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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File No. 0-30270
Crompton Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-2183153
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
199 Benson Road
Middlebury, Connecticut 06749
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 573-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |x| No | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed as of February 27, 2004 was $822,545,607.
The number of voting shares of Common Stock of the registrant outstanding
as of February 27, 2004 was 114,510,126.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders on April 27, 2004 ...Part III
PART I Page
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Item 1. Business 2
Polymer Products 3
Specialty Products 5
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters 16
and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial 19
Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on 71
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 71
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and 71
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 72
Item 14. Principal Accountant Fees and Services 72
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72
Signatures 80
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PART I.
ITEM 1. BUSINESS
When we use the terms the "Corporation," "Company," "Crompton, "Registrant,"
"we," "us" and "our," unless otherwise indicated or the context otherwise
requires, we are referring to Crompton Corporation and its consolidated
subsidiaries. Certain disclosures included in this Annual Report on Form 10-K
constitute forward-looking statements that are subject to risk and uncertainty.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward-Looking Statements."
(a) General Development of Business
Crompton Corporation, formerly known as CK Witco Corporation, was incorporated
in Delaware in 1999 in connection with the merger of Crompton & Knowles
Corporation and Witco Corporation on September 1, 1999 (the "Merger").
Crompton & Knowles Corporation ("Crompton & Knowles") was incorporated in
Massachusetts in 1900. Crompton & Knowles engaged in the manufacture and sale of
specialty chemicals beginning in 1954 and, beginning in 1961, in the manufacture
and sale of polymer processing equipment. Crompton & Knowles substantially
expanded both its specialty chemical and its polymer processing equipment
businesses through a number of acquisitions in both the United States and
Europe, including the acquisition in 1996 of Uniroyal Chemical Company, Inc.,
("Uniroyal") a multinational manufacturer of performance chemicals, including
rubber chemicals and additives for plastics and lubricants, crop protection
chemicals, and polymers, which include Royalene(R) EPDM rubber and
Adiprene(R)/Vibrathane(R) urethane prepolymers.
Witco Corporation ("Witco") was incorporated in Delaware in 1958 as Witco
Chemical Company, Inc., at which time it succeeded by merger to the business of
Witco Chemical Company, an Illinois corporation formed in 1920. Witco was a
global manufacturer and marketer of specialty chemical products for use in a
wide variety of industrial and consumer applications. In 1995, Witco acquired
OSi Specialties Holding Company, an entity engaged in the manufacture of
silicone surfactants, organofunctional silanes, specialty fluids and amine
catalysts, which was sold in 2003 (see below). In 1998, Witco acquired Ciba
Specialty Chemicals Inc.'s ("Ciba") worldwide polyvinyl chloride heat
stabilizers business and related assets and Ciba acquired Witco's global epoxy
systems and adhesives business and related assets.
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 resulted in a gain of $111.7 million (net of income taxes of $175.3
million). The Company received net cash proceeds of $633.4 million, which
includes proceeds from its first quarterly earn-out payment of $8.75 million
less certain transaction-related fees of $18.4 million. In addition, as part of
the transaction, the Company acquired GE's Specialty Chemicals business valued
at $160 million. The Company will continue to receive quarterly earn-out
payments through September of 2006 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, of which the minimum was recorded on a present
value basis as a receivable on the date of the transaction. The Company will
receive a minimum of $35 million of these cash payments in 2004. Based on the
performance of GE's Silicones business during the fourth quarter of 2003, the
Company will receive an additional $4.5 million of earn-out proceeds in the
first quarter of 2004. The recognition of this additional gain is contingent
upon the continued favorable future performance of GE's Silicones business,
which the Company will assess on a quarterly basis.
In July 2003, the Company announced a cost reduction program to eliminate, at a
minimum, overhead expenses previously absorbed by the OrganoSilicones business.
The Company expects this cost reduction program to result in approximately $40
million of annual pre-tax savings in 2004. In order to achieve its goal, the
Company expects to reduce its global workforce by approximately 375 positions.
(b) Financial Information About Industry Segments
Information as to the sales, operating profit (loss), depreciation and
amortization, assets, capital expenditures and equity method investments
attributable to each of the Corporation's business segments during each of its
last three fiscal years is set forth in the Business Segment Data footnote
included in the Notes to Consolidated Financial Statements on pages 65 through
67 of this Report.
The Corporation's businesses are grouped into two units, "Polymer Products" and
"Specialty Products." Polymer Products consists of separate reporting segments
for Polymer Additives (plastic additives, rubber additives, urethane additives
and petroleum additives), Polymers (EPDM and urethane polymers) and Polymer
Processing Equipment (Davis-Standard). Specialty Products consists of separate
reporting segments for Crop Protection (specialty actives and the Gustafson
Joint Venture) and Other (refined products.)
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(c) Narrative Description of Business
Products and Services
The Corporation manufactures and markets a wide variety of polymer and specialty
products. Most of the Corporation's products are sold to industrial customers
for use as additives, ingredients or intermediates that impart particular
characteristics to the customers' end products. The Corporation's products are
currently marketed in more than 120 countries and serve a wide variety of end
use markets including tires, agriculture, automobiles, textiles, plastics,
lubricants, petrochemicals, leather, construction, recreation, mining,
packaging, home furnishings, personal care, appliances and paper. The principal
products and services offered by the Corporation are described below.
POLYMER PRODUCTS
Polymer Additives
The Polymer Additives business supplies a number of specialty chemicals to the
plastics, rubber, coatings/adhesives and lubricant industries. The Polymer
Additives business had net sales for fiscal 2003 of $1,232 million.
Plastic Additives
The Corporation is a global leader in supplying a broad line of additives to the
plastics industry. These additives are often specially developed and formulated
for a customer's specific manufacturing requirements. The Corporation
manufactures stabilizers, lubricants, plasticizers and peroxide catalysts, and
markets UV stabilizers and antistats, which are used in the manufacture of PVC
resins and compounds for applications such as pipes, fittings, siding, flooring,
window profiles and packaging materials. In addition, the Corporation is a
manufacturer and supplier of polymerization inhibitors, polymerization catalysts
and initiators, antioxidants, lubricants, chemical foaming agents, polymer
modifiers and chemical intermediates as additives for the olefins and styrenics
industries for use in the manufacture of resins and compounds that are employed
in a broad spectrum of applications used in packaging, automobiles,
construction, furniture and appliances. With the acquisition of General
Electric's Specialty Chemical business in 2003, the Corporation expanded its
antioxidant product line with a manufacturing facility and added marketing of
impact modifiers and processing aids. These products are used in PVC and
engineering thermoplastics. The Corporation also produces organotin compounds
for the production of PVC stabilizers and pharmaceuticals, and for use as a
catalyst in the production of polymers and in certain glass applications.
The Corporation is backward integrated in fatty acids for use in the plastic
additives business. Produced are fatty acids and glycerin for internal
consumption and the merchant market. Derivatives of fatty acids (esters,
stearates and amides) are produced for surface modification as direct
lubricants, emulsifiers or as intermediates for ingredients that modify
surfaces. Fatty acids are used as lubricants in polymers (rubber and plastic)
for personal care products and in curing systems for rubber. Glycerin is used to
provide lubrication in pharmaceutical and personal care applications.
Net sales of plastic additives during fiscal 2003, 2002 and 2001 were 32.4%,
28.3% and 25.8% of the Corporation's net sales for such years, respectively.
Rubber Additives
This product line of the Polymer Additives business contains over 60 different
chemicals for use in processing rubber. These products include accelerators,
antioxidants, antiozonants, chemical foaming agents and specialty waxes.
Accelerators are used for curing natural and synthetic rubber, and have a wide
range of activation temperatures, curing ranges and use forms. Antiozonants
protect rubber compounds from flex cracking and ozone, oxygen and heat
degradation. Antioxidants provide rubber compounds with protection against
oxygen, light and heat. Foaming agents produce gas by thermal decomposition or
via a chemical reaction with other components of a polymer system and are mixed
with rubber to produce sponge rubber products. Waxes inhibit static atmospheric
ozone cracking in rubber. Tire manufacturers accounted for approximately 60% of
the Corporation's rubber additives sales in fiscal 2003, with the balance of
such sales going to industrial rubber goods, which includes numerous
manufacturers of hoses, belting, sponge and a wide variety of other engineered
rubber products. The Corporation believes it is the third largest producer of
rubber additives in the world.
Urethane Additives
The urethane additives business is comprised of three product groupings that
offer technologically advanced materials to a diverse and global customer base:
Fomrez(R) saturated polyester polyols, Witcobond(R) polyurethane dispersions,
and Witcothane(R) polyurethane systems. Polyester polyols are employed in
industrial applications such as flexible foam for seating, thermoplastic
urethanes for structural parts, adhesives and coatings. The polyurethane
dispersions are sold to a larger and more diverse customer base primarily for
coating applications such as flooring, fiberglass sizing and textiles. The
polyurethane systems business, which supplies products primarily for use by the
shoe sole industry, is a highly service intensive business.
Baxenden Chemicals Limited, the Corporation's 53.5% owned subsidiary (Croda Inc.
owns 46.5%), is engaged in the manufacture and marketing of isocyanate
derivatives, polyester polyols and specialty polymer systems used in a wide
range
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of applications. The major markets served by Baxenden are automotive,
construction, surface coatings, leather and textile finishing. Sub-markets
include coatings, adhesives, sealants, elastomers and insulation for the above
markets. Baxenden is focused on specialty polymer and resin chemistry and novel
curing mechanisms for such polymers. The core technology is urethane and acrylic
chemistry and also includes novel polyesters and esterification processes.
Petroleum Additives
The Corporation is a global manufacturer and marketer of high-performance
additive components used in transport and industrial lubricant applications. The
component product line includes Hybase(R) overbased calcium sulfonates and
Lobase(R) neutral calcium sulfonates used in motor oils and marine lubricants.
These sulfonates are oil soluble surfactants and their properties include
detergency and corrosion protection to help lubricants keep car, truck and ship
engines clean with minimal wear. Also in the product line are barium and sodium
sulfonates which provide corrosion protection and emulsification in metalworking
fluids. Other key products are the Naugalube(R) antioxidants widely used by the
Corporation's customers in engine oils, gear oils, industrial oils and greases
and Synton(R) high viscosity poly alpha olefins (PAO) used in the production of
synthetic lubricants for automotive, aviation and industrial applications
(e.g.compressor oils and gear oils). Products under development include new
friction modifiers and antiwear additives to meet customers' performance
requirements in automotive applications.
Polymer Additives are sold through a specialized sales force, including
technical service professionals who address customer inquiries and problems. The
technical service professionals generally have degrees in chemistry and/or
chemical engineering and are knowledgeable in specific product application
fields. The sales and technical service professionals identify and focus on
customers' growth opportunities, working not only with the customers'
headquarters staff, but also with their research and development and
manufacturing personnel on a worldwide basis.
Polymers
The Polymers business, which had net sales for fiscal 2003 of $285.7 million,
has two principal product lines: Adiprene(R)/Vibrathane(R) urethane prepolymers
and Royalene(R) EPDM rubber.
EPDM
Ethylene-propylene-diene rubber ("EPDM") is commonly known as "crackless rubber"
because of its ability to withstand sunlight and ozone without cracking. EPDM's
application end uses include various automobile components, single-ply roofing,
hoses, electrical insulation, tire sidewalls, mechanical seals and gaskets, oil
additives and plastic modifiers. The Corporation produces and markets more than
30 different EPDM polymer variations.
The Corporation believes it is one of the five largest suppliers of EPDM
polymers in the world, and the third largest North American producer of EPDM.
The Corporation's success in this business has been due to several factors,
including product performance, low cost manufacturing, customized products, and
outstanding technical and customer service supported by a highly qualified staff
of technical service specialists with extensive field and rubber processing
experience, which have earned the Corporation a reputation for excellence and
strong customer loyalty.
Royalene(R) products are primarily sold through a dedicated sales force;
however, in certain geographic areas outside the United States, Royalene(R)
products are sold through distributors.
Urethane Polymers
The Corporation believes that it is the leading manufacturer of high performance
liquid castable urethane prepolymers in the world. Among the most common
applications using these prepolymers are solid industrial tires, printing
rollers, industrial rolls, abrasion-resistant mining products such as chutes,
hoppers and slurry transport systems, mechanical goods and a variety of sports
equipment and other consumer items. The Corporation competes effectively in this
business by providing efficient customer service and technical assistance
through a highly regarded technical service staff and a proven ability to
develop new products and technologies for its customers. Over 150 grades of
urethane prepolymers are commercially available from the Corporation.
Adiprene(R)/Vibrathane(R) urethane prepolymers are sold directly by a dedicated
sales force in the United States, Canada and Australia and through direct sales
distributorships in Europe, Latin America and the Far East.
Adiprene(R)/Vibrathane(R) customers are serviced worldwide by a dedicated
technical staff. Technical service personnel support field sales, while a
research and development staff is dedicated to support new product and process
development to meet rapidly changing customer needs. Technical support is a
critical component of the product offering.
Polymer Processing Equipment
The Corporation's wholly owned subsidiary, Davis-Standard Corporation, designs,
manufactures and sells polymer processing equipment, which includes extruders,
electronic controls, and integrated extrusion systems, and offers specialized
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service and modernization programs for in-place polymer processing systems. The
polymer processing equipment business had net sales for fiscal 2003 of $166.5
million.
Integrated polymer processing systems, which include extruders in combination
with controls and other equipment, are used to process polymers into various
products such as plastic sheet and profiles used in appliances, automobiles,
home construction, and furniture; extruded shapes used as house siding,
furniture trim, and substitutes for wood molding; and cast and blown film used
to package many consumer products. Integrated extrusion systems are also used to
compound engineered polymers, to recycle and reclaim plastics, to coat paper,
cardboard and other materials used as packaging, and to apply plastic or rubber
insulation to power cables for electrical utilities and to wire for the
communications, construction, automotive, and appliance industries. Industrial
blow molding equipment produced by the Corporation is sold to manufacturers of
non-disposable plastic items such as tool cases and beverage coolers.
The Corporation is a leading producer of polymer processing equipment for the
polymers industry and competes with domestic and foreign producers of such
products. The Corporation is one of a number of producers of this type of
polymer processing machinery.
In the United States, most of the Corporation's sales of polymer processing
equipment are made by its own dedicated sales force and sales agents. In other
parts of the world, and for export sales from the United States, the
Corporation's sales of such equipment are made largely through agents.
SPECIALTY PRODUCTS
Crop Protection
The Crop Protection business manufactures and markets a wide variety of
agricultural chemicals for many major food crops, including grains, fruits, nuts
and vegetables, and many non-food crops, such as tobacco, cotton, turf, flax and
ornamental plants. The business focuses its efforts mainly on products used on
high-value cash crops, such as ornamentals, nuts, citrus and tree and vine
fruits as opposed to commodity crops such as soybeans and corn. The Crop
Protection business had net sales for fiscal 2003 of $270.9 million.
Specialty Actives
The specialty actives business offers four major crop protection chemical
product lines: fungicides, miticides and insecticides, growth regulants, and
herbicides. Each product line is composed of numerous formulations for specific
crops and geographic regions.
The Corporation has a substantial presence in its targeted segments of the
agrichemicals market due to its strategy of focusing research, product
development, and sales and marketing on highly profitable market niches that are
less sensitive to competitive pricing pressures than commodity segments of the
market. While the products of the specialty actives business represent a
relatively small percentage of the grower's overall costs, these products are
often critical to the success or failure of the crops being treated. In
addition, product line extensions, attention to application effectiveness and
customer service are important factors in developing strong customer loyalty.
In Australia, the Corporation's subsidiary, Hannaford Seedmaster Services Pty.
Ltd., provides seed treatment chemicals and treating services to the local
market as well as agricultural chemicals for various crop and non-crop uses.
The Crop Protection business, under the Uniroyal name, promotes seed treatment
chemicals in all regions of the world other than North America and Australia,
and enjoys a substantial position in the international seed treatment market.
The Corporation anticipates continuing growth in seed treatment, which is
environmentally attractive because it involves very localized use of
agricultural chemicals and very low use rates compared to broad foliar or soil
treatment.
The Crop Protection business markets its products in North America through a
direct sales force selling to a distribution network consisting of more than one
hundred distributors and direct customers. In the international market, the Crop
Protection business' direct sales force services over 300 distributors, dealers
and agents.
Gustafson Joint Venture
In November 1998, the Corporation formed joint ventures with Bayer Corporation
to serve the agricultural seed treatment markets in North America. The
Corporation and Bayer each hold a 50 percent interest in the seed treatment
business operated by Gustafson LLC and Gustafson Partnership (collectively,
"Gustafson").
Gustafson has a leading share of the North American commercial seed treatment
formulation market and is recognized as a technological leader in this market.
Gustafson is engaged directly and through cooperative activities in developing
and formulating seed treatment systems, offering a broad line of chemical
formulations, which contain fungicides, insecticides and seed conditioning aids
in addition to commercial seed treating equipment. Gustafson's expertise enables
it to develop and
5
produce formulations consisting of multiple components to obtain optimum
efficacy against seed and soil disease pathogens and insects.
Gustafson maintains a developmental program in the field of naturally occurring
biological control agents targeted for disease. Gustafson has focused its
efforts on naturally occurring organisms as opposed to genetically engineered
organisms.
OrganoSilicones
In July 2003, the Company completed the sale of its OrganoSilicones business to
GE and its acquisition of GE's Specialty Chemicals business. Information
concerning this transaction is set forth in Item 1(a) on page 2 of this Report
and in the Discontinued Operations footnote included on pages 45 and 46 of Item
8 of this Report.
Other
The Other business of the Corporation, with net sales for fiscal 2003 of $243.2
million, consists of Refined Products.
Refined Products
The refined products business is engaged in the manufacture and marketing of a
wide range of high purity hydrocarbon products, including white oils and ink
oils, petrolatums, microcrystalline waxes, cable compounds, and refrigeration
oils and compressor lubricants, serving numerous global markets predominantly
requiring food grade quality. The business' products serve as lubricants,
emollients, moisture barriers, plasticizers and carriers and are characterized
by their chemical inertness and high quality.
Refined products are used in four major market segments: polymers (including
polystyrene, polyolefin, thermoplastic elastomers and PVC applications),
personal care, refrigeration oils and telecommunication cables, as well as
additional minor markets.
In 1998, Petro-Canada Lubricants of Mississauga, Ontario, Canada, became Refined
Products' supplier for most grades of paraffinic white oils used in certain
applications and refined products became Petro-Canada's exclusive distributor of
these white oils in North America, Latin America and Asia Pacific. The refined
products sales, marketing and distribution organization services refined
products' and Petro- Canada's paraffinic white mineral oil customers for a
variety of applications.
The Corporation markets its refined products primarily directly through its own
sales force.
Sources of Raw Materials
Chemicals, steel, castings, parts, machine components and other raw materials
required in the manufacture of the Corporation's products are generally
available from a number of sources, some of which are foreign. The Corporation
uses significant amounts of petrochemical feedstocks in many of its chemical
manufacturing processes. Large increases in the cost of petrochemical
feedstocks, particularly for sustained periods of time, or other raw materials
could adversely affect the Corporation's operating margins. While temporary
shortages of raw materials used by the Corporation may occur occasionally, such
raw materials are currently readily available. However, their continuing
availability and price are subject to domestic and world market and political
conditions and regulations. Major requirements for key raw materials are
typically purchased pursuant to multi-year contracts. The Corporation is not
dependent on any one supplier for a material amount of its raw material
requirements, except one supplier provides the Corporation with approximately 8
to 10% of diverse raw materials sourced from the supplier's multiple
manufacturing/processing locations.
The Corporation holds a 50% interest in Rubicon Inc. ("Rubicon"), a
manufacturing joint venture between Uniroyal and Huntsman Corporation, located
in Geismar, Louisiana, which supplies both Huntsman and the Corporation with
aniline, and the Corporation with diphenylamine ("DPA"). The Corporation
believes that its aniline and DPA needs in the foreseeable future will be met by
production from Rubicon.
Patents and Licenses
The Corporation has over 2,500 United States and foreign patents and pending
applications and has trademark protection for approximately 570 product names.
Patents, trade names, trademarks, know-how, trade secrets, formulae, and
manufacturing techniques assist in maintaining the competitive position of
certain of the Corporation's products. Patents, formulae, and know-how are of
particular importance in the manufacture of a number of specialty chemicals
manufactured and sold by the Corporation, and patents and know-how are also
significant in the manufacture of certain wire insulating and polymer processing
machinery product lines. The Corporation is licensed to use certain patents and
technology owned by other companies, including some foreign companies, to
manufacture products complementary to its own products, for which it pays
royalties in amounts not considered material to the consolidated results of the
enterprise. Products to which the Corporation has such rights include certain
crop protection chemicals and polymer processing machinery.
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While the existence of a patent is prima facie evidence of its validity, the
Corporation cannot assure that any of its patents will not be challenged nor can
it predict the outcome of any such challenge. The Corporation believes that no
single patent, trademark, or other individual right is of such importance,
however, that expiration or termination thereof would materially affect its
business.
Seasonal Business
With the exception of the Crop Protection business, the sales of which are
influenced by agricultural growing seasons, no material portion of any segment
of the business of the Corporation is significantly seasonal.
Customers
The Corporation does not consider any reporting segment of its business
dependent on a single customer or a few customers, the loss of any one or more
of who would have a material adverse effect on the reporting segment. No one
customer's business accounts for more than ten percent of neither the
Corporation's gross revenues nor more than ten percent of its earnings before
taxes.
Backlog
Because machinery production schedules range from about 60 days to 10 months,
backlog is significant to the Corporation's polymer processing equipment
business. Firm backlog of customers' orders for this business at the end of 2003
totaled approximately $62 million compared with $76 million at the end of 2002.
It is expected that most of the 2003 backlog will be shipped during 2004. Orders
for specialty chemicals and polymers are generally filled from inventory stocks
and thus are excluded from backlog.
Competitive Conditions
The Corporation is a major manufacturer of polymer products and specialty
products. Competition varies by product and by geographic region, except that in
rubber chemicals the market is fairly concentrated. In that market, the
Corporation believes that it is one of the three largest suppliers of rubber
chemicals in the world. In addition, the EPDM market is fairly concentrated. The
Corporation believes that it is one of the five largest suppliers of EPDM
polymers in the world, and the third largest producer of EPDM in North America.
Product performance, quality, technical and customer service, and price are all
important factors in competing in the polymer product and specialty product
businesses.
Research and Development
The Corporation conducts research and development on a worldwide basis at a
number of facilities, including field stations that are used for crop protection
research and development activities. Research and development expenditures by
the Corporation totaled $51.5 million for the year 2003, $54.3 million for the
year 2002, and $56.0 million for the year 2001.
Environmental Matters
Chemical companies are subject to extensive environmental laws and regulations
concerning, among other things, emissions to the air, discharges to land,
surface, subsurface strata and water and the generation, handling, storage,
transportation, treatment and disposal of waste and other materials and are also
subject to other federal, state and local laws and regulations regarding health
and safety matters.
Environmental Regulation. The Corporation believes that its business, operations
and facilities have been and are being operated in substantial compliance in all
material respects with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations. The ongoing operations of chemical manufacturing plants,
however, entail risks in these areas and there can be no assurance that material
costs or liabilities will not be incurred. In addition, future developments,
such as increasingly strict requirements of environmental and health and safety
laws and regulations and enforcement policies thereunder, could bring into
question the handling, manufacture, use, emission or disposal of substances or
pollutants at facilities owned, used or controlled by the Corporation or the
manufacture, use or disposal of certain products or wastes by the Corporation
and could involve potentially significant expenditures. To meet changing
permitting and regulatory standards, the Corporation may be required to make
significant site or operational modifications, potentially involving substantial
expenditures and reduction or suspension of certain operations. The Corporation
incurred $10.9 million of costs for capital projects and $30.0 million for
operating and maintenance costs related to environmental compliance at its
facilities during fiscal 2003. In fiscal 2004, the Corporation expects to incur
approximately $12.9 million of costs for capital projects and $29.7 million for
operating and maintenance costs related to environmental compliance at its
facilities. During fiscal 2003, the Corporation spent $16.6 million to clean up
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previously utilized waste disposal sites and to remediate current and past
facilities. The Corporation expects to spend approximately $17.2 million during
fiscal 2004 to clean up such waste disposal sites and to remediate current and
past facilities.
Beginning in 2003, European environmental regulations has limited the use of
lead-based heat stabilizers that until now have been essential to the
manufacture of polyvinyl chloride construction pipe. As an alternative to these
lead-based products, the Corporation has patented new technology for an
organic-based, heavy-metal-free product. Capacity has been added at the
Corporation's Lampertheim, Germany plant to produce this product. In October
2001, the International Maritime Organization passed a regulation banning the
use of TBTO in paints for ships. The regulation goes into effect one year after
25% of the member nations representing at least 25% of the world's shipping
tonnage adopt the regulation. The Corporation manufactures TBTO at its
Bergkamen, Germany plant. Sales of this product were not material in 2003.
Pesticide Regulation. The Corporation's Crop Protection business is subject to
regulation under various federal, state, and foreign laws and regulations
relating to the manufacture, sales and use of pesticide products.
In August, 1996, Congress enacted the Food Quality Protection Act of 1996
("FQPA"), which made significant changes to the Federal Insecticide, Fungicide,
and Rodenticide Act ("FIFRA"), governing U.S. sale and use of pesticide
products, and the Federal Food, Drug, and Cosmetic Act ("FFDCA"), which limits
pesticide residues on food. FQPA facilitated registrations and reregistrations
of pesticides for special (so called "minor") uses under FIFRA and authorized
collection of maintenance fees to support pesticide reregistrations.
Coordination of regulations implementing FIFRA and FFDCA is now required. Food
safety provisions of FQPA establish a single standard of safety for pesticide
residue on raw and processed foods; require that information be provided through
large food retail stores to consumers about the health risks of pesticide
residues and how to avoid them; preempt state and local food safety laws if they
are based on concentrations of pesticide residues below recently established
federal residue limits (called "tolerances"); and ensure that tolerances protect
the health of infants and children.
FFDCA, as amended by FQPA, authorizes the Environmental Protection Agency
("EPA") to set a tolerance for a pesticide in or on food at a level, which poses
"a reasonable certainty of no harm" to consumers. The EPA is required to review
all tolerances for all pesticide products by August 2006. Some of the
Corporation's products have successfully completed review, others are currently
under review and other products will be reviewed under this standard in the
future.
The European Commission ("EC") has established procedures whereby all existing
active ingredient pesticides will be reviewed. This EC regulation became
effective in 1993 and will result in a review of all commercial products. The
initial round of reviews covered ninety products, four of which are the
Corporation's products. Data from the Corporation pertaining to these products
were submitted for review in mid-2003. Other of the Corporation's products will
be reviewed in future years. The process may lead to full reregistration in
member states of the EC or may lead to some restrictions, or cancellation of
registrations if adverse data is discovered.
Employees
The Corporation had 5,521 employees on December 31, 2003.
Available Information
The Corporation's internet website address is www.cromptoncorp.com. The
Corporation makes available free of charge on or through its internet website
the Corporation's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
soon as reasonably practicable after the Corporation electronically files such
material with, or furnishes it to, the Securities and Exchange Commission
("Commission").
The Corporation's Corporate Governance Principles, Code of Business Conduct and
charters for its Audit Committee and its Organization, Compensation and
Governance Committees are available on the Corporation's website and will be
available, free of charge, to any stockholder who requests them from the
Corporation's Investor Relations Department at Crompton Corporation, 199 Benson
Road, Middlebury, CT 06749 USA. The information contained on the Corporation's
website is not incorporated by reference in this annual report on Form 10-K and
should not be considered a part of this report.
Geographic Information
The information with respect to sales and property, plant and equipment
attributable to each of the major geographic areas served by the Corporation for
each of the Corporation's last three fiscal years, is set forth in the Notes to
Consolidated Financial Statements on pages 67 and 68 of this Report.
The Corporation considers that the risks relating to operations of its foreign
subsidiaries are comparable to those of other U.S. companies, which operate
subsidiaries in developed countries. All of the Corporation's international
operations are subject to
8
fluctuations in the relative values of the currencies in the various countries
in which its activities are conducted and other risks inherent in conducting
business internationally.
