Financial Officer
(Section 906) (filed herewith).
(b) The following Reports on Form 8-K have been filed during
the second quarter and through the date of this filing:
(i) 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);
(ii) 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);
(iii) 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);*
(iv) Report on Form 8-K dated June 26, 2003, reporting
on Item 5 (Other Events and Regulation FD
Disclosure) and Item 7 (Financial Statements and
Exhibits);
(v) Report on Form 8-K dated July 14, 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); and*
(vi) Report on Form 8-K dated July 31, 2003, reporting
on Item 5 (Other Events and Regulation FD
Disclosure), Item 7 (Financial Statements and
Exhibits) and Item 12 (Results of Operations and
Financial Condition).*
* In accordance with General Instruction B of Form 8-K, the
Reports submitted to the Securities and Exchange Commission
under Items 9 and 12 of Form 8-K are 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
Reports 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: August 14, 2003 /s/Michael F. Vagnini
Michael F. Vagnini
Vice President and Controller
(Principal Accounting Officer)
Date: August 14, 2003 /s/Barry J. Shainman
Barry J. Shainman
Secretary