ITEM 2. PROPERTIES
The following table sets forth information as to the principal operating
properties and other significant properties of the Corporation and its
subsidiaries. All properties are owned in fee except where otherwise indicated:
Location Facility Reporting Segment
- -------- -------- -----------------
UNITED STATES
Alabama
Bay Minette Plant Polymer Additives
Connecticut
Bethany Research Center Crop
Middlebury Corporate Offices, Research Center* Corporate Headquarters
Naugatuck Research Center Polymer Additives, Polymers
Pawcatuck Office, Plant, Machine Shop, Tech Center Polymer Processing Equipment
Illinois
Mapleton Plant Polymer Additives, Polymers, Other
Louisiana
Geismar Plant Crop, Polymer
Taft Plant Polymer Additives
New Jersey
Perth Amboy Plant Polymer Additives
Somerville Office, Plant, Machine Shop Polymer Processing Equipment
New York
Tarrytown Research Center* Polymer Additives, Other
North Carolina
Gastonia Plant Crop, Polymer Additives, Polymers
Pennsylvania
Petrolia Plant Other
Tennessee
Memphis Plant Polymer Additives, Other
Texas
Marshall Plant Polymer Additives
West Virginia
Morgantown Plant, Research Center Polymer Additives
INTERNATIONAL
Australia
Regency Park, S.A. Office, Machine Shop* Crop
Seven Hills Office, Laboratory* Polymers
Belgium
Antwerp Office* Crop, Polymer Additives, Polymers, Other
Brazil
Rio Claro Plant Crop, Polymer Additives, Polymers
Sao Paulo Office* Crop, Polymer Additives, Polymers
Canada
Elmira Plant Crop, Polymer Additives, Polymers
Guelph Research Center Crop, Polymer Additives, Polymers
Scarborough Plant* Polymer Additives
West Hill Plant Polymer Additives
Germany
Bergkamen Plant* Polymer Additives
Erkrath Office, Plant, Machine Shop, Tech Center Polymer Processing Equipment
Haan Office and Machine Shop Polymer Processing Equipment
Lampertheim Plant Polymer Additives
Italy
Latina Plant Crop, Polymer Additives, Polymers
9
Location Facility Reporting Segment
- -------- -------- -----------------
Korea
Ansan Plant Polymer Additives
Mexico
Altamira Plant Polymer Additives
Cuautitlan Plant Polymer Additives
The Netherlands
Ankerwag Plant Crop
Amsterdam Plant Polymer Additives, Other
Haarlem Plant Polymer Additives, Other
Koog aan de Zaan Plant Polymer Additives, Other
Republic of China
Kaohsiung Plant** Polymer Additives
Nanjing Plant (Under Construction) Polymers
Singapore Administrative, Research, Sales Office* Polymer Additives, Polymers, Other
Thailand
Mapthaphut Plant* Polymer Additives
United Kingdom
Accrington Plant*** Polymer Additives
Droitwich Plant*** Polymer Additives
Evesham Research Center Crop
Langley Office* Crop, Polymer Additives, Polymers, Other
Oldbury Office, Plant, Machine Shop Polymer Processing Equipment
- -------------
* Facility leased by the Corporation.
** Facility owned by Uniroyal Chemical Taiwan Ltd., which is 80% owned by
Uniroyal.
*** Facility owned by Baxenden Chemicals Limited, which is 53.5% owned by the
Corporation.
All facilities are considered to be in good operating condition, well
maintained, and suitable for the Corporation's requirements.
ITEM 3. LEGAL PROCEEDINGS
The Corporation 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.
Environmental Liabilities
Each quarter, the Corporation evaluates and reviews estimates for future
remediation and other costs to determine appropriate environmental reserve
amounts. For each site, a determination is made of the specific measures that
are believed to be required to remediate the site, the estimated total cost to
carry out the remediation plan, the portion of the total remediation costs to be
borne by the Corporation and the anticipated time frame over which payments
toward the remediation plan will occur. The total amount accrued for such
environmental liabilities at December 31, 2003, was $120.7 million. The
Corporation estimates the potential liabilities to range from $109 million to
$133 million at December 31, 2003. It is reasonably possible that the
Corporation'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 Corporation and some of its subsidiaries have been identified by federal,
state or local governmental agencies, and by other potentially responsible
parties (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. Because these regulations have been construed to authorize
joint and several liability, the EPA could seek to recover all costs involving a
waste disposal site from any one of the PRP's for such site, including the
Corporation, despite the involvement of other PRP's. In many cases, the
Corporation is one of several hundred PRPs so identified. In a few instances,
the Corporation is one of only a handful of PRPs. In certain instances, a number
of other financially responsible PRP's are also involved, and the Corporation
expects that any ultimate liability resulting from such matters will be
apportioned between the Corporation and such other parties. In addition, the
10
Corporation is involved with environmental remediation and compliance activities
at some of its current and former sites in the United States and abroad. The
more significant of these matters are described below.
Laurel Park - The EPA, the State of Connecticut, and the Laurel Park Coalition
(consisting of Uniroyal and a number of other parties) have entered into a
Consent Decree governing the design and implementation of the selected remedy
for the Laurel Park site. Remedial construction began at the Laurel Park site in
July 1996, and was completed in 1998. Operation and maintenance activities at
the site are ongoing.
Litigation brought by the Laurel Park Coalition seeking contribution to the
costs from the owner/operators of the site and later from other identified
generator parties has resulted in substantial recoveries from a number of
parties. In December 2000 and January 2001, the United States District Court for
the District of Connecticut ("District Court") issued final judgment allowing
recovery against various municipalities by the Laurel Park Coalition in the
aggregate amount of approximately $1,044,000, and declaring that the defendants
at the Laurel Park site are liable for certain stated percentages of future
response costs. As a result of a settlement with one municipality, the aggregate
amount of the outstanding judgment has been reduced to approximately $761,000.
In October 2002, the United States Second Circuit Court of Appeals ("Second
Circuit") generally affirmed the recoveries adopted by the District Court with
respect to the municipal defendants. In November 2002, the municipal defendants
filed a Petition for Rehearing En Banc with the Second Circuit which was denied
in January 2003. Immediately following this denial, the same defendants filed a
Motion to Stay Mandate for 90 days to allow them to petition the United States
Supreme Court for a writ of certiorari. In June 2003, the Petition for Writ of
Certiorari was denied and the matter was remanded to the District Court to
perform a calculation concerning interest due on response costs. The District
Court subsequently ordered mediation that was unsuccessful. The District Court
then directed the parties to submit calculations of interest in accordance with
the Second Circuit's decision.
Vertac - Uniroyal and its Canadian subsidiary, Uniroyal Chemical Co./Cie
(formerly known as Uniroyal Chemical Ltd./Ltee) were joined with others as
defendants in consolidated civil actions brought in the United States District
Court, Eastern District of Arkansas, Western Division ("Court") by the United
States of America, the State of Arkansas and Hercules Incorporated ("Hercules"),
relating to a Vertac Chemical Corporation site in Jacksonville, Arkansas.
Uniroyal has been dismissed from the litigation. On May 21, 1997, the Court
entered an order finding that Uniroyal Chemical Co./Cie is jointly and severally
liable to the United States, and finding that Hercules and Uniroyal Chemical
Co./Cie are liable to each other in contribution. On October 23, 1998, the Court
entered an order granting the United States' motion for summary judgment against
Uniroyal Chemical Co./Cie and Hercules as to the amount of its claimed removal
and remediation costs of $102.9 million at the Vertac site. Trial on the
allocation of these costs as between Uniroyal Chemical Co./Cie and Hercules was
concluded on November 6, 1998, and on February 3, 2000, the Court entered an
Order finding Uniroyal Chemical Co./Cie liable to the United States for
approximately $2,300,000 and liable to Hercules in contribution for
approximately $700,000. On April 10, 2001, the United States Court of Appeals
for the Eighth Circuit ("Appeals Court") (i) reversed a decision in favor of the
United States and against Hercules with regard to the issue of divisibility of
harm and remanded the case back to the Court for a trial on the issue; (ii)
affirmed the finding of arranger liability against Uniroyal Co./Cie; and (iii)
set aside the findings of contribution between Hercules and Uniroyal Co./Cie by
the Court pending a decision upon remand. The Appeals Court also deferred ruling
on all constitutional issues raised by Hercules and Uniroyal Co./Cie pending
subsequent findings by the Court. On June 6, 2001, the Appeals Court denied
Uniroyal Co./Cie's petition for rehearing by the full Appeals Court on the
Appeals Court's finding of arranger liability against Uniroyal Co./Cie and on
December 10, 2001, Uniroyal Co./Cie's Petition for a Writ of Certiorari to the
United States Supreme Court with regard to the issue of its arranger liability
was denied. On December 12, 2001, the Court concluded hearings pursuant to the
April 10, 2001 remand by the Appeals Court and briefing on the issue of
divisibility was completed in January 2003. A decision from the Court is
expected during the second quarter of 2004.
The Corporation 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 matters could have a material adverse effect on its
consolidated results of operations in any given year or other reporting period
if a number of these matters are resolved unfavorably.
Antitrust Investigations and Related Matters
Antitrust Investigations
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber chemicals
will be resolved.
11
The Company also reached agreement with the Commissioner of Competition and the
Attorney General (the "Attorney General") of Canada on March 15, 2004, regarding
a criminal antitrust investigation of the Company. The Company has agreed to
plead guilty to one count of conspiring to lessen competition unduly in the sale
and marketing of certain rubber chemicals in Canada. The Attorney General and
the Company will jointly recommend that the court impose a sentence requiring
the Company to pay a fine of $9 million Canadian (U.S. $7 million), payable in
six annual installments, without interest, beginning in 2004. If the court
accepts the joint recommendation at a hearing expected to occur in the next
several months, the Canadian investigation of the Company with respect to rubber
chemicals will be resolved.
Expected cash payments for U.S. and Canadian fines total $2.3 million in 2004;
$2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007; $16.2 million
in 2008; and $18.5 million in 2009. The Company recorded a charge of $45.2
million against results of operations for its fiscal year ended December 31,
2003, as a reserve for the payment of the U.S. and Canadian fines.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the Company
cannot predict the timing or outcome of that investigation, including the amount
of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in, coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the "Governmental
Authorities") with respect to possible antitrust violations relating to the sale
and marketing of certain other products, including ethylene propylene diene
monomer (EPDM); heat stabilizers, including tin-based stabilizers and
precursors, mixed metal stabilizers and epoxidized soybean oil (ESBO); nitrile
rubber; and urethanes and urethane chemicals. Such investigations concern
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 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 EC'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 EC with respect to mixed metal
stabilizers and ESBO in the near future. The assurances of amnesty are
conditioned upon several factors, including continued cooperation with the
Governmental Authorities. The Company is actively cooperating with the
Governmental Authorities regarding such investigations.
Since inception of the governmental investigations, the Company has been
conducting its own internal investigation with the assistance of special
counsel. The Company has completed its review of the matters under investigation
by the Governmental Authorities as well as 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. During the course of the
Company's internal investigation, the Company has provided the Governmental
Authorities with information regarding other areas of the Company's business and
products that may involve certain anticompetitive practices. As discussed above,
the Company has received, from each of the Governmental Authorities, verbal or
written assurances of conditional amnesty from prosecution and fines with
respect to each of such areas. In addition, the Company has completed its
internal investigation of any improper or criminal conduct by current and former
officers and employees of the Company and its affected subsidiaries. During the
course of the Company's internal investigation, the Company has strengthened its
training and compliance programs and has taken certain actions with respect to
certain employees, including termination of employment and other disciplinary
actions.
During the fiscal year ended December 31, 2003, the Company had sales of rubber
processing chemicals, including accelerators, antioxidants and antiozonants, of
$191 million; sales of EPDM of $144 million; sales of heat stabilizers,
including tin-based stabilizers and precursors, mixed metal stabilizers and
ESBO, of approximately $224 million; and sales of urethanes and urethane
chemicals of approximately $286 million. The Company's 2003 sales did not
include sales of nitrile rubber, which is no longer part of the Company's
business. The nitrile rubber business was previously part of a joint venture
between the Company and an unaffiliated company. In December 2001, the Company
sold its interest in the joint venture, which had 2001 sales of approximately
$30 million.
The Company does not expect the resolution of the rubber chemicals
investigations by the U.S. and Canada to have a material adverse effect on its
consolidated financial position. However, the resolution of any other 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.
During the fiscal year ended December 31, 2003, the Company also incurred
antitrust investigation and related costs of $32.5 million (pre-tax). The
Company expects to continue to incur substantial costs until all antitrust
investigations are concluded and civil claims are resolved.
12
Civil Lawsuits
Federal Antitrust Class Actions.
The Company, individually or together with certain of its subsidiaries and other
companies, is a defendant in certain direct purchaser class action lawsuits
filed in federal courts during the period from late March, 2003 through
February, 2004 involving the sale of rubber chemicals, EPDM, plastic additives,
including heat stabilizers, impact modifiers and processing aids, and nitrile
rubber.
With respect to rubber chemicals, the Company, its subsidiary Uniroyal Chemical
Company, Inc. ("Uniroyal") and other companies are defendants in a single,
consolidated direct purchaser class action lawsuit filed in the United States
District Court, Northern District of California, by plaintiffs on behalf of
themselves and a class consisting of all persons and entities who purchased
rubber chemicals in the United States directly from any of the defendants, or
any present or former parent, subsidiary or affiliate, at any time during the
period from January 1, 1994 through the present. The consolidated class action
lawsuit consolidates six previously pending class action lawsuits filed in
California. In addition to the consolidated action, the Company, its subsidiary
Uniroyal and other companies are defendants in a single class action lawsuit,
also filed in the United States District Court, Northern District of California,
by plaintiffs on behalf of themselves and a class consisting of all persons and
entities who purchased rubber chemicals in the United States directly from any
of the defendants at any time during the period from January 1, 1994 through the
present.
With respect to EPDM, the Company, its subsidiary Uniroyal and other companies,
are defendants in a single, consolidated direct purchaser class action lawsuit
filed in the United States District Court, District of Connecticut, by
plaintiffs on behalf of themselves and a class consisting of all persons and
entities who purchased EPDM in the United States directly from any of the
defendants, or any present or former parent, subsidiary or affiliate, at any
time during the period from January 1, 1994 through December 31, 2002. The
consolidated class action lawsuit consolidates eleven previously pending class
action lawsuits filed in California, Connecticut, New Jersey and New York that
had been transferred to the United States District Court, District of
Connecticut, and coordinated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation.
With respect to plastic additives, the Company and other companies are
defendants in a single, consolidated class action lawsuit filed in the United
States District Court, Eastern District of Pennsylvania, by plaintiffs on behalf
of themselves and a class consisting of all persons and entities who purchased
plastic additives in the United States directly from any of the defendants or
from any predecessors, parents, subsidiaries, or affiliates at any time during
the period from January 1, 1990 through January 31, 2003. The consolidated class
action lawsuit consolidates seven previously pending class action lawsuits filed
in Pennsylvania.
With respect to nitrile rubber, the Company, its subsidiary Uniroyal and other
companies are defendants in six class action lawsuits filed in the United States
District Court, Western District of Pennsylvania, by plaintiffs on behalf of
themselves and a class consisting of all persons and entities who purchased
nitrile rubber from any of the defendants or from any predecessors, parents,
subsidiaries, or affiliates at any time during various periods with the earliest
period commencing on January 1, 1994.
The complaints in these actions principally allege that the defendants conspired
to fix, raise, maintain or stabilize prices for rubber chemicals, EPDM, plastic
additives or nitrile rubber, as applicable, sold in the United States in
violation of Section 1 of the Sherman Act and that this caused injury to the
plaintiffs who paid artificially inflated prices for such products as a result
of such alleged 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, are defendants in nine pending putative indirect
purchaser class action lawsuits filed during the period from October, 2002
through December, 2002 in state courts in nine states. The putative class in
each of the actions comprises all persons within each of the applicable states
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 caused injury to individuals who paid more to purchase tires
as a result of such alleged 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. Ten previously pending rubber chemicals
class action lawsuits filed in Arizona, Kansas, Maine, Nebraska, New Mexico, New
York, North Dakota, Wisconsin and Washington D.C. have been dismissed.
13
With respect to EPDM, the Company, its sudsidiary Uniroyal and other companies
are defendants in a consolidated indirect purchaser class action lawsuit, filed
on October 31, 2003 in California. The consolidated class action lawsuit
consolidates three previously pending indirect purchaser class action lawsuits
filed in California. The putative class in this action comprises all persons or
entities in California who indirectly purchased EPDM at any time from at least
January 1, 1994 to the present. The complaint principally alleges that the
Company conspired to fix, raise, stabilize and maintain the price of EPDM and
allocate markets and customers in the United States and California in violation
of California's Cartwright Act and Unfair Competition Act and that this caused
injury to purchasers who paid more to purchase, indirectly, EPDM as a result of
such alleged anticompetitive activities. The plaintiffs seek, among other
things, treble damages of an unspecified amount, costs (including attorneys'
fees) and disgorgement of profits.
With respect to plastic additives, the Company and other companies are
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 caused injury to purchasers who paid more to purchase PVC modifiers as
a result of such alleged 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 parties have been advised
to meet and confer to devise an orderly discovery process.
With respect to nitrile rubber, the Company is a defendant in an indirect
purchaser class action lawsuit, filed on March 4, 2004 in California. The
putative class in this action comprises all persons or entities in California
who indirectly purchased nitrile rubber at any time from at least January 1,
1994 to the December 31, 2002. The complaint principally alleges that the
Company conspired to fix, raise, stabilize and maintain the price of nitrile
rubber 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 caused injury to purchasers who paid more to purchase, indirectly, nitrile
rubber as a result of such alleged anticompetitive activities. The plaintiffs
seek, among other things, treble damages of an unspecified amount, costs
(including attorneys' fees) and disgorgement of profits.
Federal Securities Class Actions.
Between July 18, 2003 and September 5, 2003, plaintiffs, on behalf of all
purchasers of the Company's stock during the period from October 26, 1998
through October 8, 2002, filed three federal securities class action lawsuits in
California against the Company and certain of its officers and directors. 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. Plaintiffs filed two additional federal class action lawsuits containing
substantially similar allegations in Connecticut. The plaintiffs in the three
federal court actions filed in California agreed to voluntarily dismiss these
actions and proceed instead in the two federal securities class actions filed in
Connecticut. Notices of voluntary dismissal with respect to the three federal
court actions filed in California were filed in October 2003.
Plaintiffs filed a sixth class action lawsuit in Connecticut state court on
behalf of those persons or entities who acquired the Company's common stock in
connection with the Company's merger with Witco Corp. The complaint principally
alleged that the defendants breached their fiduciary duties by causing 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. The plaintiffs contended that this
wrongful conduct caused them injury by causing them to exchange their Witco
shares at artificially inflated prices and inducing them to accept as
consideration for their Witco shares, shares in a new company whose balance
sheet did not reflect its true liabilities. This action was subsequently removed
to Connecticut federal court. While a motion to remand this case to state court
was pending, plaintiffs agreed to voluntarily dismiss the action and proceed
instead in the two federal securities class actions filed in Connecticut, as
described above. A voluntary dismissal of this sixth class action lawsuit was
filed in November 2003.
The Connecticut federal court actions have been ordered to be consolidated in
Connecticut federal court. Plaintiffs' motion for the appointment of lead
plaintiff and lead plaintiff's counsel is currently pending before the court. It
is anticipated that after the court resolves plaintiffs' motion for the
appointment of lead plaintiff and lead plaintiff's counsel, the appointed
plaintiff's counsel will file a new consolidated amended class action complaint.
At that point, the court will set a briefing schedule for defendants' motions
addressed to the consolidated amended complaint.
14
Shareholder Derivative Lawsuit.
The Company and its board of directors are defendants in a shareholder
derivative lawsuit, filed on August 25, 2003 in Connecticut state court,
nominally brought on behalf of the Company. The complaint principally alleges
that the Company's directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result of
engaging in an illegal price-fixing conspiracy with respect to rubber chemicals.
The plaintiffs contend that this wrongful conduct caused the Company's financial
results to be inflated, cost the Company its credibility in the marketplace and
market share, and has and will continue to cost the Company millions of dollars
in investigative and legal fees. The plaintiffs seek, among other things,
punitive damages of an unspecified amount, prejudgment interest and attorneys'
fees and costs. On January 8, 2004, plaintiffs' counsel and defendants' counsel
filed a joint motion to stay the derivative action until 90 days after the
federal court rules on any motions to dismiss in the Connecticut federal court
securities class actions. The state court has not yet ruled on this joint
motion.
The federal and state 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. The Company has not recorded a charge for potential liabilities and
expenses in connection with the civil claims, because it is not yet able to
reasonably estimate a reserve for such potential costs.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation are as follows:
Robert L. Wood, age 49, has served as President and Chief Executive Officer of
the Company since January 2004. Previously, Mr. Wood served for 27 years with
The Dow Chemical Company in a variety of executive capacities, most recently as
business group President for Thermosets and Dow Automotive.
Vincent A. Calarco, age 61, has served as Chairman of the Board since 1999 and
as President and Chief Executive Officer of the Registrant from 1999 to January
2004. Mr. Calarco served as President and Chief Executive Officer of Crompton &
Knowles from 1985 to 1999, and Chairman of the Board from 1986 to 1999. Mr.
Calarco has been a member of the Board of Directors of the Registrant since 1999
and was a member of the Board of Directors of Crompton & Knowles from 1985 to
1999.
Robert W. Ackley, age 62, has served as Executive Vice President, Polymer
Processing Equipment of the Registrant since 1999. Mr. Ackley served as Vice
President, Polymer Processing Equipment, of Crompton & Knowles from 1998 to 1999
and has served as President of Davis-Standard Corporation (prior to 1995,
Davis-Standard Division) since 1983.
Peter Barna, age 60, has served as Senior Vice President and Chief Financial
Officer of the Registrant since 1999. Mr. Barna served as Senior Vice President
and Chief Financial Officer of Crompton & Knowles in 1999 and as Vice
President-Finance of Crompton & Knowles from 1996 to 1999. Mr. Barna was the
Principal Accounting Officer of Crompton & Knowles from 1986 to 1999 and its
Treasurer from 1980 to 1996.
John T. Ferguson II, age 57, has served as Senior Vice President and General
Counsel of the Registrant since 1999 and served as Secretary of the Registrant
from 1999 to 2000. Mr. Ferguson served as Vice President of Crompton & Knowles
from 1996 to 1999, and General Counsel and Secretary of Crompton & Knowles from
1989 to 1999. Mr. Ferguson served as a member of the Board of Directors of the
Registrant in 1999.
Mary L. Gum, PhD., age 56, has served as Executive Vice President, Performance
Chemicals and Elastomers Group since 2003. Dr. Gum served as Executive Vice
President, OrganoSilicones Group & Urethanes, of the Registrant from 2002 to
2003 and served as Executive Vice President, OrganoSilicones Group, from 1999 to
2002.
Marvin H. Happel, age 64, has served as Senior Vice President, Organization &
Administration of the Registrant since 1999. Mr. Happel served as Vice
President-Organization and Administration of Crompton & Knowles from 1996 to
1999 and Vice President-Organization from 1986 to 1996.
15
Alfred F. Ingulli, age 62, has served as Executive Vice President, Crop
Protection and Strategy & Development, of the Registrant since 2003 and
Executive Vice President, Crop Protection, from 1999 to 2003. Mr. Ingulli served
as Vice President, Crop Protection, of Crompton & Knowles from 1998 to 1999 and
as Executive Vice President, Crop Protection of Uniroyal since 1994.
John R. Jepsen, age 48, has served as Vice President and Treasurer of the
Registrant since 1999. Mr. Jepsen served as Treasurer of Crompton & Knowles from
1998 to 1999. Mr. Jepsen served with the International Paper Company as
Assistant Treasurer, International from 1996 to 1998 and, prior to that, as
Director of Corporate Finance from 1986 to 1996.
Myles S. Odaniell, age 45, has served as Executive Vice President, Plastics and
Petroleum Additives since 2003. Previously, Mr. Odaniell served for more than 20
years with Cytec Industries/American Cyanamid Company in a variety of executive
capacities, most recently as President, Coating and Performance Chemicals and
President, Cytec Latin America.
Walter K. Ruck, age 61, has served as Senior Vice President, Europe, Africa and
Middle East since 2003, and Senior Vice President, Operations, of the Registrant
from 1999 to 2003. Mr. Ruck has served as Vice President, Operations, of
Uniroyal since 1998; and served as Vice President, Manufacturing, of Uniroyal
from 1997 to 1998. He served as Regional Vice President, Americas of Uniroyal
from 1995 to 1997 and Regional Vice President of Uniroyal from 1994 to 1995.
Barry J. Shainman, age 61, has served as Secretary of the Registrant since 2000
and has served as Assistant General Counsel of the Registrant since 1999. Mr.
Shainman served as Secretary of Uniroyal from 1998 to 2000 and has served as
Senior Corporate Counsel of Uniroyal since 1990.
Michael F. Vagnini, age 47, has served as Vice President and Controller of the
Registrant since 2002; Corporate Controller of the Registrant from 1999 to 2002
and Corporate Controller of Crompton & Knowles from 1998 to 1999. Mr. Vagnini
has served as Corporate Controller of Uniroyal since 1995.
The term of office of each of the above-named executive officers is until the
first meeting of the Board of Directors following the next annual meeting of
stockholders and until the election and qualification of his or her successor.
There is no family relationship between any of such officers, and there is no
arrangement or understanding between any of them and any other person pursuant
to which any such officer was selected as an officer.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes the range of market prices for Crompton
Corporation's common stock on the New York Stock Exchange and the amount of
dividends per share by quarter during the past two years.
2003
-----------------------------------------
First Second Third Fourth
------ ------ ----- ------
Dividends per common share $ 0.05 0.05 0.05 0.05
Market price per common share:
High $ 6.90 7.75 7.63 7.37
Low $ 3.63 3.75 5.10 5.31
2002
-----------------------------------------
First Second Third Fourth
------ ------ ----- ------
Dividends per common share $ 0.05 0.05 0.05 0.05
Market price per common share:
High $12.75 13.00 12.90 10.69
Low $ 8.46 10.25 8.81 5.44
The number of registered holders of common stock of the Company on December 31,
2003 was 5,787.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company for each of its last five fiscal
years follows:
(In millions of dollars, except per share data) 2003 2002 2001 2000 1999(a)(b)
--------- ------- ------- ------- ----------
Summary of Operations
Net sales $ 2,185.0 2,090.3 2,286.5 2,554.0 1,933.4
Gross profit $ 569.0 622.0 659.9 763.6 669.6
Selling, general and administrative $ 353.0 354.5 378.9 371.1 311.1
Depreciation and amortization $ 115.4 111.4 150.8 148.8 106.0
Research and development $ 51.5 54.3 56.0 59.2 57.9
Equity income $ (13.2) (7.9) (9.2) (11.4) (10.6)
Facility closures, severance and related costs $ 19.6 18.0 101.5 20.2 --
Antitrust costs $ 77.7 6.3 -- -- --
Impairment of long-lived assets $ -- -- 80.4 -- --
Acquired in-process research and development $ -- -- -- -- 195.0
Merger and related costs $ -- -- -- -- 29.5
Operating profit (loss) $ (35.0) 85.4 (98.5) 175.7 (19.3)
Interest expense $ 89.7 101.7 109.9 120.4 69.8
Loss on early extinguishment of debt $ 24.7 -- -- -- 24.6
Other expense, net (c) $ 5.4 38.0 27.2 7.1 49.2
Earnings (loss) from continuing operations
before income taxes and cumulative effect of
accounting change $ (154.8) (54.3) (235.6) 48.2 (162.9)
Income taxes (benefit) $ (36.1) (18.9) (79.9) 22.8 27.0
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (118.7) (35.4) (155.7) 25.4 (189.9)
Earnings from discontinued operations $ 26.3 50.9 31.8 63.9 14.9
Gain on sale of discontinued operations $ 111.7 -- -- -- --
Cumulative effect of accounting change $ (0.4) (299.0) -- -- --
Net earnings (loss) $ 19.0 (283.5) (123.9) 89.3 (175.0)
Per Share Statistics
Basic and Diluted
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (1.05) (0.31) (1.38) 0.22 (2.28)
Earnings from discontinued operations $ 0.23 0.44 0.28 0.56 0.18
Gain on sale of discontinued operations $ 0.99 -- -- -- --
Cumulative effect of accounting change $ -- (2.63) -- -- --
Net earnings (loss) $ 0.17 (2.50) (1.10) 0.78 (2.10)
Dividends $ 0.20 0.20 0.20 0.20 0.10
Book value $ 2.64 1.76 4.84 6.69 6.50
Common stock trading range: High $ 7.75 13.00 12.19 14.19 21.38
Low $ 3.63 5.44 6.20 6.94 7.13
Average shares outstanding (in thousands)-Basic 112,531 113,568 113,061 113,644 83,507
Average shares outstanding (in thousands)-Diluted 112,531 113,568 113,061 115,165 83,507
Financial Position
Working capital $ 109.2 365.6 412.7 624.4 390.2
Current ratio 1.2 1.5 1.6 1.9 1.4
Total assets $ 2,529.2 2,840.8 3,232.2 3,528.3 3,726.6
Total debt $ 814.7 1,256.8 1,412.0 1,493.9 1,375.5
Stockholders' equity $ 302.7 199.9 547.5 754.0 759.9
Total capital employed $ 1,117.4 1,456.7 1,959.5 2,247.9 2,135.4
Debt to total capital % 72.9 86.3 72.1 66.5 64.4
17
(In millions of dollars, except for number of employees) 2003 2002 2001 2000 1999(a)
------- ------- ------- ------- --------
Other Statistics
Net cash (used in) provided by operations $ (14.8) 201.8 205.0 210.6 88.6
Capital spending from continuing operations $ 81.7 84.3 92.3 107.1 131.8
Depreciation from continuing operations $ 100.8 99.9 119.0 116.8 81.0
Amortization from continuing operations $ 14.5 11.6 31.8 32.0 25.0
Number of employees at end of year 5,521 6,777 7,340 8,306 8,612
(a) The Company's 1999 operating results may not be comparable to its
operating results in subsequent periods due to the merger of Crompton &
Knowles Corporation and Witco Corporation on September 1, 1999.
(b) The loss on early extinguishment of debt in 1999 has been reclassified
from an extraordinary item to a component of net earnings (loss) from
continuing operations before income taxes in accordance with FASB
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections."
(c) Other expense, net includes a loss of $34.7 million on the sale of the
industrial specialties business unit in 2002, losses of $17.3 and $1.8
million on the sale of the industrial colors business unit and the nitrile
rubber joint venture, respectively, in 2001, and in 1999 a loss of $83.3
million on the sale of the textile colors business unit partially offset
by a gain of $42.1 million on the sale of the specialty ingredients
business unit.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is a global producer of specialty chemicals and polymer products and
equipment. The Company has approximately 5,500 employees worldwide and sells its
products in more than 120 countries. The Company is headquartered in Middlebury,
Connecticut. The Company operates in various markets, including automotive,
construction, agriculture, packaging and industrial rubber. Each of these
markets is impacted by a number of economic and other factors.
The primary economic factors that influence operations are industrial
production, capacity utilization, residential and commercial construction, auto
production and resin production. In addition, the Company's crop protection
business is influenced by worldwide weather conditions and its polymer
processing equipment business is influenced by capital spending cycles. The
Company also monitors the Gross National Product for key foreign economies.
During 2003, the Company experienced an increase in unit volume across many
businesses due in part to an improvement in worldwide economic conditions.
Other major factors affecting the Company's financial performance include raw
material and energy costs, selling prices and the impact of changes in foreign
exchange rates. The Company continued to experience elevated raw material and
energy costs during 2003 and does not yet see signs of abatement. Although
selling price declines were less significant in 2003 than those realized in
2002, the pricing environment remained very competitive. After three years of
softness or declines in selling prices, the Company has begun to see some
stabilization that may translate into a more favorable pricing environment in
2004. Consequently, the Company has recently announced, and is attempting to
implement, selective price increases in a number of its businesses to mitigate
the impact of higher raw material and energy costs. Although foreign exchange
rates had a favorable impact on sales in 2003, the Company realized a slightly
negative impact on earnings in 2003 primarily as a result of selling European
and Canadian manufactured products at dollar denominated prices in Asia, Latin
America and the United States.
In response to the impact of the above-mentioned external factors, the Company
has undertaken various cost reduction initiatives over the past several years
and continues to aggressively pursue cost reductions to mitigate the impact of
these factors. The latest initiative was announced in July of 2003 and is
expected to yield an additional $40 million of annual pre-tax cost savings in
2004. An important component of the Company's cost reduction efforts is its
continued expansion of its Six Sigma programs.
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber chemicals
will be resolved.
The Company also reached agreement with the Commissioner of Competition and the
Attorney General (the "Attorney General") of Canada on March 15, 2004, regarding
a criminal antitrust investigation of the Company. The Company has agreed to
plead guilty to one count of conspiring to lessen competition unduly in the sale
and marketing of certain rubber chemicals in Canada. The Attorney General and
the Company will jointly recommend that the court impose a sentence requiring
the Company to pay a fine of $9 million Canadian (U.S. $7 million), payable
in six annual installments, without interest, beginning in 2004. If the court
accepts the joint recommendation at a hearing expected to occur in the next
several months, the Canadian investigation of the Company with respect to rubber
chemicals will be resolved.
Expected cash payments for U.S. and Canadian fines total $2.3 million in 2004;
$2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007; $16.2 million
in 2008; and $18.5 million in 2009.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the Company
cannot predict the timing or outcome of that investigation, including the amount
of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the "Governmental
Authorities") with respect to possible antitrust violations relating to the sale
and marketing of certain other products, including ethylene propylene diene
monomer (EPDM); heat stabilizers, including tin-based stabilizers and
precursors, mixed metal
19
stabilizers and epoxidized soybean oil (ESBO); nitrile rubber; and urethanes and
urethane chemicals. 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 Company recorded pre-tax charges of $77.7 million for antitrust costs in its
consolidated statement of operations at December 31, 2003. This includes a $45.2
million charge to reserve for the payment of U.S. and Canadian fines, which
represents the present value of the expected payments of $57 million. The
Company also incurred pre-tax antitrust costs of $32.5 million associated with
antitrust investigations and related civil lawsuits. The Company expects to
continue to incur substantial costs until all antitrust investigations are
concluded and civil claims are resolved.
The Company and certain of its subsidiaries, together with other companies, are
defendants in certain federal direct purchaser and state direct and indirect
purchaser class action lawsuits principally alleging that the defendants
conspired to fix, raise, maintain or stabilize prices for rubber chemicals,
EPDM, plastic additives, including impact modifiers and processing aids, and
nitrile rubber in violation of federal and state law. The Company and certain of
its officers and directors are also defendants in federal securities class
action lawsuits principally alleging 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 result of engaging in an illegal price fixing conspiracy
with respect to rubber chemicals. In addition, the Company and its board of
directors are defendants in a shareholder derivative lawsuit principally
alleging that the directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result of
engaging in an illegal price fixing conspiracy with respect to rubber chemicals.
These federal and state actions 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.
The Company has not recorded a charge for potential liabilities and expenses in
connection with the coordinated civil investigation by the EC or with the civil
claims, because it is not yet able to reasonably estimate a reserve for such
potential costs. The resolution of the coordinated civil investigation by the EC
and 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.
The Company's domestic credit facility expires in October 2004. The Company is
in the process of negotiating a new credit facility and reviewing its
refinancing alternatives with several leading financial institutions. The
Company will finance its short-term operations with cash flows provided by
operations, earn-out proceeds to be received from GE related to the sale of the
OrganoSilicones business, its existing credit facilities and its accounts
receivable securitization programs. The Company expects to obtain new financing
prior to the expiration of its domestic credit facility that will provide
flexibility to cover future obligations and operating needs.
During 2003, the Company appointed a Business Ethics and Compliance Officer and
implemented a company-wide training and awareness program reaching all employees
of the Company. The goals of the Company's compliance program are to ensure that
employees comply with all legal requirements in the jurisdictions where the
Company conducts business and to ensure that all employees perform their duties
in accordance with the Company's Code of Business Conduct.
The Company's management is working diligently to ensure the Company's resources
are well allocated and that its strategies are sound and well executed. The main
goals of management are to improve business unit operating performance and
profitability, strengthen flexibility through debt reduction, improve the
Company's pricing discipline to offset cost increases, resolve pending legal
issues and continue to reduce costs through cost reduction programs, including
Six Sigma applications.
LIQUIDITY AND CAPITAL RESOURCES
During 2003, the Company's net cash used in operations was $14.8 million, of
which the most significant uses resulted from lower earnings excluding the gain
on sale of discontinued operations, decreases in accounts payable and accounts
receivable securitization, and payments for items previously accrued, including
severance, environmental and foreign income tax payments. Net cash provided by
investing activities was $547.5 million, which included proceeds from the sale
of the OrganoSilicones business of $633.4 million and capital expenditures of
$87.6 million. Net cash used in financing activities was $514.3 million, which
included net payments of indebtedness of $448.2 million, a premium paid on early
extinguishment of debt of $23.8 million, dividends paid of $22.6 million and
common stock acquired of $22.1 million. Cash flows from operating, investing and
financing activities include cash flows from discontinued operations.
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 resulted in a gain of $111.7 million (net of income taxes of $175.3
million). The Company received net cash proceeds of
20
$633.4 million, which includes proceeds from its first quarterly earn-out
payment of $8.75 million less certain transaction-related fees of $18.4 million.
In addition, as part of the transaction, the Company acquired GE's Specialty
Chemicals business valued at $160 million. The Company will continue to receive
quarterly earn-out payments through September of 2006 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, of which the minimum was recorded
on a present value basis as a receivable on the date of the transaction. The
Company will receive a minimum of $35 million of these cash payments in 2004.
Based on the performance of GE's Silicones business during the fourth quarter of
2003, the Company will receive an additional $4.5 million of earn-out proceeds
in the first quarter of 2004. The recognition of this additional gain is
contingent upon the continued favorable future performance of GE's Silicones
business, which the Company will assess on a quarterly basis.
The Company has used proceeds from this transaction primarily to reduce
indebtedness. On July 31, 2003, the Company reduced the borrowings under its
domestic credit facility from $294 million to zero and in August of 2003, the
Company repurchased $250 million of its 8.5% notes and repaid the $61.3 million
balance of its EURIBOR based bank loans. As a result of the repurchase of $250
million of its 8.5% notes in August 2003, the Company recorded a loss on early
extinguishment of debt of $24.7 million. Included in this loss is a premium of
$23.8 million and a write-off of $0.9 million related to the unamortized
discount and debt issuance costs related to the notes repurchased.
The December 31, 2003 working capital balance of $109.2 million decreased $256.4
million from the December 31, 2002 balance of $365.6 million, and the current
ratio decreased to 1.2 from 1.5 in 2002. The decreases in working capital and
the current ratio were primarily due to the classification of the assets and
liabilities related to the OrganoSilicones business as assets and liabilities
held for sale in 2002. In addition, there was an increase in notes payable
primarily due to the classification of the domestic credit facility as
short-term due to its October 2004 expiration date and an increase in income
taxes payable. These factors were partially offset by an increase in cash due to
proceeds from the sale of the OrganoSilicones business, increases in accounts
receivable, inventory and other current assets resulting in part from the
acquisition of the GE Specialty Chemicals business and a decrease in accounts
payable. Average days sales in receivables from continuing operations increased
to 28 days in 2003, versus 21 days in 2002. Excluding the accounts receivable
securitization programs, average days sales in receivables from continuing
operations decreased slightly to 64 days in 2003 versus 65 days in 2002. Average
inventory turnover from continuing operations increased slightly to 4.2 in 2003,
compared to 4.1 in 2002.
Net cash used in operations of $14.8 million decreased $216.6 million from
$201.8 million of net cash provided by operations in 2002. Key factors that
contributed to this decrease were the increase in the loss from continuing
operations of $83.2 million and the decrease in earnings from discontinued
operations of $24.6 million due to the sale of the OrganoSilicones business in
July 2003. The 2003 loss from continuing operations includes a pre-tax charge
for antitrust costs of $77.7 million as compared to a pre-tax charge of $6.3
million in 2002. Net cash used in operations was also impacted by changes in
certain working capital accounts, of which the most significant changes are
summarized below:
(In thousands) 2003 2002 Change
--------- --------- ---------
Accounts receivable $ 75,407 $ 7,858 $ 67,549
Accounts receivable - securitization (38,051) (157) (37,894)
Inventories 39,421 22,683 16,738
Accounts payable (82,220) 28,945 (111,165)
The changes in the working capital accounts shown above were impacted by the
sale of the OrganoSilicones business. In addition to the impact of the sale,
working capital decreased due to a reduction in accounts payable related to the
timing of payments in 2003 as compared to 2002. The Company expects changes in
working capital for 2004 to more closely correlate with business activity
levels. In addition, net cash provided by operations in 2002 included a
non-recurring $50 million federal income tax refund.
Depreciation and amortization, including discontinued operations, decreased to
$136.1 million in 2003 as compared to $146.6 million in 2002 primarily as a
result of the sale of the OrganoSilicones business on July 31, 2003. The Company
expects depreciation and amortization to further decline in 2004 as the annual
impact of the sale of the OrganoSilicones business is fully realized.
The Company's debt to total book capital decreased to 73% in 2003 from 86% in
2002. The decrease is due to a decrease in debt and an increase in stockholders'
equity, both of which were significantly impacted by the transaction with GE.
Capital expenditures for 2003 totaled $87.6 million compared to $100.3 million
in 2002. Capital expenditures for 2003 included $81.7 million from continuing
operations and $5.9 million from discontinued operations. Capital expenditures
for 2002 included $84.3 from continuing operations and $16 million from
discontinued operations. The decrease in capital
21
expenditures from continuing operations is primarily due to timing with respect
to certain capital spending projects and a reduction in spending. The Company
estimates that its capital expenditures for 2004 will approximate $90 to $100
million, primarily for the Company's replacement needs and improvement of
domestic and foreign facilities.
Contractual Obligations and Other Cash Requirements
The Company has obligations to make future cash payments under contracts and
commitments, including long-term debt agreements, lease obligations,
environmental liabilities and other long-term liabilities. At December 31, 2003,
the Company's long-term debt agreements included various notes, debentures and
bank loans for which payments totaling $754.0 million will be payable through
2026. The Company has $96.7 million of operating lease obligations at December
31, 2003, primarily related to the lease of office space. Such obligations are
net of future sublease income and will be expensed over the life of the related
lease contracts. The Company also has environmental liabilities, recorded on an
undiscounted basis, for future remediation, and operating and maintenance costs
directly related to remediation. The Company estimates its potential
environmental liability to range from $109 million to $133 million, and has
recorded a liability for environmental remediation of $120.7 million at December
31, 2003. As of December 31, 2003, the Company recorded a $45.2 million
antitrust reserve for the payment of U.S. and Canadian fines, which represents
the present value of the expected payments of $57 million that are payable in
six annual installments beginning in June 2004. As of December 31, 2003, the
Company had unconditional purchase commitments to purchase $1.5 million of raw
materials from outside vendors. The Company also has other miscellaneous
long-term liabilities, excluding pension and other post-retirement liabilities,
of $39.2 million.
The following table summarizes the Company's significant contractual cash
obligations as of December 31, 2003:
(In millions) Payments Due by Period
-----------------------------------------------------------------
2008 and
Contractual Obligations Total 2004 2005 2006 2007 Thereafter
--------- ------ ------- ------- ------ ----------
Long-term debt * $ 754.0 $ -- $ 350.0 $ 150.0 $ -- $ 254.0
Operating leases * 96.7 17.9 15.2 10.5 9.1 44.0
Environmental liabilities
(including current portion) * 120.7 17.2 22.6 17.3 15.1 48.5
Antitrust reserve (including
current portion) * 57.0 2.3 2.3 6.5 11.2 34.7
Unconditional purchase
obligations 1.5 1.5 -- -- -- --
Other long-term liabilities
(excluding pension and other
post-retirement liabilities) 39.2 -- 5.5 3.3 1.6 28.8
--------- ------ ------- ------- ------ ----------
Total $ 1,069.1 $ 38.9 $ 395.6 $ 187.6 $ 37.0 $ 410.0
========= ====== ======= ======= ====== ==========
* Additional information is provided in the Indebtedness, Leases, Antitrust
Investigations and Related Matters, and Contingencies footnotes in the Notes to
Consolidated Financial Statements.
In addition to the items included in the above table, the Company has accruals
related to its cost reduction programs totaling $22.8 million, from which it
expects to make cash payments of approximately $20.1 million in 2004.
During 2003, the Company made payments under its operating leases, environmental
liabilities, unconditional purchase obligations and cost reduction programs of
approximately $24.4 million, $16.6 million, $0.8 million, and $30.4 million,
respectively, which it financed from operations.
The Company also has several defined benefit pension plans, as described in the
Pension and Other Post-Retirement Benefit Plans footnote in the Notes to
Consolidated Financial Statements. The Company funds these plans based on the
minimum amounts required by law plus such amounts the Company deems appropriate.
Estimated funding requirements for the domestic pension plans are $4.6 million
for 2004 and $6.8 million for 2005. Estimated funding requirements have not been
provided for periods after 2005 due to their dependence on factors that are not
readily determinable. The Company contributed $30.9 million in 2003, which
included a special $20.9 million contribution of the Company's common stock,
which was in excess of the minimum required contribution for 2003 thereby
reducing the funding requirements for 2004 and 2005. The funding estimates for
2004 and 2005 are based upon actual December 31, 2003, asset values and the
assumption that the Company would contribute the minimum required contributions.
The funding estimates also assume pension funding relief legislation will be
extended and no other significant changes with regards to demographics,
legislation, plan provisions, or actuarial assumptions or methods to determine
the estimated funding requirements. For further information, see the Critical
Accounting Estimates section included herein.
22
The Company has post-retirement health care plans that provide health and life
insurance benefits to certain retired and active employees and their
beneficiaries, as described in the Pension and Other Post-Retirement Benefit
Plans footnote in the Notes to Consolidated Financial Statements. These plans
are generally not pre-funded and expenses are paid by the Company as incurred,
with the exception of certain inactive government related plans. Approximately
$18.4 million was paid on behalf of the plan participants for the domestic plans
in 2003. Estimated payments for the domestic plans are $19.4 million for 2004
and $20.7 million for 2005. These estimates are based on an average growth rate
of approximately 8.9% due to the estimated impact of health care cost inflation
and demographic changes. Estimated payments have not been provided for periods
after 2005 due to their dependence on factors that are not readily determinable.
The Company's domestic credit facility expires in October 2004 and was
classified as short-term at December 31, 2003. Borrowings under this facility
were $57 million at December 31, 2003. The Company's $350 million of outstanding
notes have a scheduled maturity of March 2005 and accordingly will be classified
as short-term in March 2004.
The Company also has standby letters of credit and guarantees with various
financial institutions. At December 31, 2003, the Company had $58.2 million of
outstanding letters of credit and guarantees primarily related to its
environmental remediation liabilities, insurance obligations, a potential tax
exposure and a customer guarantee. For losses that the Company believes are
probable and which are estimable, the Company has accrued for such amounts in
its consolidated balance sheets.
Sources of Cash
The Company expects to finance its continuing operations and capital spending
requirements in 2004 with cash flows provided by operations and additional
proceeds from the sale of its OrganoSilicones business. The Company does not
anticipate that it will require material uses of cash outside of the normal
course of business to support its operating needs in 2004.
In 2003, the Company received its first minimum earn-out payment from GE of
$8.75 million, which was included in net proceeds from sale of businesses. In
2004, the Company will receive $35 million of minimum earn-out payments. The
Company will also receive an additional $4.5 million of earn-out proceeds in the
first quarter of 2004 based on the performance of GE's Silicones business during
the fourth quarter of 2003. The total amount of additional proceeds in excess of
the minimum is indeterminate at this time as it is contingent upon the continued
favorable future performance of GE's Silicones business. The Company may receive
additional proceeds or could be required to refund the $4.5 million of
additional proceeds.
The Company has a five-year credit facility of $300 million, which is scheduled
to mature in October 2004. Borrowings on this facility are at various rate
options to be determined on the date of borrowing. On April 1, 2003, the Company
utilized its credit facility to repay its $165 million of 6.6% notes due in
2003. On July 31, 2003, the Company utilized a portion of the proceeds from the
transaction with GE to reduce the borrowings under its credit facility from $294
million to zero. Borrowings under this agreement amounted to $57 million at
December 31, 2003 and carried a weighted-average interest rate of 3.57%. The
Company also has arrangements with various banks for lines of credit for its
international subsidiaries aggregating $26.3 million, of which $3.7 million was
outstanding at December 31, 2003.
The Company is in the process of reviewing its refinancing alternatives with
several leading financial institutions. The Company expects to obtain new
financing prior to the expiration of its domestic credit facility.
The Company has an accounts receivable securitization program to sell up to $150
million of domestic accounts receivable to agent banks. At December 31, 2003,
$106.1 million of domestic accounts receivable had been sold under these
agreements. In addition, the Company's European subsidiaries have an agreement
to sell their eligible accounts receivable to agent banks. At December 31, 2003,
$93.3 million of international accounts receivable had been sold under these
agreements.
Debt Covenants
The Company is required to report compliance with certain financial covenants to
its lenders on a quarterly basis. Under these 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 adjustments
to both debt and earnings being made in accordance with the terms of the
domestic 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. As a result of the waiver and amendments to the domestic credit facility
agreement dated October 17, 2003 and November 10, 2003, the leverage and
interest coverage ratio covenants were modified to allow for more latitude
beginning in the third quarter of 2003. The Company was in compliance with the
financial covenants of its domestic credit facility at December 31, 2003.
23
Cost Reduction Programs
In July 2003, the Company announced a new cost reduction program to eliminate,
at a minimum, overhead expenses previously absorbed by the OrganoSilicones
business. The Company expects this cost reduction program to result in
approximately $40 million of annual pre-tax cost savings in 2004, of which
approximately $22 million will be in selling, general and administrative (SG&A),
$4 million in research and development (R&D) and the remainder in cost of
products sold. In order to achieve its goal, the Company expects to reduce its
global workforce by approximately 375 positions, of which approximately 305
positions had been eliminated as of December 31, 2003. The Company estimated
that it would incur cash related charges ranging from $15 million to $18 million
primarily during the second half of 2003. In 2003, the Company recorded a
pre-tax charge of $14 million for facility closures, severance and related costs
in the consolidated statement of operations primarily for severance costs. Based
on currently identified cost reduction programs, the Company estimates that it
will incur approximately $3 million of additional costs in 2004. As of December
31, 2003, the Company had accruals of $9.7 million for severance and related
costs and $0.6 million for other facility closure costs related to this program.
The Company expects the majority of the future cash payments from this accrual
to be made in 2004. Such payments are expected to be funded from operations.
During 2003, as a result of the Company's cost reduction initiative that began
in 2001 and the relocation of its corporate headquarters that began in 2002, the
Company recorded a charge for facility closures, severance and related costs of
$5.6 million. This charge primarily includes severance costs related to the
relocation of the corporate headquarters from Greenwich, CT to Middlebury, CT
and decommissioning costs resulting from the closure of the Company's Naugatuck,
CT facility in 2002. The Company expected to realize approximately $60 million
of annual pre-tax cost savings as a result of the 2001 cost reduction
initiative. The Company achieved these savings by the end of 2002, with
approximately $25 million of these savings in cost of products sold, $7 million
in SG&A, $1 million in R&D, $2 million in depreciation expense and $22 million
in earnings from discontinued operations in 2002 and $3 million of savings in
2001. The 2001 initiative became an ongoing program and in 2003 the Company
realized approximately $26.9 million of additional savings, of which
approximately $20 million was in cost of products sold and $6.9 million was in
SG&A. The Company also expects to realize annual pre-tax cost savings of
approximately $8 million to $10 million as a result of the relocation of its
corporate headquarters by the end of 2004. During 2003, the Company realized
$3.6 million of these savings and expects to realize approximately $5 million of
additional savings in 2004, primarily in SG&A. All cost savings, both estimated
and actual, are reported net of any increased expenses or the impact of reduced
revenues. The 2001 initiative and the corporate relocation have been
substantially completed as of December 31, 2003 and the Company does not expect
future costs to be significant. As of December 31, 2003, the Company had
accruals of $8.4 million for severance and related costs and $4.1 million for
other facility closure costs related to the 2001 initiative and the corporate
relocation. The Company expects future cash payments against these accruals to
approximate $10.2 million in 2004, $1.4 million in 2005 and $0.9 million
thereafter.
ANTITRUST INVESTIGATIONS AND RELATED MATTERS
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber chemicals
will be resolved.
The Company also reached agreement with the Commissioner of Competition and the
Attorney General (the "Attorney General") of Canada on March 15, 2004, regarding
a criminal antitrust investigation of the Company. The Company has agreed to
plead guilty to one count of conspiring to lessen competition unduly in the sale
and marketing of certain rubber chemicals in Canada. The Attorney General and
the Company will jointly recommend that the court impose a sentence requiring
the Company to pay a fine of $9 million Canadian (U.S. $7 million), payable in
six annual installments, without interest, beginning in 2004. If the court
accepts the joint recommendation at a hearing expected to occur in the next
several months, the Canadian investigation of the Company with respect to rubber
chemicals will be resolved.
24
Expected cash payments for U.S. and Canadian fines total $2.3 million in 2004;
$2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007; $16.2 million
in 2008; and $18.5 million in 2009.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the Company
cannot predict the timing or outcome of that investigation, including the amount
of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the "Governmental
Authorities") with respect to possible antitrust violations relating to the sale
and marketing of certain other products, including ethylene propylene diene
monomer (EPDM); heat stabilizers, including tin-based stabilizers and
precursors, mixed metal stabilizers and epoxidized soybean oil (ESBO); nitrile
rubber; and urethanes and urethane chemicals. 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 Company recorded pre-tax charges of $77.7 million for antitrust costs in its
consolidated statement of operations at December 31, 2003. This includes a $45.2
million charge to reserve for the payment of U.S. and Canadian fines, which
represents the present value of the expected payments of $57 million. The
Company also incurred pre-tax antitrust costs of $32.5 million associated with
antitrust investigations and related civil lawsuits. The Company expects to
continue to incur substantial costs until all antitrust investigations are
concluded and civil claims are resolved.
The Company and certain of its subsidiaries, together with other companies, are
defendants in certain federal direct purchaser and state direct and indirect
purchaser class action lawsuits principally alleging that the defendants
conspired to fix, raise, maintain or stabilize prices for rubber chemicals,
EPDM, plastic additives, including impact modifiers and processing aids, and
nitrile rubber in violation of federal and state law. The Company and certain of
its officers and directors are also defendants in federal securities class
action lawsuits principally alleging 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 result of engaging in an illegal price fixing conspiracy
with respect to rubber chemicals. In addition, the Company and its board of
directors are defendants in a shareholder derivative lawsuit principally
alleging that the directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result of
engaging in an illegal price fixing conspiracy with respect to rubber chemicals.
These federal and state actions 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.
The Company has not recorded a charge for potential liabilities and expenses in
connection with the coordinated civil investigation by the EC or with the civil
claims, because it is not yet able to reasonably estimate a reserve for such
potential costs. The resolution of the coordinated civil investigation by the EC
and 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.
25
RESULTS OF OPERATIONS
(In thousands, except per share data)
2003 2002 2001
----------- ----------- -----------
Net Sales
Polymer Products
Polymer Additives $ 1,232,022 $ 1,110,804 $ 1,125,910
Polymers 285,669 270,954 292,092
Polymer Processing Equipment 166,539 172,702 202,653
Eliminations (13,302) (15,064) (13,805)
----------- ----------- -----------
1,670,928 1,539,396 1,606,850
Specialty Products
Crop Protection 270,870 240,142 245,562
Other 243,245 310,733 434,131
----------- ----------- -----------
514,115 550,875 679,693
----------- ----------- -----------
Net Sales $ 2,185,043 $ 2,090,271 $ 2,286,543
=========== =========== ===========
Operating Profit (Loss)
Polymer Products
Polymer Additives $ 24,392 $ 79,403 $ 55,723
Polymers 28,018 41,028 42,243
Polymer Processing Equipment 5,164 (13,766) (15,647)
----------- ----------- -----------
57,574 106,665 82,319
Specialty Products
Crop Protection 64,963 60,241 79,186
Other (3,283) 7,960 10,779
----------- ----------- -----------
61,680 68,201 89,965
General corporate expense including amortization (48,551) (53,701) (78,065)
Unabsorbed overhead expense from discontinued
operations (8,445) (11,515) (10,841)
Facility closures, severance and related costs (19,560) (17,969) (101,512)
Antitrust costs (77,716) (6,306) --
Impairment of long-lived assets -- -- (80,366)
----------- ----------- -----------
Total Operating Profit (Loss) (35,018) 85,375 (98,500)
Interest expense 89,653 101,704 109,877
Loss on early extinguishment of debt 24,699 -- --
Other expense, net 5,383 38,021 27,265
----------- ----------- -----------
Loss from continuing operations before income
taxes and cumulative effect of accounting change (154,753) (54,350) (235,642)
Income tax benefit (36,102) (18,904) (79,883)
----------- ----------- -----------
Loss from continuing operations before
cumulative effect of accounting change (118,651) (35,446) (155,759)
Earnings from discontinued operations 26,314 50,920 31,815
Gain on sale of discontinued operations 111,692 -- --
Cumulative effect of accounting change (401) (298,981) --
----------- ----------- -----------
Net Earnings (Loss) $ 18,954 $ (283,507) $ (123,944)
=========== =========== ===========
Basic and Diluted Earnings (Loss) Per Common Share
Loss from continuing operations before
cumulative effect of accounting change $ (1.05) $ (0.31) $ (1.38)
Earnings from discontinued operations 0.23 0.44 0.28
Gain on sale of discontinued operations 0.99 -- --
Cumulative effect of accounting change -- (2.63) --
----------- ----------- -----------
Net Earnings (Loss) Per Common Share $ 0.17 $ (2.50) $ (1.10)
=========== =========== ===========
26
2003 COMPARED TO 2002
Overview
Consolidated net sales of $2.19 billion in 2003 increased 5% from $2.09 billion
in 2002. The increase was primarily the result of favorable foreign currency
translation of 4%, the GE Specialty Chemicals acquisition of 3% and increased
unit volume of 2%, partially offset by the sale of the industrial specialties
business unit in 2002 of 4%. International sales, including U.S. exports, were
51% of total sales, up from 47% in 2002. This increase was primarily due to the
strengthening of the Euro versus the U.S. dollar. For further information about
sales, see the discussion of segment results below.
Net earnings for 2003 of $19.0 million, or $0.17 per common share, compared to a
net loss of $283.5 million, or $2.50 per common share in 2002. Net earnings for
2003 included a gain on the sale of discontinued operations of $111.7 million,
or $0.99 per common share, and earnings from discontinued operations of $26.3
million, or $0.23 per common share, as compared to 2002, which included earnings
from discontinued operations of $50.9 million, or $0.44 per common share. Net
earnings for 2003 also included a cumulative effect of accounting change of $0.4
million, related to the implementation of Financial Accounting Standards Board
(FASB) Statement No. 143, "Accounting for Asset Retirement Obligations" and the
net loss for 2002 included a cumulative effect of accounting change of $299
million, or $2.63 per common share, related to the implementation of FASB
Statement No. 142, "Goodwill and Other Intangible Assets." The loss from
continuing operations for 2003 of $118.7 million, or $1.05 per common share,
compared to a loss of $35.4 million, or $0.31 per common share for 2002. The
loss from continuing operations for 2003 included pre-tax charges for antitrust
costs ($77.7 million), a loss on early extinguishment of debt ($24.7 million)
and facility closures, severance and related costs ($19.6 million). The loss
from continuing operations for 2002 included pre-tax charges for the loss on the
sale of the industrial specialties business unit recorded in other expense, net
($34.7 million), facility closures, severance and related costs ($18.0 million)
and antitrust costs ($6.3 million). The losses from continuing operations for
2003 and 2002 also included pre-tax overhead expenses previously absorbed by the
OrganoSilicones business unit of $8.4 million and $11.5 million, respectively.
Gross profit as a percentage of sales was 26.0% for 2003 as compared to 29.8%
for 2002. The decrease in gross profit of $53.1 million was primarily due to
increased raw material and energy costs of $62.6 million, the divestiture of the
industrial specialties business unit in June 2002 of $21.3 million and lower
selling prices of $14.1 million, partially offset by $20.0 million of savings
attributable to cost reduction initiatives, favorable foreign currency
translation of $18.3 million and the gross profit from the newly acquired GE
Specialty Chemicals business of $15.8 million. The gross profit attributable to
increased unit volume was primarily offset by an unfavorable sales mix. The
business segments most unfavorably impacted by the higher raw material and
energy costs were polymer additives, the refined products portion of other and
polymers. The decline in selling prices was primarily attributed to the polymers
and polymer additives segments, partially offset by an increase in the refined
products portion of other. Polymer additives benefited the most from cost
reductions relating to savings initiatives. All segments benefited from the
impact of favorable foreign currency.
In addition to reporting depreciation and amortization on a separate line in the
consolidated statements of operations, the gross profit of the Company may not
be comparable to those of other entities since certain companies include
shipping costs 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 $80.5 million and $72.4 million
for 2003 and 2002, respectively.
Selling, general and administrative expenses of $353.0 million for 2003 declined
by $1.5 million compared to 2002. The most significant factors contributing to
this decrease were the elimination of expenses related to the divested
industrial specialties business unit of $10.9 million and lower expenses related
to long-term incentive plans of $8.5 million, partially offset by unfavorable
foreign currency translation of $14.8 million. Depreciation and amortization
increased by $3.9 million to $115.4 million due primarily to unfavorable foreign
currency translation of $4.3 million and an increase from the newly acquired GE
Specialty Chemicals business of $3.9 million, partially offset by a $4.6 million
reduction resulting from the divestiture of the industrial specialties business
unit in June 2002. Research and development costs of $51.5 million declined by
$2.8 million due primarily to the divestiture of the industrial specialties
business unit. Equity income of $13.2 million increased $5.3 million due mainly
to increased earnings associated with the Gustafson seed treatment joint venture
included in the crop protection segment.
Facility closures, severance and related costs were $19.6 million as compared to
$18.0 million for 2002. These costs were primarily for severance and other
facility closure costs, which resulted from the cost reduction initiative that
began in 2001, the relocation of the Company's corporate headquarters that began
in 2002 and the new cost reduction program initiated during the third quarter of
2003.
The Company incurred antitrust costs of $77.7 million for 2003 as compared to
$6.3 million for the comparable period in 2002. The 2003 costs include $45.2
million of U.S. and Canadian fines, which represent the present value of the
expected payments of $57 million. The remaining costs were primarily for legal
costs associated with antitrust investigations and related civil lawsuits.
27
The 2003 operating loss of $35 million increased by $120.4 million compared to
operating profit of $85.4 million for 2002. The decline was mainly due to lower
gross profit of $53.1 million and increased antitrust costs of $71.4 million.
Polymer Products
Polymer additives sales of $1.23 billion were up 11% from 2002, of which 6% was
attributable to the GE Specialty Chemicals acquisition and the remainder due
primarily to favorable foreign currency translation of 4% and increased unit
volume of 2%, offset in part by lower pricing of 1%. Plastic additives sales
rose 20% due primarily to the GE Specialty Chemicals acquisition, favorable
foreign currency translation and increased unit volume. Urethane additives sales
increased 8% primarily as a result of favorable foreign currency translation.
Rubber additives sales decreased 7% due primarily to lower pricing. Petroleum
additives sales were up 4% due primarily to favorable foreign currency
translation and improved pricing. Polymer additives operating profit of $24.4
million decreased 69% from 2002 due primarily to higher costs, lower selling
prices and an unfavorable sales mix. Costs increased mainly as a result of
higher raw material and energy costs, and higher legal and environmental
expenses, partially offset by savings from cost reduction initiatives.
Polymers sales of $285.7 million rose 5% from 2002 primarily due to higher unit
volume of 7% and favorable foreign currency translation of 3%, partially offset
by lower pricing of 5%. EPDM sales were up 7% due primarily to an increase in
unit volume, offset in part by lower pricing. Urethanes sales rose 4% primarily
as a result of favorable foreign currency translation. Operating profit of $28.0
million was down 32% from 2002 due primarily to lower EPDM selling prices and
higher raw material and energy costs, partially offset by the impact of
increased unit volume and lower manufacturing costs resulting from increased
plant throughput.
Polymer processing equipment sales of $166.5 million decreased 4% from 2002 due
primarily to lower unit volume of 10% resulting from reduced spending for
capital equipment, offset partially by favorable foreign currency translation of
4% and higher pricing of 2%. Operating profit of $5.2 million was up $18.9
million from 2002 primarily due to lower operating expenses and higher selling
prices, offset partially by the impact of lower unit volume. The equipment order
backlog totaled $62 million at the end of 2003, down $14 million from the end of
2002.
Specialty Products
Crop protection sales of $270.9 million were up 13% from 2002 due primarily to
an increase in unit volume of 8% and favorable foreign currency translation of
5%. Operating profit of $65.0 million rose 8% from 2002 due primarily to the
impact of improved unit volume and higher joint venture earnings, partially
offset by higher operating expenses, an unfavorable foreign currency impact and
the absence of a prior year vendor settlement credit of $1.6 million. The
improvement in joint venture earnings of $5.2 million resulted primarily from
increased sales and profitability in the Company's Gustafson seed treatment
joint venture.
Other sales of $243.2 million were down 22% from 2002 primarily due to the
divestiture of the industrial specialties business unit in June 2002. Sales of
the remaining refined products business rose 6% primarily due to favorable
foreign currency translation and improved pricing. The operating loss of $3.3
million was unfavorable versus the prior year by $11.2 million, of which $3.4
million related to the industrial specialties divestment, with the balance due
primarily to higher raw material and energy costs, partially offset by higher
selling prices.
General Corporate and Unabsorbed Overhead Expenses
General corporate expense includes costs and expenses that are of a general
corporate nature or managed on a corporate basis. 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 also includes all amortization expense.
Contributing to the $5.2 million decrease in these expenses from 2002 to 2003
were reduced charges related to the Company's long-term incentive plans of $8.5
million, partially offset by higher amortization expense of $3.0 million.
Unabsorbed overhead expense from discontinued operations of $8.4 million in 2003
and $11.5 million in 2002 represents general overhead costs that were previously
absorbed by the OrganoSilicones business unit.
Other
Interest expense decreased 12% primarily as a result of the repayment of debt in
the third quarter of 2003 utilizing proceeds from the sale of the
OrganoSilicones business on July 31, 2003.
The Company recorded a loss on early extinguishment of debt of $24.7 million
during the third quarter of 2003. This loss was the result of the repurchase of
$250 million of the Company's 8.5% notes utilizing proceeds from the sale of the
OrganoSilicones business on July 31, 2003.
28
Other expense, net, of $5.4 million for 2003 decreased from $38.0 million in
2002. The decrease is primarily the result of the $34.7 million loss reported in
2002 relating to the sale of the industrial specialties business unit.
The effective income tax benefit rate decreased to 23.3% from 35% for the
comparable period of 2002 primarily due to $45.2 million of antitrust fines,
which are not deductible for tax purposes, and differences in the relative mix
of earnings and losses among the various jurisdictions in which the Company
operates.
Discontinued Operations
Earnings from discontinued operations for 2003 included seven months of results
of the OrganoSilicones business unit compared to twelve months for the same
period in 2002. Earnings from discontinued operations were $26.3 million (net of
income taxes of $9.0 million) in 2003 and $50.9 million (net of income taxes of
$12.7 million) in 2002. Earnings from discontinued operations do not include any
allocation of general overhead expenses.
2002 COMPARED TO 2001
Overview
Consolidated net sales of $2.09 billion in 2002 decreased 9% from $2.29 billion
in 2001. The decrease was primarily the result of a 5% impact from the
divestiture of the industrial specialties and industrial colors business units,
lower unit volume of 2% and lower selling prices of 2%. International sales,
including U.S. exports, were 47% of total sales, up from 46% in 2001. This
increase was primarily due to the weaker domestic economy and the strengthening
of the Euro versus the U.S. dollar. For further information about sales, see the
discussion of segment results below.
The net loss for 2002 was $283.5 million, or $2.50 per common share, as compared
to a net loss of $123.9 million, or $1.10 per common share, in 2001. The net
loss for 2002 included earnings from discontinued operations of $50.9 million,
or $0.44 per common share, as compared to 2001, which included earnings from
discontinued operations of $31.8 million, or $0.28 per common share. The net
loss for 2002 also included a cumulative effect of accounting change of $299
million, or $2.63 per common share, related to the implementation of FASB
Statement No. 142, "Goodwill and Other Intangible Assets." The loss from
continuing operations for 2002 of $35.4 million, or $0.31 per common share,
compared to a loss of $155.8 million, or $1.38 per common share for 2001. The
net loss from continuing operations for 2002 included pre-tax charges for
facility closures, severance and related costs ($18.0 million), antitrust costs
($6.3 million) and the loss on the sale of the industrial specialties business
unit recorded in other expense, net ($34.7 million). The net loss from
continuing operations for 2001 included pre-tax charges for facility closures,
severance and related costs ($101.5 million), an impairment of long-lived assets
($80.4 million) and losses on the sale of the industrial colors business unit
and nitrile rubber joint venture recorded in other expense, net ($19.1 million).
The losses from continuing operations for 2002 and 2001 also included pre-tax
overhead expenses previously absorbed by the OrganoSilicones business unit of
$11.5 million and $10.8 million, respectively.
Gross profit as a percentage of sales increased to 29.8% in 2002 from 28.9% in
2001. Although the gross profit percentage increased, gross profit dollars
decreased by $37.9 million. The major factors contributing to this decrease were
lower selling prices of $53.0 million, the divestitures of the industrial
specialties and the industrial colors business units of $29.0 million, the
impact of unfavorable unit volume/mix of $17.9 million and other net incremental
costs totaling $29.3 million, offset partially by reduced raw material and
energy costs of $65.2 million and savings from cost reduction initiatives of
$26.1 million. The segments most adversely affected by lower selling prices were
polymer additives and polymers. The lower unit volume impact was most evident in
the polymer processing equipment segment. The greatest reductions in raw
material and energy costs were reported in polymer additives, polymers and the
refined products portion of other, while polymer additives and polymer
processing equipment achieved the largest savings from cost reduction
initiatives.
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 costs 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 $72.4 million and $78.3 million for 2002 and 2001,
respectively.
Selling, general and administrative expenses of $354.6 million decreased by
$24.4 million from 2001. The decline was primarily due to lower expenses
resulting from the divestitures of the industrial specialties and the industrial
colors business units of $18.0 million and savings from cost reduction
initiatives of $8.4 million. Depreciation and amortization of $111.4 million
decreased by $39.4 million from 2001 due mainly to lower amortization expense of
$20.2 million due primarily to the implementation of the goodwill
non-amortization provision of FASB Statement No. 142, a reduction in
depreciation of $9 million resulting from the fourth quarter 2001 asset
impairments and reduced depreciation attributable to the divestitures of the
industrial specialties and industrial colors business units of $7.8 million.
Research and development costs of $54.3 million decreased slightly as the
reduction related to divested business units exceeded the increase in research
and development
29
costs in various other business units. Equity income decreased $1.4 million
primarily as a result of lower earnings from the Gustafson seed treatment joint
venture, partially offset by the elimination of the 2001 loss of the nitrile
rubber joint venture (sold in December 2001).
Facility closures, severance and related costs were $18.0 million as compared to
$101.5 million for 2001. These costs were primarily for severance, asset
write-offs and impairments, and demolition and decommissioning costs related to
closed sites, which resulted from 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 costs of $6.3 million for 2002 and did not incur
any antitrust costs in 2001. Such costs were primarily for legal costs
associated with antitrust investigations and related civil lawsuits.
Asset impairments in 2001 of $80.4 million included $66.7 million related to the
rubber additives business and $13.7 million related to the trilene business.
These charges were the result of changes in the marketplace, which caused the
carrying amount of the long-lived assets of these businesses to be impaired.
Operating profit for 2002 was $85.4 million as compared to an operating loss of
$98.5 million in 2001. The $183.9 million improvement was primarily due to
reduced charges for facility closures, severance and related costs of $83.5
million, a 2001 impairment of long-lived assets of $80.4 million, lower
depreciation and amortization costs of $39.4 million and a reduction in selling,
general and administrative expenses of $24.4 million. These favorable variances
were partially offset by a 2002 charge of $6.3 million for antitrust costs and a
$37.9 million decline in gross profit.
Polymer Products
Polymer additives sales of $1.11 billion were down 1% from 2001 due primarily to
lower pricing of 3%, offset partially by increases of 1% in both unit volume and
favorable foreign currency translation. Plastic and petroleum additives sales
were both essentially unchanged, as increases in volume were offset by lower
pricing. Urethane additives sales decreased 6% due primarily to the loss of
certain low margin business. Rubber additives sales were down 3% due primarily
to lower selling prices, partially offset by an increase in unit volume. Polymer
additives operating profit of $79.4 million increased 42% from 2001 due
primarily to reduced manufacturing costs, including lower raw material and
energy costs and savings from cost reduction initiatives, partially offset by
lower selling prices.
Polymers sales of $271.0 million were down 7% from 2001 due primarily to lower
pricing of 5% and lower unit volume of 3%, offset partially by higher foreign
currency translation of 1%. EPDM sales were down 14% due primarily to the
negative impact that industry overcapacity had on price and volume. Urethanes
sales were up 1% due primarily to higher volume. Operating profit of $41.0
million declined 3% from 2001. The decline was due primarily to lower EPDM
selling prices and unit volume, partially offset by reduced raw material and
energy costs, and the absence of a $5.1 million operating loss attributable to
the divested nitrile rubber joint venture.
Polymer processing equipment sales of $172.7 million decreased 15% from 2001 due
primarily to lower volume resulting from depressed demand for capital equipment.
Despite lower sales, the operating loss of $13.8 million was favorable versus
the prior year by 12% primarily due to the impact of the implementation of cost
reduction initiatives. The equipment order backlog totaled $76 million at the
end of 2002 compared to $83 million at the end of 2001.
Specialty Products
Crop protection sales of $240.1 million were down 2% from 2001 due primarily to
a 3% decline in unit volume, as demand decreased in Europe, Canada and Asia
Pacific, partially offset by favorable foreign currency translation of 1%.
Operating profit of $60.2 million decreased 24% from 2001 due primarily to a
prior year non-recurring pension curtailment gain of $4.7 million, lower
earnings of $4.5 million from the Company's Gustafson seed treatment joint
venture, the impact of lower unit volume and an unfavorable sales mix.
Other sales of $310.7 million decreased 28% from 2001 due primarily to a 24%
decline in unit volume attributable to the divestitures of the industrial
specialties and industrial colors business units. Operating profit of $8.0
million was down 26% from 2001 due primarily to higher operating costs in the
refined products business unit, as the divestitures had little impact on profit.
General Corporate and Unabsorbed Overhead Expenses
General corporate expense includes costs and expenses that are of a general
corporate nature or are managed on a corporate basis. 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 also includes all amortization expense. The
decrease from 2002 to 2001 of $24.4 million was due mainly to lower amortization
expense of $20.2 million resulting primarily from the adoption of the goodwill
non-amortization provision of FASB Statement No. 142, "Goodwill and Intangible
Assets".
30
Unabsorbed overhead expense from discontinued operations of $11.5 million in
2002 and $10.8 million in 2001 represents general overhead costs that were
previously absorbed by the OrganoSilicones business unit.
Other
Interest expense decreased 7% due primarily to reduced borrowings in 2002.
Other expense, net, of $38.0 million in 2002 increased from $27.3 million in
2001. The net amount in 2002 included a loss of $34.7 million on the sale of the
industrial specialties business unit, while the net amount in 2001 included
losses of $17.3 million on the sale of the industrial colors business unit and
$1.8 million on the sale of the nitrile rubber joint venture.
The effective income tax benefit rate increased to 35% from 34% for the
comparable period of 2001 primarily due to differences in the relative mix of
earnings and losses among the various jurisdictions in which the Company
operates.
Discontinued Operations
Earnings from discontinued operations includes the results of the
OrganoSilicones business unit. These earnings were $50.9 million (net of income
taxes of $12.7 million) in 2002 and $31.8 million (net of income taxes of $15.2
million) in 2001. Earnings from discontinued operations do not include any
allocation of general overhead expenses.
CRITICAL ACCOUNTING ESTIMATES
The Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which require the Company to make estimates and assumptions that affect the
amounts and disclosures reported in the consolidated financial statements and
accompanying notes. The Company's estimates are based on historical experience
and currently available information. Actual results could differ from such
estimates. The following paragraphs summarize the Company's critical accounting
estimates. Additional accounting policies are discussed in the Notes to
Consolidated Financial Statements.
Recoverability of Long-Lived Assets and Goodwill
The Company evaluates the recoverability of the carrying value of long-lived
assets of its businesses, excluding goodwill, whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Under
such circumstances, the Company assesses whether the projected undiscounted cash
flows of its businesses are sufficient to recover the existing unamortized cost
of its long-lived assets. If the undiscounted projected cash flows are not
sufficient, the Company calculates the impairment amount by discounting the
projected cash flows using its weighted average cost of capital. The amount of
the impairment is written-off against earnings in the period in which the
impairment has been determined.
The Company tests the recoverability of the goodwill of each of its reporting
units on an annual basis, or sooner if events occur or circumstances change, by
comparing the net book value to the estimated fair value of each of its
reporting units to determine if there is a potential impairment issue. The fair
value is estimated based on discounted projected cash flows. If the fair value
is not sufficient to cover the carrying value of the reporting unit, the Company
calculates the goodwill impairment amount related to that reporting unit in
accordance with FASB Statement No. 142. Any impairment is recorded to earnings
in the period in which the amount has been determined.
The Company continually monitors and evaluates business and competitive
conditions that affect its operations and reflects the impact of these factors
in its financial projections. If permanent or sustained changes in business and
competitive conditions occur, they can lead to revised projections that could
potentially give rise to impairment charges.
Contingencies
On an ongoing basis, the Company assesses the potential liabilities related to
any lawsuits or claims brought against it, including antitrust related matters.
The Company accrues for such liabilities when it determines that it is probable
that a loss has been incurred and a reasonable estimate of the loss can be made.
The Company intends to assert all meritorious legal defenses and all other
equitable factors that are available to it with respect to such matters,
however, the resolution of these matters could have a material adverse effect on
the Company's consolidated results of operations and cash flows. For further
information see the Antitrust Investigations and Related Matters disclosure
included herein.
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
31
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 operation 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 December 31, 2003, the Company's reserves for environmental
remediation activities totaled $120.7 million. The Company estimates its
potential environmental liability to range from $109 million to $133 million as
of December 31, 2003. 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 that are available to it with respect to the above matters.
The Company believes that the resolution of these environmental matters will not
have a material adverse effect on its consolidated financial position. While the
Company believes it is unlikely, the resolution of these environmental matters
could have a material adverse effect on its consolidated results of operations
in any given year if a significant number of these matters are resolved
unfavorably.
Pension and Other Post-Retirement Benefits Expense
The Company's calculation of pension and other post-retirement benefits expense
are dependent on assumptions used in calculating such amounts. These assumptions
include discount rates, health care cost trend rates, expected long-term rate of
return on plan assets, mortality rates, expected salary and wage increases, and
other factors. Components of pension and other post-retirement benefits expense
include interest and service cost on the pension and other post-retirement
benefit plans, expected return on plan assets and amortization of certain
unrecognized costs and obligations. Actual results that differ from the
assumptions utilized are accumulated and amortized over future periods and,
therefore, generally affect recognized expense and the recorded obligation in
future periods. While the Company believes that the assumptions used are
appropriate, differences in actual experience or significant changes in
assumptions would affect its pension and other post-retirement benefits costs
and obligations.
Consistent with past practice, the Company's discount rate used for the
qualified and non-qualified domestic pension plans and the other domestic
post-retirement benefit plans is based on high-quality corporate bonds. Since
the payout structures for all plans are generally annuity based, rather than
lump-sum, the use of bonds with long maturities is deemed appropriate. The
Company utilized a discount rate of 6.0% for all domestic plans at December 31,
2003. As a sensitivity measure, a 25 basis point reduction in the discount rate
for all domestic plans would result in approximately a $1.6 million decrease in
pre-tax earnings and a $20.2 million increase to the additional minimum
liability in 2004.
The Company's estimated rate of compensation increase was 4.0% for all domestic
pension plans at December 31, 2003. The Company believes that this is a
reasonable expectation of salary growth. As a sensitivity measure, an increase
of 25 basis points would decrease pre-tax earnings by approximately $0.2
million.
The Company utilized a 9.5% expected long-term rate of return on all domestic
plan assets for the year ended December 31, 2003. The domestic expected rate of
return on plan assets is derived by applying the expected returns on various
asset classes to the Company's assumed asset allocation. The expected returns
are based on the expected performance of the various asset classes and the
expected benefit from active fund management. They are further supported by
historical investment returns for various asset classes. The Company utilized a
weighted average expected long-term rate of return of 7.0% on its international
plan assets for the year ended December 31, 2003. This international rate is
developed primarily based on the same factors considered in developing the
domestic long-term rate of return.
The 9.5% domestic expected rate of return is based on an assumed long-term
inflation rate of 3%. The Company has assumed that normative investment returns
on long-term bonds will be 350 basis points above inflation, or 6.5%. The
assumed premiums for domestic and international equity investments over
long-term bonds are 400 and 450 basis points, respectively. In addition, the
Company has assumed an overall 50 basis point benefit from active fund
management.
As noted above, the Company's domestic expected long-term rate of return on plan
assets is further supported by historical returns for various classes of assets.
Historical returns are evaluated based on an arithmetic average of annual
returns derived from passive indices, such as the S&P 500, for various asset
classes. The Company believes the period since 1986 provides the most
representative indication of potential investment market performance since it
excludes the significantly
32
higher interest rate environment of the 1978 through 1985 period. In addition,
the Company believes that this period best reflects the policies of the existing
Federal Reserve Board and reflects an appropriate time period that includes
multiple business cycles. The arithmetic average of annual investment returns
from passive indices during this period was 11.4%, which is not materially
different from the geometric average for the same period. Although the Company
believes post-1985 investment performance is the most relevant, it also believes
it is useful to consider investment performance over longer periods of business
expansion and contraction. In this regard, both 20-year and 30-year average
returns based on the assumed asset allocation also show investment returns that
are in excess of the 9.5% domestic expected investment return. The arithmetic
average annual investment returns during the 20-year and 30-year period were
12.3% and 11.8%, respectively. The Company's domestic expected long-term rate of
return on plan assets is further supported by overall investment returns of
20.8% for the year ended December 31, 2003.
Although the Company believes that its domestic expected long-term rate of
return was reasonable for fiscal year 2003, as a result of the re-evaluation of
the Company's investment strategy and future return assumptions, the domestic
expected long-term rate of return will be reduced to 9.0% for fiscal year 2004.
The Company's investment strategy with respect to pension assets is to achieve
the expected rate of return with an acceptable or appropriate level of risk. The
Company's investment strategy is designed to promote diversification to moderate
volatility and attempt to balance the expected return with risk levels. As a
sensitivity measure, an additional 50 basis point decrease in the expected
long-term rate of return on domestic plan assets would result in approximately a
$3.0 million decrease in pre-tax earnings in 2004.
The adjusted domestic expected long-term rate of return of 9.0% for 2004 is
based on an assumed long-term inflation rate of 2.6%. The Company has adjusted
the normative investment returns on long-term bonds to 370 basis points above
inflation, or 6.3%. The assumed premiums for domestic and international equity
investments over long-term bonds have been adjusted to 340 and 420 basis points,
respectively. The Company has assumed that the active fund management benefit
will remain at 50 basis points.
The Company's target asset allocation for the domestic pension plans is based on
investing 60% of plan assets in equity instruments and 40% of plan assets in
fixed income investments. The Company intends to lengthen the duration of its
bond portfolio to better match its expected payments. The portfolio at December
31, 2003 was 58% invested in equities and 42% invested in fixed income
investments. The Company will continue to monitor investment performance and
will adjust the asset allocation accordingly.
The Company has unrecognized actuarial losses of $208 million relating to the
domestic qualified plans. These unrecognized actuarial losses will impact future
pre-tax earnings in two ways and are dependent on whether the unrecognized
actuarial losses are deferred through the asset-smoothing mechanism
(market-related value as defined by FASB Statement No. 87, "Employers'
Accounting for Pensions") or whether the unrecognized actuarial losses are
subject to amortization in pre-tax earnings. Losses subject to amortization will
be recognized in pre-tax earnings to the extent that they exceed a 10%
amortization corridor, as defined by FASB Statement No. 87, where they are
amortized over the average remaining participant career. The Company currently
utilizes a five-year "smoothed" asset value for its market-related value of
domestic plan assets, whereby 20% of the cumulative investment gains or losses
are phased into the market-related value each year. Due to severe investment
underperformance, primarily during the years 2000 through 2002, a significant
portion of the total unrecognized actuarial losses for the domestic plans will
be phased in over the next four years through the asset smoothing mechanism. As
these losses are phased in over future periods, they will impact pension cost in
two ways: first, the market-related value of assets used to determine the
pension cost will be reduced; and second, the phased-in losses will become
subject to amortization in pension cost.
At December 31, 2003, $94 million of the $208 million of unrecognized actuarial
losses on the domestic qualified pension plans represents the asset losses
deferred through the asset smoothing mechanism. Accordingly, these deferred
asset losses will be recognized into the market-related value of plan assets
over the next four years. The scheduled recognition of the deferred asset losses
would impact pre-tax earnings by $4.8 million and $6.0 million in 2004 and 2005,
respectively. The scheduled recognition of the deferred asset losses for the
international pension plans are not material. Any future asset losses would
primarily be phased in over five years through the smoothed market-related value
mechanism and would subsequently be amortized in net earnings.
The remaining $114 million of the $208 million of unrecognized actuarial losses
represents prior asset losses that have been reflected in the market-related
value, as well as other prior gains and losses resulting from assumption and
demographic changes. These amounts will be amortized to pension cost over
approximately 11 years to the extent that they should exceed the 10%
amortization corridor. The losses exceeding the 10% amortization corridor would
result in a $3.4 million decrease to pre-tax earnings for 2004. The amortization
of losses associated with the international pension plans will not be material.
Since future gains and losses beyond 2004 are a result of various factors as
described herein, it is not possible to predict with certainty to what extent
the combination of current and future losses may exceed the 10% amortization
corridor and thereby be subject to further amortization.
33
Estimated funding requirements for the domestic pension plans are $4.6 million
for 2004 and $6.8 million for 2005 compared to $30.9 million contributed in
2003. The 2003 contribution included a special $20.9 million contribution of the
Company's common stock, which was in excess of the minimum required
contributions for 2003, thereby reducing the funding requirements for 2004 and
2005. The funding estimates for 2004 and 2005 are based upon actual December 31,
2003 asset values and the assumption that the Company would contribute the
minimum required contributions. The funding estimates also assume pension
funding relief legislation will be extended and no other significant changes
with regards to demographics, legislation, plan provisions, or actuarial
assumption or methods to determine the estimated funding requirements. If
funding relief is not approved, additional contributions will be required. In
addition, it was assumed that 2004 asset returns will equal 8.5% (i.e. the
IRS/ERISA assumption basis for discounting pension liabilities) and that
interest rates remain at year-end 2003 levels.
In addition, at December 31, 2003, the Company recognized a liability on its
balance sheet for each pension plan if the fair value of the assets of that
pension plan was less than the accumulated benefit obligation (ABO). This
liability is called a "minimum pension liability" and is recorded as a charge in
accumulated other comprehensive loss in stockholders' equity. In December 2003,
the Company recorded a charge to accumulated other comprehensive loss of $24.9
million. This charge primarily represents the after-tax impact of recording the
minimum pension liability for the pension plans. This charge had no impact on
the Company's net income, liquidity, or cash flows.
Income Taxes
Income taxes payable reflects the Company's current tax provision and
management's best estimate of the tax liability relating to the outcome of
current and future tax audits. If the actual outcome of audits differs from the
Company's best estimates, an adjustment to income taxes payable could be
required, which may result in additional income tax expense (or benefit).
The Company records deferred tax assets and liabilities based on differences
between the financial statement and tax basis of assets and liabilities using
currently enacted tax rates. The Company also records deferred tax assets for
the expected future tax benefits of net operating losses and credit
carryforwards. Valuation allowances are established when the Company determines
that the results of future operations may not generate sufficient taxable income
to realize its deferred tax assets. Thus, changes in future results of
operations could result in adjustments to the Company's valuation allowances.
Allowance for Doubtful Accounts
The Company regularly reviews past due accounts receivable balances and
information regarding the financial stability of its significant customers in
order to identify customers with potential collectibility issues. Upon
completion of its review, and giving consideration to economic conditions, the
Company estimates the probability of default of each of the customer balances
identified. Based on its probability estimates, the Company establishes an
allowance for doubtful accounts that is deemed sufficient to cover any potential
losses. Due to the judgment required to determine the financial stability of
customers and to predict future economic conditions, the actual losses from
uncollectible accounts could differ from management's estimates. However, based
on historical experience, the Company does not expect its estimates of
uncollectible accounts to vary significantly from actual losses.
Inventory Obsolescence
The Company reviews its inventory for potential impairment on a quarterly or
more frequent basis as deemed necessary. Such review includes, but is not
limited to, reviewing the levels of inventory versus customer requirements,
shelf life, obsolescence, and the ability to rework or blend inventory items.
The review and evaluation also considers the potential sale of off-grade or
impaired inventory at lower than market prices. If it is determined that
inventory items are impaired, the Company adjusts its reserves to cover the
estimated amount of the impairment. Based on past trends, the Company believes
that its reserves for inventory obsolescence have a relatively low degree of
variability and uncertainty.
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 as a deduction from sales when such sales are recognized. Rebate programs
are monitored on a regular basis and adjusted as required. The Company believes
that its accruals for customer rebates follow consistent historical patterns and
have a relatively low degree of variability and uncertainty.
34
ACCOUNTING DEVELOPMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation No. 46 requires existing
unconsolidated variable interest entities (VIE's) to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
the parties involved. Interpretation No. 46 applies immediately to VIE's created
after January 31, 2003 and to VIE's 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. In December 2003, the FASB reissued
Interpretation No. 46 with certain modifications and clarifications for certain
VIE's. The Company has no unconsolidated VIE's and therefore its consolidated
financial statements are in compliance with the requirements of Interpretation
No. 46 at December 31, 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 has applied the provisions of Statement No. 149, which has not had a
material impact on its earnings or financial position.
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 has applied the provisions of Statement No. 150, which has not
had a material impact on its earnings or financial position.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K 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, the ability to
obtain and timing of new financing, 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, the ability to realize expected
cost savings under the Company's cost reduction initiatives, the amount of any
additional earn-out payments from GE, and other risks and uncertainties detailed
in the Company's filings with the Securities and Exchange Commission. These
statements are based on the Company's estimates and assumptions and on currently
available information. The forward-looking statements include information
concerning the Company's 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 report was produced and such information will not necessarily be
updated by the Company.
35
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
risk-management strategy that uses derivative instruments as needed to mitigate
risk against foreign currency movements and to manage interest rate volatility.
The Company does not enter into derivative financial instruments for trading or
speculative purposes.
The Company has short-term exposure to changes in foreign currency exchange
rates resulting from transactions entered into by the Company and its foreign
subsidiaries in currencies other than their local currency (primarily trade
payables and receivables). The Company is also exposed to currency risk on
intercompany transactions (including intercompany loans). The Company manages
these transactional currency risks on a consolidated basis, which allows it to
net its trade payable and receivable exposure. The Company purchases foreign
currency forward contracts, primarily denominated in Euros, Canadian dollars,
Hong Kong dollars, Swiss francs and Singapore dollars, to hedge its transaction
exposure. These contracts are generally settled on a monthly basis. Realized and
unrealized gains and losses on foreign currency forward contracts are recognized
in other expense, net to offset the impact of valuing recorded foreign currency
trade payables, receivables and intercompany transactions. The Company has not
designated these derivatives as hedges under FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
although it believes these instruments reduce the Company's exposure to foreign
currency risk. The net effect of the realized and unrealized gains and losses on
these derivatives and the underlying transactions is not significant at December
31, 2003.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted-average interest rates by expected
maturity date for the Company's long-term debt. Weighted-average variable
interest rates are based on the applicable floating rate index as of the
reporting date.
Interest Rate Sensitivity
2009 and Fair Value
(In thousands) 2004 2005 2006 2007 2008 Thereafter Total At 12/31/03
------- --------- --------- ------- ------- ---------- --------- -----------
Fixed rate debt $ -- $ 350,000 $ 150,000 $ -- $ -- $ 270,000 $ 770,000 $ 776,554
Average interest rate 7.58% 7.58% 6.81% 7.19% 7.19% 7.19%
Variable rate debt $ -- $ -- $ -- $ -- $ -- $ 8,500 $ 8,500 $ 8,500
Average interest rate(a) 1.35% 1.35% 1.35% 1.35% 1.35% 1.35%
(a) Average interest rate is based on rates in effect at December 31, 2003.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statements of Operations
Years ended December 31, 2003, 2002 and 2001
(In thousands of dollars, except per share data)
2003 2002 2001
----------- ----------- -----------
NET SALES $ 2,185,043 $ 2,090,271 $ 2,286,543
COSTS AND EXPENSES
Cost of products sold 1,616,092 1,468,268 1,626,667
Selling, general and administrative 353,026 354,559 378,916
Depreciation and amortization 115,369 111,426 150,830
Research and development 51,467 54,285 56,030
Equity income (13,169) (7,917) (9,278)
Facility closures, severance and related costs 19,560 17,969 101,512
Antitrust costs 77,716 6,306 --
Impairment of long-lived assets -- -- 80,366
----------- ----------- -----------
OPERATING PROFIT (LOSS) (35,018) 85,375 (98,500)
Interest expense 89,653 101,704 109,877
Loss on early extinguishment of debt 24,699 -- --
Other expense, net 5,383 38,021 27,265
----------- ----------- -----------
EARNINGS (LOSS)
Loss from continuing operations before income
taxes and cumulative effect of accounting change (154,753) (54,350) (235,642)
Income tax benefit (36,102) (18,904) (79,883)
----------- ----------- -----------
Loss from continuing operations before
cumulative effect of accounting change (118,651) (35,446) (155,759)
Earnings from discontinued operations 26,314 50,920 31,815
Gain on sale of discontinued operations 111,692 -- --
Cumulative effect of accounting change (401) (298,981) --
----------- ----------- -----------
Net Earnings (Loss) $ 18,954 $ (283,507) $ (123,944)
=========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Loss from continuing operations before
cumulative effect of accounting change $ (1.05) $ (0.31) $ (1.38)
Earnings from discontinued operations 0.23 0.44 0.28
Gain on sale of discontinued operations 0.99 -- --
Cumulative effect of accounting change -- (2.63) --
----------- ----------- -----------
Net Earnings (Loss) $ 0.17 $ (2.50) $ (1.10)
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
37
Consolidated Balance Sheets
Years ended December 31, 2003 and 2002
(In thousands of dollars, except per share data)
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 39,213 $ 16,941
Accounts receivable 210,190 183,329
Inventories 390,199 353,556
Other current assets 170,852 112,950
Assets held for sale -- 392,887
----------- -----------
Total current assets 810,454 1,059,663
----------- -----------
NON-CURRENT ASSETS
Property, plant and equipment 774,612 695,962
Cost in excess of acquired net assets 418,607 584,633
Other assets 525,509 500,557
----------- -----------
$ 2,529,182 $ 2,840,815
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 60,695 $ 3,694
Accounts payable 232,127 268,593
Accrued expenses 267,472 260,718
Income taxes payable 130,284 116,111
Other current liabilities 10,667 15,670
Liabilities held for sale -- 29,273
----------- -----------
Total current liabilities 701,245 694,059
----------- -----------
NON-CURRENT LIABILITIES
Long-term debt 754,018 1,253,149
Pension and post-retirement health care liabilities 566,966 510,235
Other liabilities 204,244 183,489
STOCKHOLDERS' EQUITY
Common stock - $.01 par value 1,192 1,192
Additional paid-in capital 1,034,027 1,048,304
Accumulated deficit (590,157) (586,555)
Accumulated other comprehensive loss (96,463) (200,426)
Treasury stock at cost (45,890) (62,632)
----------- -----------
Total stockholders' equity 302,709 199,883
----------- -----------
$ 2,529,182 $ 2,840,815
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
38
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
(In thousands of dollars)
Increase (decrease) in cash 2003 2002 2001
- --------------------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 18,954 $(283,507) $(123,944)
Adjustments to reconcile net earnings (loss) to net
cash (used in) provided by operations:
Cumulative effect of accounting change 401 298,981 --
Impairment of long-lived assets -- -- 80,366
Gain on sale of discontinued operations (111,692) -- --
Loss on sale of business units -- 34,705 19,121
Loss on early extinguishment of debt 24,699 -- --
Depreciation and amortization 136,087 146,550 185,570
Equity income (13,169) (7,917) (9,278)
Deferred taxes (76,968) (38,431) (84,820)
Changes in assets and liabilities, net:
Accounts receivable 75,407 7,858 93,053
Accounts receivable - securitization (38,051) (157) 19,358
Inventories 39,421 22,683 29,906
Other current assets 3,742 (95) (10,736)
Other assets 31,318 13,683 33,585
Accounts payable (82,220) 28,945 12,594
Accrued expenses (54,477) (48,914) (601)
Income taxes payable 28,423 57,053 (12,770)
Other current liabilities (6,026) (4,531) 2,567
Pension and post-retirement health care liabilities (20,191) (10,811) (4,042)
Other liabilities 28,528 (10,442) (27,760)
Other 984 (3,899) 2,838
--------- --------- ---------
Net cash (used in) provided by operations (14,830) 201,754 205,007
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of businesses 633,427 80,000 35,061
Capital expenditures (87,591) (100,309) (136,642)
Other investing activities 1,707 (1,526) 933
--------- --------- ---------
Net cash provided by (used in) investing activities 547,543 (21,835) (100,648)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term notes (478,380) (11,742) (169)
Proceeds from long-term notes -- -- 2,003
Proceeds (payments) on domestic credit facility 32,000 (130,000) (105,000)
Payments on short-term borrowings (1,824) (27,186) (672)
Premium paid on early extinguishment of debt (23,804) -- --
Dividends paid (22,556) (22,698) (22,542)
Proceeds from interest rate swap contract -- -- 21,870
Common shares acquired (22,080) -- --
Other financing activities 2,323 6,415 1,555
--------- --------- ---------
Net cash used in financing activities (514,321) (185,211) (102,955)
--------- --------- ---------
CASH
Effect of exchange rates on cash 3,880 727 (675)
--------- --------- ---------
Change in cash 22,272 (4,565) 729
Cash at beginning of period 16,941 21,506 20,777
--------- --------- ---------
Cash at end of period $ 39,213 $ 16,941 $ 21,506
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
39
Consolidated Statements of Stockholders' Equity
Fiscal years ended 2003, 2002 and 2001
(In thousands, except per share data)
Accumulated
Common Additional Other
Shares Treasury Common Paid-in Accumulated Comprehensive
Issued Shares Stock Capital Deficit Loss
------- -------- ------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 2000 119,372 6,597 $ 1,194 $ 1,051,371 $ (133,864) $ (86,221)
Comprehensive loss:
Net loss (123,944)
Equity adjustment for translation
of foreign currencies (22,038)
Minimum pension liability
adjustment (net of deferred tax
benefit of $24,237) (37,576)
Other (6,004)
Total comprehensive loss
Cash dividends ($0.20 per share) (22,542)
Stock options and other issuances (467) (116)
Merger share adjustment (185) (2) 2
------- -------- ------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 2001 119,187 6,130 1,192 1,051,257 (280,350) (151,839)
Comprehensive loss:
Net loss (283,507)
Equity adjustment for translation
of foreign currencies 30,038
Minimum pension liability
adjustment (net of deferred tax
benefit of $49,370) (78,463)
Other (162)
Total comprehensive loss
Cash dividends ($0.20 per share) (22,698)
Stock options and other issuances (832) (2,953)
Merger share adjustment (35) -- --
------- -------- ------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 2002 119,152 5,298 1,192 1,048,304 (586,555) (200,426)
Comprehensive income:
Net earnings 18,954
Equity adjustment for translation
of foreign currencies 125,438
Minimum pension liability
adjustment (net of deferred tax
benefit of $18,534) (24,887)
Other 3,412
Total comprehensive income
Cash dividends ($0.20 per share) (22,556)
Stock options and other issuances (638) (3,664)
Common shares acquired 3,200
Issued for pension funding (3,200) (10,613)
------- -------- ------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 2003 119,152 4,660 $ 1,192 $ 1,034,027 $ (590,157) $ (96,463)
======= ======== ======= =========== =========== =============
Treasury
Stock Total
---------- ---------
BALANCE, DECEMBER 31, 2000 $ (78,504) $ 753,976
Comprehensive loss:
Net loss (123,944)
Equity adjustment for translation
of foreign currencies (22,038)
Minimum pension liability
adjustment (net of deferred tax
benefit of $24,237) (37,576)
Other (6,004)
---------
Total comprehensive loss (189,562)
Cash dividends ($0.20 per share) (22,542)
Stock options and other issuances 5,785 5,669
Merger share adjustment --
---------- ---------
BALANCE, DECEMBER 31, 2001 (72,719) 547,541
Comprehensive loss:
Net loss (283,507)
Equity adjustment for translation
of foreign currencies 30,038
Minimum pension liability
adjustment (net of deferred tax
benefit of $49,370) (78,463)
Other (162)
---------
Total comprehensive loss (332,094)
Cash dividends ($0.20 per share) (22,698)
Stock options and other issuances 10,087 7,134
Merger share adjustment --
---------- ---------
BALANCE, DECEMBER 31, 2002 (62,632) 199,883
Comprehensive income:
Net earnings 18,954
Equity adjustment for translation
of foreign currencies 125,438
Minimum pension liability
adjustment (net of deferred tax
benefit of $18,534) (24,887)
Other 3,412
---------
Total comprehensive income 122,917
Cash dividends ($0.20 per share) (22,556)
Stock options and other issuances 7,313 3,649
Common shares acquired (22,080) (22,080)
Issued for pension funding 31,509 20,896
---------- ---------
BALANCE, DECEMBER 31, 2003 $ (45,890) $ 302,709
========== =========
See accompanying Notes to Consolidated Financial Statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of all
majority-owned subsidiaries. Other affiliates in which Crompton Corporation (the
"Company") has a 20% to 50% ownership are accounted for in accordance with the
equity method. All significant intercompany balances and transactions have been
eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
require the Company to make estimates and assumptions that affect the amounts
and disclosures reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform to the current
year's presentation. These changes did not have a material impact on previously
reported results of operations or financial position.
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. As a
result, the accompanying financial statements reflect the OrganoSilicones
business unit as a discontinued operation for all periods presented. The
operations of the OrganoSilicones business unit have been classified as earnings
from discontinued operations (net of tax) in the consolidated statements of
operations and the estimated carrying amount of the assets sold and the
liabilities assumed have been reflected as assets and liabilities held for sale
in the consolidated balance sheets for all prior periods presented. The
consolidated statements of cash flows have not been adjusted to reflect the
discontinued operations and thus include the cash flows of the OrganoSilicones
business through July 31, 2003. Refer to the Discontinued Operations footnote
for further information.
Accounting Developments
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 requires existing unconsolidated variable interest
entities (VIE's) to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the parties involved.
Interpretation No. 46 applies immediately to VIE's created after January 31,
2003 and to VIE's 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. In December 2003, the FASB reissued
Interpretation No. 46 with certain modifications and clarifications for certain
VIE's. The Company has no unconsolidated VIE's and therefore its consolidated
financial statements are in compliance with the requirements of Interpretation
No. 46 at December 31, 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 has applied the provisions of Statement No. 149, which has not had a
material impact on its earnings or financial position.
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 has applied the provisions of Statement No. 150, which has not
had a material impact on its earnings or financial position.
Revenue Recognition
Substantially all of the Company's revenues are derived from the sale of
products. Approximately 94% of the Company's revenue is recognized when risk of
loss of, and title to, the product is transferred to the customer, which usually
occurs at the time shipment is made. Substantially all of the Company's products
are sold FOB ("free on board") shipping point or on an equivalent basis. The
Company's standard terms of delivery are included on its sales invoices and
order confirmation documents. The remaining 6% of revenue, which represents a
substantial portion of the revenue of the polymer processing equipment reporting
segment, is recognized in accordance with the completed contract method of
accounting.
41
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 as a deduction from sales when such sales are recognized. Rebate programs
are monitored on a regular basis and adjusted as required. The Company's
accruals for customer rebates were $27.4 million and $21.8 million at December
31, 2003 and December 31, 2002, respectively.
Operating Costs and Expenses
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 costs for out-bound product shipments,
information technology, legal, provision for doubtful accounts, corporate
facilities and corporate administration. 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 (R&D)
include basic and applied research and development activities of a technical and
non-routine nature. R&D costs are expensed as incurred. Costs of products sold,
research and development, and SG&A expenses exclude depreciation and
amortization expenses, which are presented on a separate line in the
consolidated statements of operations.
Included in SG&A are shipping costs of $80.5 million, $72.4 million and $78.3
million in 2003, 2002 and 2001, respectively.
Equity Investments
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 $93.4 million and $38.3 million,
respectively, as of December 31, 2003 and were $74.0 million and $26.3 million,
respectively, as of December 31, 2002. The combined pre-tax income of the two
investments for the years ended December 31, 2003, 2002 and 2001 were $25.3
million, $15.6 million and $24.7 million, respectively, of which the Company has
included its proportionate share in equity income in its consolidated statements
of operations.
Allowance for Doubtful Accounts
Included in accounts receivable are allowances for doubtful accounts in the
amount of $17.8 million in 2003 and $16.3 million in 2002.
Inventory Valuation
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated
depreciation. Depreciation expense ($100.8 million in 2003, $99.9 million in
2002 and $119 million in 2001) is computed on the straight-line method using the
following ranges of asset lives: land improvements 3 to 20 years; buildings and
improvements 10 to 40 years; machinery and equipment 10 to 25 years; information
systems equipment 5 to 10 years; and furniture, fixtures and other 3 to 10
years.
Renewals and improvements that extend the useful lives of the assets are
capitalized. Capitalized leased assets and leasehold improvements are
depreciated over the shorter of their useful lives or the remaining lease term.
Expenditures for maintenance and repairs are charged to expense as incurred.
Intangible Assets
Prior to January 1, 2002, the excess cost over the fair value of net assets of
businesses acquired (goodwill) was being amortized on a straight-line basis over
20 to 40 years. Effective January 1, 2002, in accordance with FASB Statement No.
142, the Company discontinued the amortization of goodwill. Goodwill
amortization expense was $20.2 million in 2001.
Patents, trademarks and other intangibles are being amortized principally on a
straight-line basis using the following ranges for their estimated useful lives:
patents 10 to 15 years; trademarks 10 to 40 years; and other intangibles
primarily 5 to 19 years. Further information is provided in the Goodwill and
Intangible Assets footnote included herein.
Recoverability of Long-Lived Assets and Goodwill
The Company evaluates the recoverability of the carrying value of long-lived
assets, excluding goodwill, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Under such circumstances, the
Company assesses whether the projected undiscounted cash flows of its businesses
are sufficient to recover the existing unamortized cost of its long-lived
assets. If the undiscounted projected cash flows are not sufficient, the Company
calculates the
42
impairment amount by discounting the projected cash flows using its
weighted-average cost of capital. The amount of the impairment is written-off
against earnings in the period in which the impairment is determined.
The Company evaluates the recoverability of the carrying value of goodwill on an
annual basis as of July 31, or sooner if events occur or circumstances change,
in accordance with FASB Statement No. 142. See the Goodwill and Intangible
Assets footnote included herein for further details.
Environmental Liabilities
Accruals for environmental remediation, and operation and management costs
directly related to remediation, are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated based on current laws and existing technologies. Each quarter, the
Company evaluates and reviews estimates for future remediation and related costs
to determine appropriate environmental reserve amounts. At December 31, 2003,
environmental liabilities of $17.2 million have been included in accrued
expenses and $103.5 million have been included in other liabilities. At December
31, 2002, environmental liabilities of $21.8 million have been included in
accrued expenses and $107 million have been included in other liabilities. See
the Contingencies and Environmental Matters footnote included herein for further
details.
Stock-Based Compensation
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and Statement 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 Opinion (APB) No. 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 consolidated statements of operations for these awards.
However, compensation expense has been recognized for the restricted awards
under the Company's long-term incentive programs in accordance with the
provisions of APB 25, which would be unchanged under FASB Statements No. 123 and
No. 148. The following table illustrates the effect on net earnings (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of Statements No. 123 and No. 148 to all stock-based employee
compensation awards.
(In thousands, except per share data) 2003 2002 2001
-------- ----------- -----------
Net earnings (loss), as reported $ 18,954 $ (283,507) $ (123,944)
Stock-based employee compensation expense (income)
included in net earnings (loss), net of tax (1,359) 4,944 2,371
Total stock-based employee compensation determined under
fair value based accounting method for all awards, net of
tax (2,770) (10,863) (11,598)
-------- ----------- -----------
Pro forma net earnings (loss) $ 14,825 $ (289,426) $ (133,171)
======== =========== ===========
Earnings (loss) per share:
Basic and diluted - as reported $ 0.17 $ (2.50) $ (1.10)
Basic and diluted - pro forma $ 0.13 $ (2.55) $ (1.18)
Financial and Derivative Instruments
Financial and derivative instruments are presented in the accompanying
consolidated financial statements at either cost or fair value as required by
accounting principles generally accepted in the United States of America.
Further information is provided in the Financial Instruments and Derivative
Instruments and Hedging Activities footnotes included herein.
Translation of Foreign Currencies
Balance sheet accounts denominated in foreign currencies are translated at the
current rate of exchange as of the balance sheet date, while revenues and
expenses are translated at average rates of exchange during the periods
presented. The cumulative foreign currency adjustments resulting from such
translation are included in accumulated other comprehensive loss.
Statements of Cash Flows
Cash includes bank term deposits with original maturities of three months or
less. Cash payments included interest payments of $95.8 million in 2003, $105.4
million in 2002 and $119.3 million in 2001. Cash payments also included net
income tax payments of $21.4 million in 2003, net income tax refunds of $26.4
million in 2002 and net income tax payments of $31.3 million in 2001. The net
income tax refund in 2002 included a $50 million federal income tax refund
resulting from a change in tax legislation. Included in the Company's cash
balance at December 31, 2003, is approximately $13 million of restricted
43
cash that is required to be on deposit to support certain letters of credit and
performance guarantees, the majority of which will be settled within one year.
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
In July 2003, the Company announced a new cost reduction program to eliminate,
at a minimum, overhead expenses previously absorbed by the OrganoSilicones
business. In order to achieve this goal, the Company expects to reduce its
global workforce by approximately 375 positions, of which approximately 305
positions had been eliminated as of December 31, 2003. In 2003, the Company
recorded a pre-tax charge of $14 million for facility closures, severance and
related costs in the consolidated statements of operations. A summary of this
charge is as follows:
Severance Other
and Facility
Related Asset Closure
(In thousands) Costs Write-offs Costs Total
--------- ---------- -------- --------
2003 charge $ 12,585 $ 396 $ 988 $ 13,969
Cash payments (2,859) -- (383) (3,242)
Non-cash charges -- (396) -- (396)
--------- ---------- -------- --------
Balance at December 31, 2003 $ 9,726 $ -- $ 605 $ 10,331
========= ========== ======== ========
In July 2001, the Company announced a cost reduction initiative expected to
lower annual operating costs through a program of facility consolidation,
workforce reduction, and improvements in procurement and working capital
control. In 2002, the Company announced the relocation of its corporate
headquarters from Greenwich, CT to Middlebury, CT. The 2001 initiative and the
corporate relocation have been substantially completed as of December 31, 2003
and the Company does not expect future costs to be significant. As a result of
the cost reduction initiative and the corporate relocation, the Company recorded
pre-tax charges for facility closures, severance and related costs of $5.6
million, $17.4 million and $109 million (of which $7.5 million is in cost of
products sold) in 2003, 2002 and 2001, respectively. These charges are
summarized as follows:
Asset
Severance Write-offs Other
and and Facility
Related Impairments Closure
(In thousands) Costs (a) (b) Costs (c) Total
--------- ----------- --------- --------
2001 charge:
Continuing operations $ 41,196 $ 41,847 $ 25,986 $109,029
Discontinued operations 4,270 -- 734 5,004
Cash payments (8,526) -- (2,022) (10,548)
Non-cash charges (6,706) (41,847) (13,866) (62,419)
--------- ----------- --------- --------
Balance at December 31, 2001 30,234 -- 10,832 41,066
2002 charge:
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 2,711 183 2,697 5,591
Discontinued operations 15 -- 15 30
Cash payments (17,457) -- (9,695) (27,152)
Non-cash charges (1,110) (183) (280) (1,573)
--------- ----------- --------- --------
Balance at December 31, 2003 $ 8,392 $ -- $ 4,075 $ 12,467
========= =========== ========= ========
(a) Includes severance at various sites, including severance resulting from
the corporate relocation, and pension curtailments related to closed
sites.
(b) Includes primarily asset write-offs related to closed sites and the
write-down of an equity investment relating to the impairment of assets of
an affiliate.
(c) Includes primarily demolition, decontamination and decommissioning costs
and inventory charges related to closed sites.
44
In December 2000, the Company closed its manufacturing facility in Freeport,
Grand Bahama Island. In connection with the facility closure, the Company
incurred a pre-tax charge of $23.1 million in 2000 (of which $3.0 million was
included in cost of products sold). This charge included $15.5 million for the
write-off of long-lived assets, $6.2 million for facility closure and
maintenance costs and $1.4 million for severance and other costs. The Company
made payments of $0.5 million and $4 million in 2002 and 2001, respectively. In
2002, due to changes in the original estimate, the Company recorded a pre-tax
charge of $0.6 million for additional facility closure and maintenance costs.
During 2003, the Company made payments of $0.4 million related to this closure
and had a remaining accrual of $0.2 million at December 31, 2003.
Effective January 1, 2003, the Company adopted the provisions of FASB 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
December 31, 2003.
The Company's accruals for facility closures, severance and related costs are
included in accrued expenses in its consolidated balance sheets.
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 GE and to acquire GE's Specialty Chemicals
business. The transaction closed on July 31, 2003 and resulted in a gain of
$111.7 million (net of income taxes of $175.3 million). The gain includes the
write-off of certain other assets associated with the OrganoSilicones business
unit, principally goodwill, with carrying amounts of $220 million at July 31,
2003. The Company received net cash proceeds of $633.4 million, which includes
proceeds from its first quarterly earn-out payment of $8.75 million less certain
transaction-related fees of $18.4 million. The consideration that the Company
received is subject to adjustment based on the change and/or adjustment to
certain net assets of the OrganoSilicones business unit and the GE Specialty
Chemicals business between December 31, 2002 and the closing date. In addition,
as a result of the transaction, the Company acquired GE's Specialty Chemicals
business valued at $160 million. The Company will continue to receive quarterly
earn-out payments through September of 2006 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. During the fourth quarter of 2003, the
Company received its first minimum quarterly earn-out payment of $8.75 million.
Based on the performance of GE's Silicones business during the fourth quarter of
2003, the Company will receive an additional $4.5 million of earn-out proceeds
in the first quarter of 2004. The recognition of this additional gain is
contingent upon the continued favorable future performance of GE's Silicones
business, which the Company will assess on a quarterly basis.
The Company has used proceeds from this transaction primarily to reduce
indebtedness. On July 31, 2003, the Company reduced the borrowings under its
domestic credit facility from $294 million to zero and in August of 2003, the
Company repurchased $250 million of its 8.5% notes and paid down the $61.3
million balance of its EURIBOR based bank loans.
The agreement provided for the sale of assets and assignment of liabilities of
the OrganoSilicones business unit with carrying amounts as follows:
(In thousands) July 31, 2003 December 31, 2002
------------- -----------------
Inventory $ 102,420 $ 106,560
Other current assets 2,356 3,798
Property, plant and equipment, net 229,328 246,554
Other assets 33,909 35,975
----------- -----------
Total assets held for sale $ 368,013 $ 392,887
=========== ===========
Notes payable $ 2,204 $ 2,033
Accounts payable and accrued expenses 13,262 14,671
Long-term debt 7,728 8,698
Other liabilities 4,193 3,871
----------- -----------
Total liabilities held for sale $ 27,387 $ 29,273
=========== ===========
45
The sales and earnings from discontinued operations for all periods presented
are as follows:
(In thousands) 2003 2002 2001
--------- --------- ---------
Net sales $ 273,387 $ 456,601 $ 432,255
========= ========= =========
Pre-tax earnings from discontinued operations $ 35,278 $ 63,634 $ 47,036
Income taxes (8,964) (12,714) (15,221)
--------- --------- ---------
Earnings from discontinued operations $ 26,314 $ 50,920 $ 31,815
========= ========= =========
The Company's consolidated statement of operations for the year ended December
31, 2003 reflects the results of operations of the acquired GE Specialty
Chemicals business for the months of August through December 2003. The $160
million purchase price was allocated to the assets acquired and liabilities
assumed based on the fair value of such assets and liabilities. The Company
engaged an independent appraiser to determine the fair value of certain assets.
As a result of the independent valuation that was performed, certain adjustments
were made to the purchase price allocation subsequent to the date of acquisition
through December 31, 2003. The purchase price allocation as of December 31, 2003
is as follows:
(In thousands) Purchase
Price
Allocation
----------
Accounts receivable $ 13,789
Inventory 28,878
Other current assets 1,670
Property, plant and equipment, net 50,992
Cost in excess of acquired net assets (goodwill) 42,345
Other assets 43,691
Accounts payable and accrued expenses (15,865)
Post-retirement health care liability (5,500)
----------
Total purchase price $ 160,000
==========
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma results of operations for the years ended December 31,
2003, 2002, and 2001 assume the divestiture of the OrganoSilicones business unit
and the acquisition of the GE Specialty Chemicals business had been consummated
as of the beginning of each respective period:
(In thousands, except per share data) 2003 2002 2001
----------- ----------- -----------
Net sales $ 2,276,962 $ 2,259,219 $ 2,449,866
=========== =========== ===========
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (101,854) $ 2,424 $ (113,491)
=========== =========== ===========
Net earnings (loss) (a) $ 9,437 $ (296,557) $ (113,491)
=========== =========== ===========
Basic earnings (loss) per common share:
Earnings (loss) before cumulative effect of
accounting change $ (0.91) $ 0.02 $ (1.00)
=========== =========== ===========
Net earnings (loss) $ 0.08 $ (2.61) $ (1.00)
=========== =========== ===========
Diluted earnings (loss) per common share:
Earnings (loss) before cumulative effect of
accounting change $ (0.91) $ 0.02 $ (1.00)
=========== =========== ===========
Net earnings (loss) $ 0.08 $ (2.56) $ (1.00)
=========== =========== ===========
46
(In thousands, except per share data) 2003 2002 2001
------- ------- -------
Weighted average shares outstanding:
Basic 112,531 113,568 113,061
======= ======= =======
Diluted 112,531 115,656 113,061
======= ======= =======
(a) The pro forma net earnings (loss) for the year ended December 31, 2003
includes a gain on the sale of discontinued operations of $111,692. In
addition, the pro forma net earnings (loss) for the years ended December
31, 2003 and 2002 include charges for cumulative effect of accounting
changes of $401 and $298,981, respectively.
The pro forma information above has been prepared for comparative purposes only
and does not purport to be indicative of the results of operations that would
have occurred had the divestiture of the OrganoSilicones business unit and the
acquisition of the GE Specialty Chemicals business been consummated at the
beginning of the respective periods.
DIVESTITURES
In June 2002, the Company sold its industrial specialties business unit
(excluding retained accounts receivable and accounts payable valued at
approximately $10 million) for $95 million, including cash proceeds of $80
million and a note receivable of $15 million due February 2003. The note
receivable, net of adjustments made to the value of certain assets sold, was
paid by the buyer. The industrial specialties assets sold consisted of inventory
of $24.9 million, property, plant and equipment, net, of $80.2 million and
intangible assets of $2.0 million. In addition, other assets (primarily
intangible assets) of $11.5 million were written off. After transaction fees and
related costs, the Company recorded a pre-tax loss of $34.7 million in 2002
(included in other expense, net). During the fourth quarter of 2003, the Company
resolved certain transaction-related matters with the buyer and accordingly
recorded a $2.6 million credit adjustment to the pre-tax loss in other expense,
net. Prior to the sale, the industrial specialties business unit was included in
the Other reporting segment.
In December 2001, the Company sold its industrial colors business unit for $32
million, which resulted in a pre-tax loss of $17.3 million (included in other
expense, net).
In December 2001, the Company sold its equity interest in the nitrile rubber
joint venture for $3.1 million. The sale resulted in a pre-tax loss of $1.8
million (included in other expense, net).
In March 2001, the Company sold its equity interest in Yorkshire Group PLC for
$7 million. The sale resulted in a pre-tax loss of $1.5 million (included in
other expense, net).
ASSET IMPAIRMENTS
During the fourth quarter of 2001, as a result of changes in the marketplace,
the Company evaluated the recoverability of the long-lived assets of its rubber
chemicals and trilene businesses. The rubber additives business (included in the
Polymer Additives reporting segment) had experienced industry-wide overcapacity,
customer consolidation and low cost regional competition, which led to
deteriorating pricing and marginally profitable long-term prospects. For the
trilene business (which represents less than $4 million of net sales included in
the Polymers reporting segment), the issue was a lack of demand with little
prospect for improvement. Based on the projected cash flows, the Company
determined that the carrying values of the long-lived assets of these businesses
were impaired and recorded impairment charges of $66.7 million and $13.7 million
related to the rubber chemicals and trilene businesses, respectively. These
amounts were charged to operating profit in the fourth quarter of 2001 with an
offsetting reduction to the long-lived assets of the businesses, primarily
property, plant and equipment.
MERGER ACCRUALS
On September 1, 1999, Crompton and Knowles Corporation (C&K) merged with Witco
Corporation (Witco) in a tax-free stock-for-stock merger (the "Merger"). As a
result of the Merger, the Company recorded various merger related accruals in
1999 as a component of cost in excess of acquired net assets (goodwill). The
changes to these accruals for the periods presented in the Company's
consolidated financial statements are as follows:
47
Severance Other
and Merger
Related Related
(In thousands) Costs Costs Total
--------- ------- -------
Balance at December 31, 2000 $ 17,678 $ 7,606 $25,284
Cash payments (3,019) (2,836) (5,855)
Non-cash charges (983) (862) (1,845)
--------- ------- -------
Balance at December 31, 2001 13,676 3,908 17,584
Cash payments (764) (1,226) (1,990)
Non-cash charges -- (157) (157)
Reserve adjustment (a) (12,571) (536) (13,107)
--------- ------- -------
Balance at December 31, 2002 341 1,989 2,330
Cash payments (115) (283) (398)
Reserve adjustment (a) -- (797) (797)
--------- ------- -------
Balance at December 31, 2003 $ 226 $ 909 $ 1,135
========= ======= =======
(a) Represents the reversal of reserves no longer deemed necessary, of which
$12.6 million in 2002 was a reduction of goodwill.
Also, as a result of the Merger, the Company recorded additional accruals in
1999 as a component of operating profit (loss). The changes to these accruals
for the periods presented in the Company's consolidated financial statements are
summarized as follows:
Severance Facility Other
and Closure and Merger
Related Maintenance Related
(In thousands) Costs Costs Costs Total
--------- ----------- ------- -------
Balance at December 31, 2000 $ 1,347 $ 4,796 $ 922 $ 7,065
Cash payments (297) (1,187) (613) (2,097)
Non-cash charges (684) (1,758) 126 (2,316)
--------- ----------- ------- -------
Balance at December 31, 2001 366 1,851 435 2,652
Cash payments (325) (1,564) (42) (1,931)
Non-cash charges 50 (287) (250) (487)
--------- ----------- ------- -------
Balance at December 31, 2002 91 -- 143 234
Cash payments -- -- (44) (44)
Reserve adjustment (91) -- 91 --
--------- ----------- ------- -------
Balance at December 31, 2003 $ -- $ -- $ 190 $ 190
========= =========== ======= =======
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAMS
The Company has an accounts receivable securitization program to sell up to $150
million of domestic accounts receivable to agent banks. At December 31, 2003,
$106.1 million had been sold at an average cost of approximately 1.89%. At
December 31, 2002, $136.5 million had been sold at an average cost of
approximately 2.19%. In addition, the Company's European subsidiaries have a
separate program to sell their eligible accounts receivable to agent banks. At
December 31, 2003, $93.3 million of international accounts receivable had been
sold at an average cost of approximately 3.37%. At December 31, 2002, $101
million of international accounts receivable had been sold at an average cost of
approximately 3.94%. The total costs associated with these programs of $7.8
million and $9.1 million as of December 31, 2003 and 2002, respectively, are
included in other expense, net in the consolidated statements of operations. The
decrease in accounts receivable sold under these programs in 2003 was primarily
due to a reduction in eligible receivables resulting from the sale of the
OrganoSilicones business unit.
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 the
unsold receivable balance owned by the SPE, which was $43.3 million and $27.4
million as of December 31, 2003 and 2002, respectively. The balance of the
unsold receivables owned by the SPE is included in the Company's accounts
48
receivable balance on its consolidated balance sheets. 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 international receivable programs as a sale of accounts
receivable.
INVENTORIES
(In thousands) 2003 2002
----------- -----------
Finished goods $ 293,846 $ 264,078
Work in process 20,175 21,158
Raw materials and supplies 76,178 68,320
----------- -----------
$ 390,199 $ 353,556
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
(In thousands) 2003 2002
----------- -----------
Land and improvements $ 47,953 $ 44,737
Buildings and improvements 236,325 172,359
Machinery and equipment 1,088,383 978,155
Information systems equipment 124,951 118,039
Furniture, fixtures and other 25,619 23,212
Construction in progress 79,386 82,725
----------- -----------
1,602,617 1,419,227
Less accumulated depreciation 828,005 723,265
----------- -----------
$ 774,612 $ 695,962
=========== ===========
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted FASB Statement No. 141, "Business
Combinations" and FASB Statement No. 142, "Goodwill and Other Intangible
Assets." Statement No. 141 requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method of accounting. It
also specifies criteria that must be met for intangible assets acquired in a
purchase combination to be recognized apart from goodwill. Statement No. 142
requires that the useful lives of all existing intangible assets be reviewed and
adjusted if necessary. It also requires that goodwill and intangible assets with
indefinite lives no longer be amortized, but rather be tested for impairment at
least annually. Other intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with FASB Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
In accordance with Statement No. 142, the Company discontinued the amortization
of goodwill effective January 1, 2002. The following is a reconciliation to
adjust previously reported annual financial information to exclude goodwill
amortization expense:
(In thousands, except per share data) 2001
-------------------------------------
Net Earnings
(Loss) Per Share
-------------------------------------
Loss Basic Diluted
----------- -------- --------
Net loss, as reported $ (123,944) $ (1.10) $ (1.10)
Goodwill amortization expense - continuing operations 20,179 0.18 0.18
Goodwill amortization expense - discontinued operations 5,877 0.05 0.05
----------- -------- --------
Adjusted net loss $ (97,888) $ (0.87) $ (0.87)
=========== ======== ========
49
The Company's intangible assets (excluding goodwill) are included in "other
assets" on the consolidated balance sheets and comprise the following:
(In thousands) December 31, 2003 December 31, 2002
-------------------------- --------------------------
Gross Accumulated Gross Accumulated
Cost Amortization Cost Amortization
--------- ------------ --------- ------------
Patents $ 60,824 $ (18,877) $ 45,440 $ (15,335)
Trademarks 83,718 (31,334) 69,547 (27,932)
Other 89,364 (37,444) 64,327 (31,325)
--------- ----------- --------- -----------
$ 233,906 $ (87,655) $ 179,314 $ (74,592)
========= =========== ========= ===========
The gross cost of the Company's intangible assets increased $54.6 million during
2003 primarily due to $43.6 million of intangibles acquired with the acquisition
of the GE Specialty Chemicals business, the capitalization of fees associated
with the renewal of patents, trademarks and registrations, and higher foreign
currency translation. The estimated fair value of intangible assets associated
with the GE Specialty Chemicals acquisition was based on an independent
valuation and includes $13.2 million for trademarks with a 40-year useful life,
$23.1 million for acquired customer lists/relationships with a weighted-average
useful life of 6.3 years, and $7.3 million for patents with a 10-year useful
life.
Amortization expense related to intangible assets (excluding goodwill) amounted
to $14.5 million in 2003, $11.6 million in 2002 and $11.6 in 2001. Estimated
amortization expense for the next five fiscal years is as follows: $17.1 million
(2004); $16.3 million (2005); $16.1 million (2006); $15.9 million (2007); and
$15.4 million (2008).
During the first quarter of 2002, in accordance with the goodwill impairment
provisions of Statement No. 142, the Company allocated its assets and
liabilities, including goodwill, to its reporting units. Much of the goodwill
relates to the Merger and, accordingly, has been allocated to the former Witco
business units. During the second quarter of 2002, the Company completed its
reporting unit fair value calculations by discounting the projected cash flows
of each of its reporting units using its weighted-average cost of capital. As a
result, the Company recorded a charge of $299 million, or $2.63 per share,
retroactive to January 1, 2002. The charge is reflected in 2002 as a cumulative
effect of accounting change. Of the $299 million charge, $84 million relates to
the divested industrial specialties business and represents 100 percent of the
goodwill attributed to that business. A further $65 million relates to 100
percent of the goodwill attributed to the refined products business and the
remaining $150 million of the charge represents 43 percent of the goodwill
attributed to the plastic additives business.
Goodwill by reportable segment is as follows:
(In thousands) December 31, December 31,
2003 2002
------------ ------------
Polymer Products
Polymer Additives $ 310,785 $ 266,105
Polymers 17,299 17,299
Polymer Processing Equipment 34,637 31,870
------------ ------------
362,721 315,274
------------ ------------
Specialty Products
OrganoSilicones -- 213,980
Crop Protection 55,886 55,379
------------ ------------
55,886 269,359
------------ ------------
$ 418,607 $ 584,633
============ ============
During 2003, goodwill decreased $166 million primarily due to the write-off of
$214 million of goodwill related to the OrganoSilicones business, partially
offset by $42.3 million of goodwill associated with the acquisition of the GE
Specialty Chemicals business (included in the Polymer Additives segment) and
higher foreign currency translation of $5.6 million. The goodwill associated
with the OrganoSilicones business was written off as part of the gain on sale of
discontinued operations. All of the goodwill associated with the GE Specialty
Chemicals business is deductible for tax purposes.
The Company has elected to perform its annual goodwill impairment procedures for
all of its reporting units as of July 31. During the third quarter of 2003, the
Company updated its carrying value calculations and fair value estimates for
each of its reporting units as of July 31, 2003. Based on the comparison of the
carrying values to the estimated fair values, the Company has concluded that no
additional goodwill impairment exists. The Company will update its review as of
July 31, 2004, or sooner, if events occur or circumstances change that could
reduce the fair value of a reporting unit below its carrying value.
50
LEASES
At December 31, 2003, minimum rental commitments under non-cancelable operating
leases, net of sublease income, amounted to $17.9 million (2004), $15.2 million
(2005), $10.5 million (2006), $9.1 million (2007), $8.7 million (2008) and $35.3
million (2009 and thereafter). Rental expenses under operating leases were $24.4
million (2003), $27.8 million (2002) and $31.5 million (2001).
Real estate taxes, insurance and maintenance expenses generally are obligations
of the Company, and accordingly, are not included as part of rental payments. It
is expected that in the normal course of business, leases that expire will be
renewed or replaced by similar leases.
INDEBTEDNESS
The Company's long-term debt instruments are recorded at face value, net of
unamortized discounts. Such discounts will be amortized to interest expense over
the life of the related debt instruments. The Company's long-term debt is
summarized as follows:
Long-Term Debt
(In thousands) 2003 2002
----------- -----------
Domestic Credit Facility (a) $ -- $ 25,000
8.50% Notes due 2005, net of unamortized discount of $850 in 2003
and $2,706 in 2002, with an effective interest rate of 8.71% 349,150 597,294
6.125% Notes due 2006, net of unamortized discount of $4,966 in 2003
and $7,348 in 2002, with an effective interest rate of 7.71% 145,034 142,652
6.875% Debentures due 2026, net of unamortized discount of $23,265 in
2003 and $24,319 in 2002, with an effective interest rate of 7.58% 126,735 125,681
7.75% Debentures due 2023, net of unamortized discount of $1,405 in
2003 and $1,478 in 2002, with an effective interest rate of 7.82% 108,595 108,522
6.60% Notes due 2003, net of unamortized discount of $442 in 2002, with
an effective interest rate of 7.67% -- 164,558
EURIBOR-based Bank Loans due 2003 -- 57,051
Other 24,504 32,391
----------- -----------
$ 754,018 $ 1,253,149
=========== ===========
(a) The Company's domestic credit facility of $57 million at December 31, 2003
has been classified as short-term due to its maturity date of October
2004.
On April 1, 2003, the Company utilized its domestic credit facility to repay its
$165 million of 6.6% notes due in 2003. On July 31, 2003, the Company completed
its transaction with GE and used the proceeds from this transaction primarily to
reduce indebtedness. On July 31, 2003, the Company reduced the borrowings under
its domestic credit facility from $294 million to zero. In August of 2003, the
Company repaid the $61.3 million balance of its EURIBOR-based bank loans and
repurchased $250 million of its 8.5% notes. As a result of the repurchase of the
8.5% notes, the Company recorded a loss on early extinguishment of debt of $24.7
million as a component of net earnings (loss) from continuing operations before
taxes in accordance with FASB Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Included in this loss is a premium of $23.8 million and a
write-off of $0.9 million related to the unamortized discount and debt issuance
costs related to the repurchased notes.
In March of 2000, the Company issued $600 million of notes due in 2005 with a
coupon rate of 8.5%, and entered into an interest rate swap contract to convert
$300 million of such notes into variable interest rate debt. On March 24, 2001,
the Company terminated the $300 million variable interest rate swap contract and
received $21.9 million of cash proceeds from the settlement of the contract,
which represented the fair market value of the contract on the date of
termination. In accordance with FASB Statements No. 133 and No. 138, as they
relate to fair value hedge accounting, the $21.9 million was recorded as an
increase to long-term debt and is being amortized to earnings over the life of
the notes. The unamortized balance at December 31, 2003 and 2002 was $6.6
million and $12.1 million, respectively.
Credit Facilities
At December 31, 2002, the Company had a $400 million five-year domestic credit
facility available through October 2004. Effective July 31, 2003, the credit
facility was amended to $300 million. Borrowings on this facility are at various
rate options determined on the date of borrowing. In addition, the Company must
pay a facility fee on the aggregate amount of the credit facility, which was
..50% and .38% at December 31, 2003 and 2002, respectively. At December 31, 2003,
borrowings under this credit facility were $57 million with a weighted-average
interest rate of 3.57%. At December 31, 2002, borrowings under
51
this credit facility were $25 million with a weighted-average interest rate of
3.56%. Due to the October 2004 maturity date, borrowings under this facility
were classified as short-term at December 31, 2003.
The Company also has arrangements with various banks for lines of credit for its
international subsidiaries aggregating $26.3 million in 2003 and $28 million in
2002, of which $3.7 million (at 4.9%) and $4.7 million (at 4.4%) were
outstanding at December 31, 2003 and 2002, respectively.
Debt Covenants
The Company's various debt agreements contain covenants that limit the ability
to create or assume mortgages or engage in mergers, consolidations, and certain
sales or leases of assets. The Company is required to report compliance with
certain financial covenants to its lenders on a quarterly basis. Under these
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 adjustments to both debt and earnings being made in
accordance with the terms of the domestic 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. As a result of the waiver and
amendments to the domestic credit facility agreement dated October 17, 2003 and
November 10, 2003, the leverage and interest coverage ratio covenants were
modified to allow for more latitude beginning in the third quarter of 2003. The
Company was in compliance with the financial covenants of its domestic credit
facility at December 31, 2003. The Company's five-year domestic credit facility
and the amendments thereto have been filed as exhibits to the Company's filings
with the Securities and Exchange Commission.
Maturities
At December 31, 2003, the scheduled maturities of long-term debt during the next
five fiscal years are: 2004 - $0; 2005 - $350 million; 2006 - $150 million; 2007
- - $0; and 2008 - $0.
INCOME TAXES
The components of earnings (loss) from continuing operations before income taxes
and cumulative effect of accounting change, and the provision for income taxes
(benefit) are as follows:
(In thousands) 2003 2002 2001
----------- ----------- -----------
Pre-tax Earnings (Loss) from Continuing Operations:
Domestic $ (249,802) $ (150,523) (280,092)
Foreign 95,049 96,173 44,450
----------- ----------- -----------
$ (154,753) $ (54,350) $ (235,642)
=========== =========== ===========
Income Taxes (Benefits):
Domestic
Current $ 2,524 $ (1,749) $ 562
Deferred (75,798) (55,435) (102,381)
----------- ----------- -----------
(73,274) (57,184) (101,819)
Foreign
Current 47,057 33,991 19,596
Deferred (9,885) 4,289 2,340
----------- ----------- -----------
37,172 38,280 21,936
Total
Current 49,581 32,242 20,158
Deferred (85,683) (51,146) (100,041)
----------- ----------- -----------
$ (36,102) $ (18,904) $ (79,883)
=========== =========== ===========
52
The provision (benefit) for income taxes differs from the Federal statutory rate
for the following reasons:
(In thousands) 2003 2002 2001
---------- ---------- ----------
Income tax benefit at statutory rate $ (54,164) $ (19,023) $ (82,475)
Antitrust fines 15,816 -- --
Goodwill amortization -- -- 7,210
Foreign income tax rate differential 5,619 (389) 6,378
State income taxes, net of federal benefit (7,433) (4,381) (9,192)
Tax audit settlements -- (900) (4,870)
Impact of valuation allowance (1,714) 5,008 1,792
Exclusions and foreign income subject to U.S. taxation 2,696 23 882
Non-deductible items 4,811 758 3,585
Other, net (1,733) -- (3,193)
---------- ---------- ----------
Actual income tax benefit $ (36,102) $ (18,904) $ (79,883)
========== ========== ==========
Provisions have been made for deferred taxes based on differences between the
financial statement and the tax basis of assets and liabilities using currently
enacted tax rates and regulations. The components of the net deferred tax assets
and liabilities are as follows:
(In thousands) 2003 2002
--------- ---------
Deferred tax assets:
Pension and other post-retirement liabilities $ 172,487 $ 182,427
Net operating loss and tax credit carryforwards 101,639 138,500
Accruals for environmental remediation 41,596 44,430
Other accruals 54,245 54,332
Inventories and other 24,695 19,407
Intercompany royalty -- 21,935
Deferred tax liabilities:
Property, plant and equipment (40,493) (69,316)
Earn-out receivable (35,786) --
Foreign basis differential (35,698) --
Financial instruments (11,793) (13,254)
Intangibles (5,380) (12,453)
Other (3,509) (5,829)
--------- ---------
Net deferred tax asset before valuation allowance 262,003 360,179
Valuation allowance (18,356) (20,070)
--------- ---------
Net deferred tax asset after valuation allowance $ 243,647 $ 340,109
========= =========
Net deferred taxes of $64.9 million and $62.1 million are included in other
current assets and $178.8 million and $278 million are included in other assets
in 2003 and 2002, respectively. The Company believes that it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize its deferred tax assets.
At December 31, 2003, the Company had an aggregate of $259.5 million of net
operating losses (NOL's) ($231.9 million generated domestically and $27.6
million related to the Company's foreign subsidiaries) and $1.3 million of
excess foreign tax credits. The Company's NOL's are subject to certain
limitations and will begin to expire in 2008. The valuation allowance at
December 31, 2003 includes $12.8 million related to the NOL's ($4.4 million for
which subsequently recognized tax benefits will be applied to reduce goodwill)
and $5.6 million related to other foreign deferred tax assets.
At December 31, 2002, the Company had an aggregate of $350.4 million of NOL's
($316.9 million generated domestically and $33.5 million related to the
Company's foreign subsidiaries) and $1.9 million of excess foreign tax credits.
The valuation allowance at December 31, 2002 included $14.5 million related to
the NOL's ($5.2 million for which subsequently recognized tax benefits will be
applied to reduce goodwill) and $5.6 million related to other foreign deferred
tax assets.
The Company has not made any provision for U.S. taxes which would be payable if
undistributed earnings of the foreign subsidiaries of approximately $466 million
at December 31, 2003 were distributed to the Company since certain foreign
countries limit the extent of repatriation of earnings while, for others, the
Company's intention is to permanently reinvest such foreign earnings. A
determination of the amount of the unrecognized deferred tax liability related
to undistributed earnings is not practicable.
53
In addition, the Company has not recognized a deferred tax liability for the
difference between the book basis and the tax basis of its investment in the
common stock of its subsidiaries. Such difference relates primarily to $235
million of unremitted earnings earned by Witco's foreign subsidiaries prior to
the Merger on September 1, 1999. The Company does not expect this difference in
basis to become subject to tax at the parent level, as it is the Company's
intention to permanently reinvest such foreign earnings.
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. Diluted earnings (loss)
per share is based on the weighted-average number of common and common share
equivalents outstanding. The computation of diluted earnings (loss) per share
equals the basic calculation since common stock equivalents were antidilutive
due to losses from continuing operations in each year. Common stock equivalents
amounted to 147,539 in 2003, 2,087,888 in 2002 and 2,442,685 in 2001.
(In thousands, except per share data) 2003 2002 2001
----------- ---------- -----------
Loss from continuing operations before cumulative
effect of accounting change $ (118,651) $ (35,446) $ (155,759)
Earnings from discontinued operations 26,314 50,920 31,815
Gain on sale of discontinued operations 111,692 -- --
Cumulative effect of accounting change (401) (298,981) --
----------- ---------- -----------
Net earnings (loss) $ 18,954 $ (283,507) $ (123,944)
=========== ========== ===========
Basic and Diluted
Weighted-average shares outstanding 112,531 113,568 113,061
=========== ========== ===========
Loss from continuing operations before cumulative
effect of accounting change $ (1.05) $ (0.31) $ (1.38)
Earnings from discontinued operations 0.23 0.44 0.28
Gain on sale of discontinued operations 0.99 -- --
Cumulative effect of accounting change -- (2.63) --
----------- ---------- -----------
Net earnings (loss) $ 0.17 $ (2.50) $ (1.10)
=========== ========== ===========
CAPITAL STOCK
The Company is authorized to issue 500 million shares of $.01 par value common
stock. There were 119,152,254 shares issued at year-end 2003 and 2002, of which
4,660,158 and 5,297,885 shares were held as treasury stock in 2003 and 2002,
respectively.
The Company is authorized to issue 250,000 shares of preferred stock without par
value, none of which are outstanding. On September 3, 1999, the Company declared
a dividend distribution of one Preferred Share Purchase Right (Rights) on each
outstanding share of common stock. These Rights entitle stockholders to purchase
one one-hundredth of a share of a new series of junior participating preferred
stock at an exercise price of $100. The Rights are only exercisable if a person
or group acquires 15% or more of the Company's common stock or announces a
tender offer which, if successful, would result in ownership of 15% or more of
the Company's common stock.
COMPREHENSIVE LOSS
Components of accumulated other comprehensive loss are as follows:
(In thousands) 2003 2002
---------- -----------
Foreign currency translation adjustment $ 49,605 $ (75,833)
Minimum pension liability adjustment (142,753) (117,866)
Other (3,315) (6,727)
---------- -----------
Accumulated other comprehensive loss $ (96,463) $ (200,426)
========== ===========
Reclassification adjustments during 2003, 2002 and 2001 aggregated $4.9 million,
$6.6 million, and $2.2 million, respectively. Of these amounts, $3.8 million in
2003, $6.0 million in 2002 and $2.0 million in 2001 relate to amortization from
other comprehensive income to earnings in connection with the Company's equity
option contracts, which expired in May 2003. These amounts have been disclosed
in the Derivative Instruments and Hedging Activities footnote. The remaining
$1.1
54
million in 2003, $0.6 million in 2002 and $0.2 million in 2001 were also
reclassified from other comprehensive income to earnings and relate to the
Company's interest rate swap contracts accounted for as cash flow hedges, which
expired in July 2003 concurrent with the maturity of the underlying debt.
STOCK INCENTIVE PLANS
The 1988 Long-Term Incentive Plan (1988 Plan), as amended, authorized the Board
of Directors (Board) to grant stock options, stock appreciation rights,
restricted stock and long-term performance awards covering up to 10 million
shares to the officers and other key employees of C&K over a period of ten years
through October 1998. Non-qualified and incentive stock options were granted
under the 1988 plan at prices not less than 100% of the fair market value of the
underlying common shares on the date of the grant. All outstanding options will
expire not more than ten years and one month from the date of grant.
The 1993 Stock Option Plan for Non-Employee Directors, as amended in 1996,
authorized 200,000 options to be granted to non-employee directors. The options
vest over a two-year period and are exercisable over a ten-year period from the
date of grant, at a price equal to the fair market value of the underlying
common shares on the date of grant.
The 1998 Long-Term Incentive Plan (1998 Plan) was approved by the shareholders
of C&K in 1999. This plan authorizes the Board to grant stock options, stock
appreciation rights, restricted stock and long-term performance awards to
eligible employees and non-qualified stock options to non-employee directors
over a ten-year period. During 2003, 2002 and 2001, non-qualified and incentive
stock options were granted under the 1998 Plan at prices not less than 100% of
the fair market value of the underlying common shares on the date of grant. All
outstanding options will expire not more than ten years and one month from the
date of grant. The 1998 Plan authorizes the Company to grant shares and options
for shares of common stock equal to the sum of (i) the shares available for
award under the 1988 Plan and the 1993 Stock Option Plan For Non-Employee
Directors as of October 18, 1998 and (ii) the shares awarded under prior plans
of C&K which were forfeited, expired, lapsed, not earned or tendered to pay the
exercise price of options or withholding taxes. In 1999, the number of common
shares reserved for issuance under the 1998 plan was increased by 2.8 million
shares and, pursuant to the Merger, increased by an additional 5 million shares.
Under the terms of the Merger, the shareholders also approved the conversion of
all outstanding Witco options into options to purchase the Company's common
stock. These 4.7 million converted options expired 30 days after the Merger and
became available for grant under the 1998 Plan.
In October 2001, the Board of Directors approved the 2001 Employee Stock Option
Plan (2001 Plan). The 2001 Plan authorizes the Board to grant up to 1 million
non-qualified stock options to key non-officer employees. Options under the 2001
plan will be granted at prices not less than 100% of the fair market value of
the underlying common shares on the date of grant and will expire not more than
10 years and one month from the date of grant.
In October 1999, the Company granted long-term incentive awards in the amount of
2,175,000 shares of restricted stock from the 1998 Plan. In connection with the
Merger, vesting requirements relating to 300,000 shares of restricted stock were
waived. The remaining 1,875,000 shares were earned as of December 31, 2000 based
upon the achievement of certain financial criteria and vested over a three-year
period, which ended on January 1, 2003. Compensation expense relating to these
shares was accrued over a three-year period.
In January 2000, the Company granted long-term incentive awards under the 1998
Plan for a maximum of 2,707,250 shares to be earned at the end of 2002 if
certain financial criteria were met. In January 2001, the January 2000 awards
were cancelled and awards were granted for a maximum of 2,343,367 shares to be
earned if certain vesting and financial criteria were met at the end of 2002. In
January 2002, the Company granted long-term incentive awards under the 1998 Plan
for a maximum of 1,052,000 shares to be earned at the end of 2004 if certain
financial criteria are met for 2002 through 2004. In conjunction with this
award, the remaining outstanding performance-based portion of the awards
(1,655,000 shares) granted in January 2001 were cancelled. In accordance with
the terms of the January 2002 grant, the maximum number of shares to be earned
under this award has been reduced to 381,000.
In January 2003, the Board of Directors approved the grant of options covering
1,270,458 shares at the fair market value of the underlying common stock at the
date of grant. In October 2003, the Board of Directors approved the grant of
options covering 898,000 shares at the fair market value of the underlying
common stock at the date of grant. These options will vest over a three-year
period.
In January 2004, the Board of Directors granted long-term incentive awards in
the amount of 430,000 shares of restricted stock, which will vest over a
three-year period. In addition, in connection with the employment of the
Company's new President and Chief Executive Officer in January 2004, the Board
of Directors approved an employment contract authorizing the grant of options
covering 500,000 shares, at the fair market value of the underlying common stock
at the date of grant, and the grant of a long-term incentive award for 200,000
shares of restricted stock. The options will vest ratably over a two-year period
and the restricted stock will vest ratably over a three-year period.
55
As permitted under FASB Statement No. 123 and FASB Statement No. 148, the
Company elected to continue its historical method of accounting for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, compensation expense
has not been recognized for stock-based compensation plans other than restricted
stock awards under the Company's long-term incentive programs.
The following table summarizes the effect on net earnings (loss) and earnings
(loss) per common share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123 to all stock-based employee compensation
awards, the estimated fair value of options granted using the Black-Scholes
model and the assumptions utilized in the model.
(In thousands) 2003 2002 2001
-------- ----------- -----------
Net earnings (loss), as reported $ 18,954 $ (283,507) $ (123,944)
Pro forma net earnings (loss) $ 14,825 $ (289,426) $ (133,171)
Earnings (loss) per share:
Basic and diluted - as reported $ 0.17 $ (2.50) $ (1.10)
Basic and diluted - pro forma $ 0.13 $ (2.55) $ (1.18)
Average fair value of options granted $ 2.67 $ 3.08 $ 3.97
Assumptions:
Dividend yield 2.6% 2.5% 2.0%
Expected volatility 49% 48% 52%
Risk-free interest rate 4.0% 3.5% 5.0%
Expected life (in years) 8 8 8
Changes during 2003, 2002 and 2001 in shares under option are summarized as
follows:
Price Per Share
------------------------
Range Average Shares
------------ -------- ----------
Outstanding at 12/31/00 $ 3.13-26.41 $ 11.98 11,771,322
Granted 7.92-10.81 7.93 1,760,866
Exercised 3.13-8.34 5.20 (111,759)
Lapsed 8.16-26.41 15.75 (346,142)
------------ ------- ----------
Outstanding at 12/31/01 5.22-26.41 11.39 13,074,287
Granted 7.25 7.25 1,272,430
Exercised 5.22-8.34 7.59 (436,149)
Lapsed 7.92-26.41 16.95 (771,165)
------------ ------- ----------
Outstanding at 12/31/02 5.22-26.41 10.79 13,139,403
Granted 5.85-6.38 6.16 2,168,458
Exercised 5.22 5.22 (8,525)
Lapsed 5.22-26.41 10.77 (1,511,244)
------------ ------- ----------
Outstanding at 12/31/03 $ 5.85-26.41 $ 10.07 13,788,092
============ ======= ==========
Exercisable at 12/31/01 $ 5.22-26.41 $ 12.78 9,073,974
Exercisable at 12/31/02 $ 5.22-26.41 $ 11.52 10,699,627
Exercisable at 12/31/03 $ 7.25-26.41 $ 11.04 10,847,565
Shares available for grant at year-end 2003 and 2002 were 6,876,664 and
6,148,135, respectively.
The following table summarizes information concerning currently outstanding and
exercisable options:
Number Weighted Number
Range Outstanding Average Weighted Exercisable
of at End Remaining Average at End Weighted
Exercise of Contractual Exercise of Average
Prices 2003 Life Price 2003 Exercise Price
- ------------ ----------- ----------- -------- ----------- --------------
$ 5.85-7.92 4,866,589 8.6 $ 6.99 1,927,729 $ 7.74
$ 8.16-8.35 5,031,485 5.7 $ 8.27 5,031,485 $ 8.27
$ 10.81-14.35 1,313,345 3.7 $ 14.04 1,311,678 $ 14.05
$ 14.50-26.41 2,576,673 2.7 $ 17.37 2,576,673 $ 17.37
----------- ------ -------- ----------- --------
13,788,092 6.0 $ 10.07 10,847,565 $ 11.04
=========== ====== ======== =========== ========
56
The Company has an Employee Stock Ownership Plan that is offered to eligible
employees of the Company and certain of its subsidiaries. The Company makes
contributions equivalent to a stated percentage of employee contributions. The
Company's contributions were $2.5 million in 2003, $2.8 million in 2002 and $3.6
million in 2001.
Effective June 1, 2001, the Company established an Employee Stock Purchase Plan.
This plan permits eligible employees to annually elect to have up to 10% of
their compensation withheld for the purchase of shares of the Company's common
stock at 85% of the average of the high and low sale prices on the date of
purchase, up to a maximum of $25,000. As of December 31, 2003, 1,577,237 shares
of common stock are available for future issuance under this plan.
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company has several defined benefit and defined contribution pension plans
covering substantially all of its domestic employees and certain international
employees. Benefits under the defined benefit plans are primarily based on the
employees' years of service and compensation during employment. The Company's
funding policy for the defined benefit plans is based on contributions at the
minimum annual amounts required by law plus such amounts as the Company may deem
appropriate. Contributions for the defined contribution plans are determined as
a percentage of the covered employees' salary. Plan assets consist of publicly
traded securities and investments in commingled funds administered by
independent investment advisors.
Employees of international locations are covered by various pension benefit
arrangements, some of which are considered to be defined benefit plans for
financial reporting purposes. Assets of these plans are comprised primarily of
insurance contracts and financial securities. Benefits under these plans are
primarily based upon levels of compensation. Funding policies are based on legal
requirements, tax considerations and local practices.
The Company also provides health and life insurance benefits for certain retired
and active employees and their beneficiaries and covered dependents for
substantially all of its domestic employees and certain international employees.
These plans are generally not pre-funded and are paid by the Company as
incurred, except for certain inactive government-related plans.
The Company uses a measurement date of December 31 for substantially all of its
pension and other post-retirement benefit plans.
Benefit Obligations
Defined Benefit Plans
---------------------------------------------------
Qualified International and Post-Retirement
Domestic Plans Non-Qualified Plans Health Care Plans
----------------------- ----------------------- -----------------------
(In thousands) 2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Change in projected benefit obligation:
Projected benefit obligation at
beginning of year $ 648,121 $ 619,981 $ 226,553 $ 184,773 $ 224,078 $ 216,511
Service cost 6,518 6,705 6,678 6,537 1,294 1,604
Interest cost 40,896 42,245 13,729 11,796 14,533 14,497
Plan participants' contributions -- -- 915 938 963 734
Plan amendments -- 98 (1,553) (83) (2,405) --
Actuarial losses 40,467 27,300 23,362 16,639 17,397 8,510
Foreign currency exchange rate changes -- -- 34,171 20,310 1,684 61
Divestitures -- -- (17,061) -- (4,248) --
Benefits paid (46,679) (46,788) (8,549) (13,564) (19,786) (17,839)
Curtailments (16,543) (1,420) (1,204) -- -- --
Settlements -- -- (637) (793) -- --
--------- --------- --------- --------- --------- ---------
Projected benefit obligation at end
of year $ 672,780 $ 648,121 $ 276,404 $ 226,553 $ 233,510 $ 224,078
========= ========= ========= ========= ========= =========
Accumulated benefit obligation at end
of year $ 661,055 $ 621,445 $ 259,573 $ 201,283 $ 233,510 $ 224,078
========= ========= ========= ========= ========= =========
Weighted-average year-end assumptions
used to determine benefit
obligations:
Discount rate 6.00% 6.75% 5.54% 5.96% 6.00% 6.75%
Rate of compensation increase 4.00% 4.00% 3.17% 3.25% -- --
An 8.9% average annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2003. The rate was assumed to decrease gradually
to 5% for 2011 and remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the post-retirement benefit obligation
reported for the health care plans. A one-percentage-point increase in assumed
health care cost trend rates would increase the accumulated post-retirement
benefit obligation by $13.6 million for health care benefits as of December 31,
2003. A one-percentage-point decrease in assumed health care
57
cost trend rates would decrease the accumulated post-retirement benefit
obligation by $11.9 million for health care benefits as of December 31, 2003.
Plan Assets
Defined Benefit Plans
-------------------------------------------------
Qualified International and Post-Retirement
Domestic Plans Non-Qualified Plans Health Care Plans
----------------------- --------------------- ---------------------
(In thousands) 2003 2002 2003 2002 2003 2002
--------- --------- -------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 458,328 $ 539,294 $ 82,431 $ 80,725 $ 30,423 $ 34,580
Actual return on plan assets 75,222 (41,058) 5,658 (4,425) 2,678 (1,832)
Foreign currency exchange rate changes -- -- 14,523 8,834 -- --
Employer contributions 30,877 6,880 10,500 10,716 16,371 14,780
Plan participants' contributions -- -- 915 938 963 734
Divestitures -- -- (10,714) -- -- --
Benefits paid (46,679) (46,788) (8,549) (13,564) (19,786) (17,839)
Settlements -- -- (151) (793) -- --
--------- --------- -------- -------- -------- --------
Fair value of plan assets at end of year $ 517,748 $ 458,328 $ 94,613 $ 82,431 $ 30,649 $ 30,423
========= ========= ======== ======== ======== ========
The asset allocation for the Company's pension plans at the end of 2003 and
2002, and the target allocation for 2004, by asset category are as follows:
Target Allocation - 2004 Percentage of Plan Assets at December 31,
--------------------------- -----------------------------------------------------
International and
Qualified Domestic Plans Non-Qualified Plans
-------------------------- ------------------------
Qualified International
Domestic and Non-
Asset Category: Plans Qualified Plans 2003 2002 2003 2002
--------- --------------- ---- ---- ---- ----
Equity securities 60% 45% 58% 47% 45% 44%
Fixed income securities 40% 53% 42% 53% 53% 54%
Other -- 2% -- -- 2% 2%
----- ---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100% 100%
===== ==== ==== ==== ==== ====
During 2003, a special contribution of $20.9 million of the Company's common
stock was made to various domestic pension plans. The value of this common stock
is $22.9 million (4% of total domestic plan assets) at the end of 2003. There
was no Company common stock included within equity securities at the end of
2002.
Estimated funding requirements for the domestic pension plans are $4.6 million
for 2004 and $6.8 million for 2005 compared to $30.9 million contributed in
2003. The Company funds the domestic pension plans based on the minimum amounts
required by law plus such amounts the Company deems appropriate. The funding
estimates for 2004 and 2005 are based upon actual December 31, 2003 asset values
and the assumption that the Company would contribute the minimum required
contributions. The funding estimates also assume pension funding relief
legislation will be extended and no other significant changes with regards to
demographics, legislation, plan provisions, or actuarial assumptions or methods
to determine the estimated funding requirements.
The Company's pension plan assets are managed by outside investment managers;
assets are monitored monthly to ensure they are within the range of parameters
as set forth by the Company. The Company's investment strategy with respect to
pension assets is to achieve the expected rate of return within an acceptable or
appropriate level of risk. The Company's investment strategy is designed to
promote diversification to moderate volatility and attempt to balance the
expected return with risk levels.
The asset allocation for the post-retirement health care plans at the end of
2003 and 2002, and target allocation for 2004, by asset category are as follows:
Percentage of Plan Assets
at December 31,
-------------------------
Target
Allocation
Asset Category: 2004 2003 2002
---------- ------------ ---------
Equity securities 60% 55% 51%
Fixed income securities 40% 45% 47%
Other -- -- 2%
----- ------- -------
Total 100% 100% 100%
===== ======= =======
58
The Company's post-retirement health care plan assets relating to certain
inactive government plans are managed by outside investment managers. The
Company will review these assets at least quarterly to ensure they are within
the range of parameters as set forth by the Company. The Company's investment
strategy with respect to post-retirement health care assets is to achieve the
expected rate of return within an acceptable or appropriate level of risk. The
Company's investment strategy is designed to promote diversification to moderate
volatility and attempt to balance the expected return with risk levels.
Funded Status
The funded status of the plans reconciled to the amount reported on the
consolidated financial statements is as follows:
Defined Benefit Plans
---------------------------------------------------------
Qualified International and Post-Retirement
Domestic Plans Non-Qualified Plans Health Care Plans
--------------------------- --------------------------- ---------------------------
(In thousands) 2003 2002 2003 2002 2003 2002
----------- ----------- ----------- ----------- ----------- -----------
Funded status at the end of year:
Funded status $ (155,032) $ (189,793) $ (181,791) $ (144,122) $ (202,861) $ (193,655)
Unrecognized transition asset (40) (47) 1,533 1,759 -- --
Unrecognized actuarial loss 208,152 206,464 62,583 32,145 11,564 4,276
Unrecognized prior service costs 285 348 30 2,479 (1,638) (4,617)
----------- ----------- ----------- ----------- ----------- -----------
Net amount recognized $ 53,365 $ 16,972 $ (117,645) $ (107,739) $ (192,935) $ (193,996)
=========== =========== =========== =========== =========== ===========
Amounts recognized in the consolidated
balance sheets at the end of year
consist of:
Prepaid benefit costs $ 57,353 $ 24,271 $ 5,782 $ 4,971 $ -- $ --
Accrued benefit liabilities (200,659) (183,315) (173,372) (132,924) (192,935) (193,996)
Intangible assets 286 258 3,395 3,340 -- --
Accumulated other comprehensive loss 196,385 175,758 46,550 16,874 -- --
----------- ----------- ----------- ----------- ----------- -----------
Net amount recognized $ 53,365 $ 16,972 $ (117,645) $ (107,739) $ (192,935) $ (193,996)
=========== =========== =========== =========== =========== ===========
The Company's prepaid benefit costs and intangible assets are included in other
assets in the consolidated balance sheets, while the accrued pension benefit
liabilities are included in other liabilities in the consolidated balance
sheets.
For pension plans with a projected and accumulated benefit obligation in excess
of plan assets and post-retirement health care plan obligation in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets at the end of 2003 and 2002 were as follows:
Accumulated
Projected and Post-Retirement Health
Accumulated Benefit Care Obligation Exceeds
Obligation Exceeds the the Fair Value of Plan
Fair Value of Plan Assets Assets
-------------------------- --------------------------
(In thousands) 2003 2002 2003 2002
--------- ---------- --------- ---------
End of year:
Projected benefit obligation $ 949,141 $ 866,008 $ -- $ --
Accumulated benefit obligation 920,588 814,066 208,487 199,814
Fair value of plan assets 612,156 529,674 -- --
59
Net Periodic Cost
Defined Benefit Plans
-------------------------------------------------------------------
Qualified International and Post-Retirement
Domestic Plans Non-Qualified Plans Health Care Plans
--------------------------------- ------------------------------- -----------------------------
(In thousands) 2003 2002 2001 2003 2002 2001 2003 2002 2001
--------- --------- ------- -------- -------- ------- ------- ------- -------
Components of net periodic
benefit cost (credit):
Service cost $ 6,518 $ 6,705 $ 6,819 $ 6,678 $ 6,537 $ 5,936 $ 1,294 $ 1,604 $ 1,539
Interest cost 40,896 42,245 43,185 13,729 11,796 11,021 14,533 14,497 15,148
Expected return on plan
assets (54,154) (56,244) (56,141) (6,857) (6,228) (6,094) (2,707) (3,179) (3,668)
Amortization of prior
service cost 62 63 414 858 955 978 (3,078) (2,838) (4,176)
Amortization of
unrecognized
transition obligation (6) (6) (3) 218 189 190 -- -- --
Recognized actuarial
(gains) losses 1,386 164 (29) 735 161 (207) (469) (936) (1,447)
Curtailment (gain) loss
recognized -- 1,154 7,045 (243) -- (13,101) (2,287) -- (1,055)
Settlement (gain) loss
recognized -- -- 873 (3,580) 330 7,095 -- -- --
--------- --------- ------- -------- -------- ------- ------- ------- -------
Net periodic benefit cost
(credit) $ (5,298) $ (5,919) $ 2,163 $ 11,538 $ 13,740 $ 5,818 $ 7,286 $ 9,148 $ 6,341
========= ========= ======= ======== ======== ======= ======= ======= =======
Defined Benefit Plans
------------------------------------------------------------
Qualified International and Post-Retirement
Domestic Plans Non-Qualified Plans Health Care Plans
---------------------------- ---------------------------- ----------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
------ ------ ------ ------ ------ ------ ------ ------ ------
Weighted-average
assumptions used to
determine net cost:
Discount rate 6.75% 7.00% 7.56% 5.96% 5.91% 6.52% 6.75% 7.00% 7.55%
Expected return on plan
assets 9.50% 9.50% 9.50% 7.04% 6.99% 7.22% 9.50% 9.50% 9.50%
Rate of compensation
increase 4.00% 4.00% 4.25% 3.25% 3.35% 3.45% -- -- --
The 9.5% expected rate of return on plan assets for the qualified domestic
pension plans for 2003 was based on an assumed long-term inflation rate of 3%.
The domestic expected rate of return on plan assets is derived by applying the
expected returns on the various asset classes to the Company's assumed asset
allocation. The expected returns are based on the expected performance of the
various asset classes and the expected benefit from active fund management. They
are further supported by historical investment returns for various asset
classes. The Company has assumed that normative investment returns on long-term
bonds will be 350 basis points above inflation, or 6.5%. The assumed premiums
for domestic and international equity investments over long-term bonds are 400
and 450 basis points, respectively. In addition, the Company has assumed an
overall 50 basis point benefit from active fund management. Actual returns for
qualified domestic plans for the year ended December 31, 2003 were 20.8%.
During 2003, the Company re-evaluated its investment strategy for domestic
plans. As a result of that review and the Company's assumption of future
returns, the Company will decrease its expected return on asset assumption for
2004 to 9.0%. The adjusted domestic expected long-term rate of return of 9.0%
for 2004 is based on an assumed long-term inflation rate of 2.6%. The Company
has adjusted the normative investment returns on long-term bonds to 370 basis
points above inflation or 6.3%. The assumed premiums for domestic and
international equity investments over long-term bonds have been adjusted to 340
and 420 basis points, respectively. The Company has assumed that the active fund
management benefit will remain at 50 basis points. The target asset allocation
is 60% equity securities and 40% fixed income securities.
The Company currently utilizes a 7.04% weighted average expected long-term rate
of return on its international plan assets. This international rate is developed
primarily based on the same factors considered in developing the domestic
long-term rate of return.
Assumed health care cost trend rates have a significant effect on the service
and interest cost components reported for the health care plans. A
one-percentage-point increase in assumed health care cost trend rates increase
the service and interest cost components of net periodic post-retirement health
care benefit cost by $1.1 million for 2003. A one-percentage-point decrease in
assumed health care cost trend rates decrease the service and interest cost
components of net periodic post-retirement health care benefit cost by $0.9
million for 2003.
60
The Company's cost of its defined contribution plans was $15.4 million, $15.8
million, and $15.2 million in 2003, 2002 and 2001, respectively.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. Through the Act,
companies that sponsor retiree health plans that cover prescription drugs are
entitled to a federal subsidy beginning in 2006 which is equal to 28% of certain
costs paid by both the employee and the Company for prescription drugs. The
three possible approaches to recognize the subsidy are as follows: immediate
recognition of all expected future subsidies when the Act is initially
recognized; amortize recognition through actuarial gains and losses; or
recognition of subsidies as received beginning in 2006. As a result of the
uncertainty regarding the possible accounting treatment, the Company has elected
to defer accounting for the effect of the Act until guidance is issued.
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
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 FASB 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
concurrent with the maturity of the underlying debt securities, as cash flow
hedges to convert its 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 changed was recognized as an adjustment to
interest expense.
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 (LTIP). 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 LTIP. Changes in market value related to the
portion of the option contract designated and effective as a hedge 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
contract were recognized in SG&A. During the second quarter of 2003, 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 option 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 these contracts had been amortized to SG&A.
In prior years, the Company used an interest rate swap contract as a fair value
hedge to convert $300 million of its fixed rate 8.5% notes into variable rate
debt. On March 24, 2001, the swap contract was terminated and the Company
received cash proceeds of $21.9 million in settlement of the contract, which
represented the market value of the contract on the date of termination. In
accordance with FASB Statements No. 133 and 138, as they relate to fair value
hedge accounting, the $21.9 million was recorded as an increase to long-term
debt and is being amortized to interest expense over the life of the notes. The
unamortized balance at December 31, 2003 and 2002 was $6.6 million and $12.1
million, respectively.
The Company also has exposure to changes in foreign currency exchange rates
resulting from transactions entered into by the Company and its foreign
subsidiaries in currencies other than their local currency (primarily trade
payables and receivables). The Company is also exposed to currency risk on
intercompany transactions (including intercompany loans). The Company manages
these transactional currency risks on a consolidated basis, which allows it to
net its trade payable and receivable exposure. The Company purchases foreign
currency forward contracts, primarily denominated in Euros, Canadian dollars,
Hong Kong dollars, Swiss francs and Singapore dollars, to hedge its transaction
exposure. The aggregate notional amount of these contracts at December 31, 2003
and 2002 was approximately $474 million and $536 million, respectively. These
contracts are generally settled on a monthly basis. Realized and unrealized
gains and losses on foreign currency forward contracts are recognized in other
expense, net to offset the impact of valuing recorded foreign currency trade
payables, receivables and intercompany transactions. The Company has not
designated these derivatives as hedges,
61
although it believes these instruments reduce the Company's exposure to foreign
currency risk. The net effect of the realized and unrealized gains and losses on
these derivatives and the underlying transactions is not significant at December
31, 2003.
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
years ended December 31, 2003 and 2002:
(In thousands) 2003 2002
------- -------
Fair value hedges (in other expense, net) $ 38 $ (2)
======= =======
Cash flow hedges (in AOCL):
Balance at beginning of year $ 2,838 $ 2,546
Interest rate swap contracts (883) (313)
Equity option contracts-change in market value 1,836 6,558
Equity option contracts-amortization to SG&A (3,791) (5,953)
------- -------
Balance at end of year $ -- $ 2,838
======= =======
FINANCIAL INSTRUMENTS
As discussed in the Derivative Instruments and Hedging Activities note above,
the Company enters into interest rate swap contracts to modify the interest
characteristics of some of its outstanding debt and purchases foreign currency
forward contracts to mitigate its exposure to changes in foreign currency
exchange rates of recorded transactions (principally foreign currency trade
receivables and payables and intercompany transactions).
At December 31, 2003, the Company had outstanding foreign currency forward
contracts with an aggregate notional amount of approximately $474 million to
hedge foreign currency risk on foreign currency accounts receivable and payable
and intercompany loans. These forward contracts are generally outstanding for
one month and are primarily denominated in Euros, Canadian dollars, Hong Kong
dollars, Swiss francs and Singapore dollars. At December 31, 2002, the Company
had outstanding foreign currency forward contracts with an aggregate notional
amount of approximately $536 million.
At December 31, 2002, the Company had outstanding interest rate swap contracts
with an aggregate notional amounts of $57.1 million. These contracts were used
to convert the Company's variable rate Euro denominated debt to fixed rate debt.
These contracts expired in July 2003.
All contracts have been entered into with major financial institutions. The risk
associated with these transactions is the cost of replacing these agreements at
current market rates, in the event of default by the counterparties. Management
believes the risk of incurring such losses is remote.
The carrying amounts for cash, accounts receivable, other current assets,
accounts payable and other current liabilities approximate their fair value
because of the short-term maturities of these instruments. The fair value of
long-term debt is based primarily on quoted market values. For long-term debt
that has no quoted market value, the fair value is estimated by discounting
projected future cash flows using the Company's incremental borrowing rate. The
fair value of interest rate swap and foreign currency forward contracts is the
amount at which the contracts could be settled based on quotes provided by
investment banking firms.
The following table presents the carrying amounts and estimated fair values of
material financial instruments used by the Company in the normal course of its
business. The carrying amounts of the interest rate swap contracts and foreign
currency forward contracts are included in either other assets or other
liabilities.
2003 2002
-------------------------- -------------------------------
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ------------- -------------
Long-term debt $ (754,018) $ (791,660) $ (1,253,149) $ (1,216,443)
Interest rate swap contracts $ -- $ -- $ (884) $ (884)
Foreign currency forward contracts $ -- $ -- $ 38 $ 38
62
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 or sale of property at several of its
facilities. The initial measurement of such obligations has been recorded at
fair value, which the Company estimated by discounting projected cash flows
using a rate of 8.5%. The fair value of any future obligations will be measured
utilizing the Company's credit-adjusted risk-free rate applicable at that time.
During 2003, the Company recorded pre-tax accretion expense of $0.3 million and
has an asset retirement obligation liability of $0.7 million at December 31,
2003.
ANTITRUST INVESTIGATION AND RELATED MATTERS
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber chemicals
will be resolved.
The Company also reached agreement with the Commissioner of Competition and the
Attorney General (the "Attorney General") of Canada on March 15, 2004, regarding
a criminal antitrust investigation of the Company. The Company has agreed to
plead guilty to one count of conspiring to lessen competition unduly in the sale
and marketing of certain rubber chemicals in Canada. The Attorney General and
the Company will jointly recommend that the court impose a sentence requiring
the Company to pay a fine of $9 million Canadian (U.S. $7 million), payable in
six annual installments, without interest, beginning in 2004. If the court
accepts the joint recommendation at a hearing expected to occur in the next
several months, the Canadian investigation of the Company with respect to rubber
chemicals will be resolved.
Expected cash payments for U.S. and Canadian fines total $2.3 million in 2004;
$2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007; $16.2 million
in 2008; and $18.5 million in 2009.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the Company
cannot predict the timing or outcome of that investigation, including the amount
of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the "Governmental
Authorities") with respect to possible antitrust violations relating to the sale
and marketing of certain other products, including ethylene propylene diene
monomer (EPDM); heat stabilizers, including tin-based stabilizers and
precursors, mixed metal stabilizers and epoxidized soybean oil (ESBO); nitrile
rubber; and urethanes and urethane chemicals. 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 Company recorded pre-tax charges of $77.7 million for antitrust costs in its
consolidated statement of operations at December 31, 2003. This includes a $45.2
million charge to reserve for the payment of U.S. and Canadian fines, which
represents the present value of the expected payments of $57 million. The
Company also incurred pre-tax antitrust costs of $32.5 million associated with
antitrust investigations and related civil lawsuits. The Company expects to
continue to incur substantial costs until all antitrust investigations are
concluded and civil claims are resolved.
The Company and certain of its subsidiaries, together with other companies, are
defendants in certain federal direct purchaser and state direct and indirect
purchaser class action lawsuits principally alleging that the defendants
conspired to fix, raise, maintain or stabilize prices for rubber chemicals,
EPDM, plastic additives, including impact modifiers and processing aids, and
nitrile rubber in violation of federal and state law. The Company and certain of
its officers and directors are also defendants in federal securities class
action lawsuits principally alleging that the defendants caused the Company's
shares to
63
trade at artificially inflated levels through the issuance of false and
misleading financial statements in violation of federal securities laws by
inflating profits as result of engaging in an illegal price fixing conspiracy
with respect to rubber chemicals. In addition, the Company and its board of
directors are defendants in a shareholder derivative lawsuit principally
alleging that the directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result of
engaging in an illegal price fixing conspiracy with respect to rubber chemicals.
These federal and state actions 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.
The Company has not recorded a charge for potential liabilities and expenses in
connection with the coordinated civil investigation by the EC or with the civil
claims, because it is not yet able to reasonably estimate a reserve for such
potential costs. The resolution of the coordinated civil investigation by the EC
and 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.
CONTINGENCIES
Environmental Matters
The Company is involved in claims, litigation, administrative proceedings and
investigations of various types in various 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 operation 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. The total amount accrued for such environmental liabilities at December
31, 2003 was $120.7 million. The Company estimates its potential environmental
liability to range from $109 million to $133 million at December 31, 2003. 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.
On May 21, 1997, the United States District Court, Eastern District of Arkansas
(the "Court"), entered an order finding that Uniroyal Chemical Co./Cie
(Uniroyal) (a wholly owned subsidiary of the Company) is jointly and severally
liable to the United States and Hercules Incorporated (Hercules) and Uniroyal
are liable to each other in contribution with respect to the remediation of the
Vertac Chemical Corporation site in Jacksonville, Arkansas. On October 23, 1998,
the Court entered an order granting the United State's motion for summary
judgment against Uniroyal and Hercules for removal and remediation costs of
$102.9 million at the Vertac site. On February 3, 2000, after trial on the
allocation of these costs, the Court entered an order finding Uniroyal liable to
the United States for approximately $2.3 million and liable to Hercules in
contribution for approximately $0.7 million. On April 10, 2001, the United
States Court of Appeals for the Eighth Circuit (the "Appeals Court") (i)
reversed a decision in favor of the United States and against Hercules with
regard to the issue of divisibility of harm and remanded the case back to the
Court for a trial on the issue; (ii) affirmed the finding of arranger liability
against Uniroyal; and (iii) set aside the findings of contribution between
Hercules and Uniroyal by the Court pending a decision upon remand. The Appeals
Court also deferred ruling on all constitutional issues raised by Hercules and
Uniroyal pending subsequent findings by the Court. On June 6, 2001, the Appeals
Court denied Uniroyal's petition for rehearing by the full Appeals Court on the
Appeals Court's finding of arranger liability against Uniroyal and on December
10, 2001, Uniroyal's Writ of Certiorari with the United States Supreme Court
with regard to the issues of its arranger liability was denied. On December 12,
2001, the Court concluded hearings pursuant to the April 10, 2001 remand by the
Appeals Court, and briefing on the issue of divisibility was completed in
January 2003. A decision from the Court is expected during the second quarter of
2004.
The Company intends to assert all meritorious legal defenses and all other
equitable factors which are available to it with respect to the above matters.
The Company believes that the resolution of these matters will not have a
material adverse effect on its consolidated financial position. While the
Company believes it is unlikely, the resolution of these matters could have a
material adverse effect on its consolidated results of operations in any given
year if a significant number of these matters are resolved unfavorably.
64
Guarantees
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 initial recognition and
measurement provisions apply to guarantees issued or modified after December 31,
2002. The adoption of Interpretation No. 45 has not had a material impact on the
Company's results of operations or financial condition.
The Company has standby letters of credit and guarantees with various financial
institutions. At December 31, 2003, the Company had $58.2 million of outstanding
letters of credit and guarantees primarily related to its environmental
remediation liabilities, insurance obligations, a potential tax exposure, and a
customer guarantee. Of these items, one of the standby letters of credit and the
customer guarantee fall within the scope of Interpretation No. 45.
The standby letter of credit relates to a potential tax exposure that existed
prior to December 31, 2002. The amount of this letter of credit is $15.7
million. At December 31, 2003, the Company had accrued $7.1 million of this
amount, which represents the Company's estimate of the probable outcome of this
tax exposure.
For the customer guarantee, the Company has contingently guaranteed certain debt
obligations for one of its customers. At December 31, 2003, the amount of this
guarantee is $4.6 million. Based on past experience and on the underlying
circumstances, the Company does not expect to have to perform under this
guarantee. The fair value of the Company's obligation to stand-ready to perform
for the term of the guarantee is not material.
The Company provides for the estimated cost of product warranties related to its
Polymer Processing Equipment segment. The Company warrants repair or replacement
to the equipment purchased by the original buyer for a one-year period from date
of shipment if the equipment is either defective in material or workmanship. In
the case of components or units purchased by the Company from other suppliers,
the obligation of the Company shall be limited to give the buyer benefit of any
warranty the Company may receive from the supplier of such components or units.
The product warranty liability at December 31, 2003 is $3.3 million.
In the ordinary course of business, the Company enters into contractual
arrangements under which the Company may agree to indemnify a third party to
such arrangement from any losses incurred relating to the services they perform
on behalf of the Company or for losses arising from certain events as defined
within the particular contract, which may include, for example, litigation,
claims or environmental matters relating to the Company's past performance. For
any losses that the Company believes are probable and which are estimable, the
Company has accrued for such amounts in its consolidated balance sheets.
BUSINESS SEGMENT DATA
Pursuant to Financial Accounting Standards Board Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," the Company has
defined its reporting segments into two major business categories, "Polymer
Products" and "Specialty Products." The accounting policies of the operating
segments are the same as those described in the Accounting Policies footnote
included in the Notes to Consolidated Financial Statements.
The Company evaluates a segment's performance based on several factors, of which
the primary factor is operating profit (loss). 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; (5)
antitrust costs; and (6) impairment of long-lived assets. These items have been
excluded from the Company's presentation of segment operating profit because
they are not reported to the chief operating decision maker for purposes of
allocating resources among reporting segments or assessing segment performance.
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 initiatives that
began in 2001 and 2003 and the relocation of the corporate headquarters that
began in 2002. The antitrust costs are primarily for fines and legal costs
associated with antitrust investigations and related civil lawsuits. The
impairment of long-lived assets was related to the rubber additives and trilene
businesses and was the result of changes in the marketplace, which caused the
carrying amount of the long-lived assets of these businesses to be impaired.
Corporate assets are principally cash, intangible assets (including goodwill)
and other assets maintained for general corporate purposes.
The GE Specialty Chemicals business that was acquired on July 31, 2003 has been
added to the plastic additives business unit included in the Polymer Additives
reporting segment.
65
A summary of business data for the Company's reportable segments for the years
2003, 2002 and 2001 is as follows:
Information by Business Segment
(In thousands)
Sales 2003 2002 2001
----------- ----------- -----------
Polymer Products
Polymer Additives $ 1,232,022 $ 1,110,804 $ 1,125,910
Polymers 285,669 270,954 292,092
Polymer Processing Equipment 166,539 172,702 202,653
Eliminations (13,302) (15,064) (13,805)
----------- ----------- -----------
1,670,928 1,539,396 1,606,850
----------- ----------- -----------
Specialty Products
Crop Protection 270,870 240,142 245,562
Other 243,245 310,733 434,131
----------- ----------- -----------
514,115 550,875 679,693
----------- ----------- -----------
$ 2,185,043 $ 2,090,271 $ 2,286,543
=========== =========== ===========
Operating Profit (Loss) 2003 2002 2001
----------- ----------- -----------
Polymer Products
Polymer Additives $ 24,392 $ 79,403 $ 55,723
Polymers 28,018 41,028 42,243
Polymer Processing Equipment 5,164 (13,766) (15,647)
----------- ----------- -----------
57,574 106,665 82,319
----------- ----------- -----------
Specialty Products
Crop Protection 64,963 60,241 79,186
Other (3,283) 7,960 10,779
----------- ----------- -----------
61,680 68,201 89,965
----------- ----------- -----------
Corporate (34,030) (42,144) (46,277)
Amortization (14,521) (11,557) (31,788)
Unabsorbed overhead expense from discontinued
operations (8,445) (11,515) (10,841)
Facility closures, severance and related costs (19,560) (17,969) (101,512)
Antitrust costs (77,716) (6,306) --
Impairment of long-lived assets -- -- (80,366)
----------- ----------- -----------
$ (35,018) $ 85,375 $ (98,500)
=========== =========== ===========
Depreciation and Amortization 2003 2002 2001
----------- ----------- -----------
Polymer Products
Polymer Additives $ 63,572 $ 59,805 $ 58,765
Polymers 15,712 16,030 17,347
Polymer Processing Equipment 2,059 2,584 2,765
----------- ----------- -----------
81,343 78,419 78,877
----------- ----------- -----------
Specialty Products
Crop Protection 7,696 8,081 8,004
Other 4,496 9,902 16,644
----------- ----------- -----------
12,192 17,983 24,648
----------- ----------- -----------
Corporate
21,834 15,024 47,305
----------- ----------- -----------
$ 115,369 $ 111,426 $ 150,830
=========== =========== ===========
66
Segment Assets 2003 2002 2001
----------- ----------- -----------
Polymer Products
Polymer Additives $ 879,047 $ 731,241 $ 728,640
Polymers 121,853 120,208 142,196
Polymer Processing Equipment 84,330 89,343 101,498
----------- ----------- -----------
1,085,230 940,792 972,334
----------- ----------- -----------
Specialty Products
Crop Protection 175,731 146,361 145,001
Other 97,829 87,280 216,080
----------- ----------- -----------
273,560 233,641 361,081
----------- ----------- -----------
Assets held for sale -- 392,887 392,015
Corporate 1,170,392 1,273,495 1,506,758
----------- ----------- -----------
$ 2,529,182 $ 2,840,815 $ 3,232,188
=========== =========== ===========
Capital Expenditures 2003 2002 2001
----------- ----------- -----------
Polymer Products
Polymer Additives $ 54,299 $ 42,755 $ 52,614
Polymers 4,355 5,584 8,987
Polymer Processing Equipment 777 2,608 4,160
----------- ----------- -----------
59,431 50,947 65,761
----------- ----------- -----------
Specialty Products
Crop Protection 3,404 5,950 8,825
Other 5,114 6,950 11,742
----------- ----------- -----------
8,518 12,900 20,567
----------- ----------- -----------
Corporate 13,798 20,436 5,975
----------- ----------- -----------
$ 81,747 $ 84,283 $ 92,303
=========== =========== ===========
Equity Method Investments 2003 2002 2001
----------- ----------- -----------
Polymer Products
Polymer Additives $ 36,542 $ 40,267 $ 45,924
Polymers -- -- 1,134
Polymer Processing Equipment -- -- --
----------- ----------- -----------
36,542 40,267 47,058
----------- ----------- -----------
Specialty Products
Crop Protection 27,411 23,963 24,465
Other -- -- 102
----------- ----------- -----------
27,411 23,963 24,567
----------- ----------- -----------
$ 63,953 $ 64,230 $ 71,625
=========== =========== ===========
Information by Geographic Area
(In thousands)
Sales are based on location of customer.
Sales 2003 2002 2001
----------- ----------- -----------
United States $ 1,081,344 $ 1,097,997 $ 1,228,264
Canada 76,530 73,516 80,150
Latin America 155,579 140,674 155,697
Europe/Africa 597,132 539,529 562,158
Asia/Pacific 274,458 238,555 260,274
----------- ----------- -----------
$ 2,185,043 $ 2,090,271 $ 2,286,543
=========== =========== ===========
67
Property, Plant and Equipment 2003 2002 2001
----------- ----------- -----------
United States $ 463,757 $ 429,535 $ 524,022
Canada 58,725 48,522 44,894
Latin America 9,686 8,329 9,488
Europe/Africa 221,204 194,182 170,598
Asia/Pacific 21,240 15,394 15,970
----------- ----------- -----------
$ 774,612 $ 695,962 $ 764,972
=========== =========== ===========
SUMMARIZED UNAUDITED QUARTERLY FINANCIAL DATA
(In thousands, except per share data) 2003
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
Net sales $ 531,972 $ 532,901 $ 559,189 $ 560,981
Gross profit $ 147,014 $ 138,264 $ 148,935 $ 134,738
Loss from continuing operations before
cumulative effect of accounting change $ (6,718) $ (19,402) $ (34,502) $ (58,029)
Earnings from discontinued operations 12,965 10,292 3,057 --
Gain on sale of discontinued operations -- -- 111,692 --
Cumulative effect of accounting change (401) -- -- --
--------- --------- --------- ---------
Net earnings (loss) $ 5,846 $ (9,110) $ 80,247 $ (58,029)
========= ========= ========= =========
Basic and diluted per share data (a):
Loss from continuing operations before
cumulative effect of accounting change $ (0.06) $ (0.17) $ (0.31) $ (0.52)
Earnings from discontinued operations 0.11 0.09 0.03 --
Gain on sale of discontinued operations -- -- 1.00 --
Cumulative effect of accounting change -- -- -- --
--------- --------- --------- ---------
Net earnings (loss) $ 0.05 $ (0.08) $ 0.72 $ (0.52)
========= ========= ========= =========
(a) The sum of the earnings per common share for the four quarters does not
equal the total earnings per common share for 2003 due to quarterly
changes in the average number of shares outstanding.
2002
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
Net sales $ 531,082 $ 571,489 $ 507,936 $ 479,764
Gross profit $ 150,945 $ 173,392 $ 158,559 $ 139,107
Loss from continuing operations before
cumulative effect of accounting change $ (1,453) $ (16,854) $ (2,300) $ (14,839)
Earnings from discontinued operations 8,208 10,560 14,888 17,264
Cumulative effect of accounting change (298,981) -- -- --
--------- --------- --------- ---------
Net earnings (loss) $(292,226) $ (6,294) $ 12,588 $ 2,425
========= ========= ========= =========
Basic and diluted per share data:
Loss from continuing operations before
cumulative effect of accounting change $ (0.01) $ (0.15) $ (0.02) $ (0.13)
Earnings from discontinued operations 0.07 0.09 0.13 0.15
Cumulative effect of accounting change (2.63) -- -- --
--------- --------- --------- ---------
Net earnings (loss) $ (2.57) $ (0.06) $ 0.11 $ 0.02
========= ========= ========= =========
68
Responsibility for Financial Statements
Management of the Company is responsible for the accuracy and reliability of the
consolidated financial statements and accompanying notes. Such financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and have been audited by KPMG LLP,
Independent Certified Public Accountants, whose report is presented herein.
The Company has a system of internal accounting and disclosure controls that
includes (1) written financial policies and procedures; (2) an organization
structure that segregates duties and defines authority; (3) a code of business
conduct that provides guidance to employees, officers and directors with respect
to business practices and procedures; (4) an anonymous hotline for the
communication of illegal or unethical behavior; (5) continuous on site audits
and reviews performed by the Company's internal audit group; (6) quarterly
representations from key business functional and financial executives regarding
the accuracy of the financial information being reported; and (7) quarterly
disclosure committee meetings to evaluate the quality and effectiveness of
internal controls for disclosures included in the financial statements filed
with the Securities and Exchange Commission. This system of controls is designed
to provide reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial reporting.
Such controls are subject to continuous review and are monitored by the
Company's financial management, disclosure committee and internal audit group.
In addition, the Board of Directors pursues its oversight role for the financial
statements through its Audit Committee, which consists solely of independent
directors. The Audit Committee meets on a regular basis with representatives of
management, the internal audit group and KPMG LLP.
/s/ Robert L. Wood
Robert L. Wood
President and Chief Executive Officer
/s/ Peter Barna
Peter Barna
Senior Vice President and Chief Financial Officer
69
Independent Auditors' Report
The Board of Directors and Stockholders
Crompton Corporation:
We have audited the accompanying consolidated balance sheets of Crompton
Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in the Asset Retirement Obligations note to the consolidated
financial statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143, "Asset Retirement Obligations" on
January 1, 2003. As discussed in the Accounting Policies note to the
consolidated financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.
/s/ KPMG LLP
Stamford, Connecticut
January 30, 2004, except as to the "Antitrust Investigations and Related
Matters" note, which is as of March 15, 2004
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Corporation's management has evaluated, with the participation of the
Corporation's Chief Executive Officer and Chief Financial Officer, the
effectiveness of the Corporation'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 annual report. Based on that evaluation, the
Corporation's Chief Executive Officer and Chief Financial Officer have concluded
that the Corporation's disclosure controls and procedures were effective as of
the end of the period covered by this annual report.
(b) Changes in Internal Control over Financial Reporting
There was no change in the Corporation's internal control over financial
reporting that occurred during the Corporation's fiscal quarter ended December
31, 2003 that has materially affected, or is reasonable likely to materially
affect, the Corporation's internal control over financial reporting.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by this item concerning directors of the Corporation and
committees of the Board of Directors is included in the definitive proxy
statement for the Corporation's Annual Meeting of Stockholders to be held on
April 27, 2004, under the captions "Election of Three Directors," "Board of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", which
is to be filed with the Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934, and such information is incorporated herein by reference.
There is no family relationship between any of such directors, and there is no
arrangement or understanding between any of them and any other person pursuant
to which any such director was selected as a director or nominee.
Information called for by this item concerning Executive Officers is included in
Part I pursuant to General Instruction G to Form 10-K.
The Corporation has adopted a written code of ethics, "Code of Business
Conduct," which is applicable to all Crompton directors, officers and employees,
including the Corporation's Chief Executive Officer, Chief Financial Officer,
and principal accounting officer and controller and other executive officers
performing similar functions (collectively, the "Selected Officers"). In
accordance with the rules and regulations of the Securities and Exchange
Commission, a copy of the Code of Business Conduct is publicly available on the
Corporation's website at www.cromptoncorp.com. The Corporation intends to
disclose any amendments to or waivers from its code of ethics applicable to any
Selected Officer or director on its website at www.cromptoncorp.com. The Code of
Business Conduct may also be requested in print by writing to the Corporation's
Investor Relations Department at Crompton Corporation, 199 Benson Road,
Middlebury, CT 06749 USA.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by this item is included in the definitive proxy
statement for the Corporation's Annual Meeting of Stockholders to be held on
April 27, 2004, under the caption "Officers' and Directors' Compensation", which
is to be filed with the Commission pursuant to Regulation 14A and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information called for by this item is included in the definitive proxy
statement for the Corporation's Annual Meeting of Stockholders to be held on
April 27, 2004, under the captions "Principal Holders of Voting Securities" and
"Security Ownership of Management", which is to be filed with the Commission
pursuant to Regulation 14A, and such information is incorporated herein by
reference.
71
The following table gives information about shares of the Corporation's common
stock that may be issued upon the exercise of options, warrants and rights under
the Corporation's equity compensation plans as of December 31, 2003:
Equity Compensation Plan Information
Number of Number of securities
securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation plans
options, options, (excluding securities
warrants, and warrants and reflected in column
rights rights (a))
(a) (b) (c)
Plan Category
Equity compensation plans approved by
security holders(1) 12,867,091 $ 10.2580 8,385,902 (2)
Equity compensation plans not approved
by security holders(3) 921,001 $ 7.4478 67,999
Total 13,788,092 $ 10.0703 8,453,901
(1) Includes Crompton Corporation 2001 Employee Stock Purchase Plan; Crompton
Corporation 1998 Long Term Incentive Plan; Crompton Corporation 1988 Long
Term Incentive Plan; and 1993 Stock Option Plan for Non-Employee
Directors.
(2) Includes 1,577,237 shares of common stock available for future issuance as
of December 31, 2003, for the Crompton Corporation 2001 Employee Stock
Purchase Plan.
(3) Includes Crompton Corporation 2001 Employee Stock Option Plan.
Crompton Corporation 2001 Employee Stock Option Plan
On October 23, 2001, the Corporation's Board of Directors approved the Crompton
Corporation 2001 Employee Stock Option Plan ("2001 Plan"). The 2001 Plan
authorizes the Board of Directors to grant up to 1 million non-qualified stock
options to key non-officer employees. Options under the 2001 Plan will be
granted at prices not less than 100% of the fair market value of the underlying
common shares on the date of grant and will expire not more than 10 years and
one month from the date of grant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information called for by this item is included in the definitive proxy
statement for the Corporation's Annual Meeting of Stockholders to be held on
April 27, 2004, under the caption "Principal Accountant Fees and Services",
which is to be filed with the Commission pursuant to Regulation 14A, and such
information is incorporated herein by reference.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements and Independent Auditors' Report, as required by Item
8 of this form appear on pages 37 through 70 of this Report.
(i) Consolidated Statements of Operations for the years ended December
31, 2003, 2002, and 2001;
(ii) Consolidated Balance Sheets for the years ended December 31, 2003
and 2002;
(iii) Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002, and 2001;
(iv) Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001;
(v) Notes to Consolidated Financial Statements; and
(vi) Independent Auditors' Report of KPMG LLP.
72
2. Independent Auditors' Report and Consent (Exhibit 23), and Financial
Statement Schedule II, Valuation and Qualifying Accounts, required by
Regulation S-X are included in this Report.
3. The following exhibits are either filed herewith or incorporated herein by
reference to the respective reports and registration statements identified
in the parenthetical clause following the description of the exhibit:
Exhibit No. Description
2.0 Agreement and Plan of Reorganization dated as of May 31, 1999, by
and among Crompton & Knowles Corporation, Park Merger Co. and Witco
Corporation (incorporated by reference to Appendix A to the Joint
Proxy Statement-Prospectus dated July 28, 1999, as part of the
Registrant's Registration Statement on Form S-4, Registration No.
333-83901, dated July 28, 1999 ("Joint Proxy Statement-Prospectus
S-4 Registration Statement")).
2.1 Amendment No. 1 to Agreement and Plan of Reorganization dated as of
July 27, 1999, by and among Crompton & Knowles Corporation, CK Witco
Corporation (formerly known as Park Merger Co.) and Witco
Corporation (incorporated by reference to Appendix A-1 to the Joint
Proxy Statement-Prospectus S-4 Registration Statement).
2.2 Agreement and Plan of Merger dated April 30, 1996, by and among
Crompton & Knowles, Tiger Merger Corp. and Uniroyal Chemical
Corporation ("UCC") (incorporated by reference to Exhibit 2 to the
Crompton & Knowles Form 10-Q for the period ended March 30, 1996).
2.3 Purchase Agreement between the Registrant (and its affiliates named
therein) and Akzo Nobel Surface Chemistry L.L.C. (and its affiliates
named therein), dated as of June 28, 2002 (incorporated by reference
to Exhibit 2.1 to the Registrant's Form 10-Q for the period ended
June 30, 2002 ("June 30, 2002 10-Q")).
2.4 Limited Liability Company Agreement by and between Gustafson, Inc.
and Trace Chemicals, Inc., effective as of September 23, 1998,
(incorporated by reference to Exhibit 2.1 to the Crompton & Knowles
Form 8-K/A dated January 21, 1999 ("Form 8-K/A")).
2.5 First Amendment to Limited Liability Company Agreement by and among
GT Seed Treatment Inc. (f/k/a Gustafson, Inc.), Ecart Inc. (f/k/a
Trace Chemicals, Inc.) and Bayer Corporation, dated as of November
20, 1998 (incorporated by reference to Exhibit 2.2 to Form 8-K/A).
2.6 Purchase Agreement by and among the Crompton & Knowles, Uniroyal,
Trace Chemicals, Inc. and Gustafson, Inc. as Sellers, and Bayer
Corporation, as Purchaser, and Gustafson LLC, dated as of November
20, 1998, (incorporated by reference to Exhibit 2.3 to Form 8-K/A).
2.7 Purchase Agreement by and between Uniroyal Chemical Co./Cie and
Bayer Inc., effective as of November 20, 1998 (incorporated by
reference to Exhibit 2.4 to Form 8-K/A).
2.8 Partnership Agreement of Gustafson Partnership by and between
Uniroyal Chemical Co./Cie and Bayer Inc., effective as of November
20, 1998 (incorporated by reference to Exhibit 2.5 to Form 8-K/A).
2.9 Purchase and Exchange Agreement by and between the Registrant and
General Electric Company dated April 24, 2003 (incorporated by
reference to Exhibit 99.2 to the Registrant's Form 8-K dated April
25, 2003).
3(i)(a) Amended and Restated Certificate of Incorporation of the Registrant
dated September 1, 1999 (incorporated by reference to Exhibit
3(i)(a) to the Registrant's Form 10-K for the fiscal year ended
December 31, 2001 ("2001 Form 10-K")).
3(i)(b) Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant dated April 27, 2000 (incorporated
by reference to Exhibit 3(i)(b) to the Registrant's 2001 Form 10-K).
3(i)(c) Certificate of Change of Location of Registered Office and of
Registered Agent dated May 18, 2000 (incorporated by reference to
Exhibit 3(i)(c) to the Registrant's 2001 Form 10-K).
3(ii) By-laws of the Registrant (incorporated by reference to Exhibit
3(ii) to the Registrant's 2001 Form 10-K).
73
4.1 Rights Agreement dated as of September 2, 1999, by and between the
Registrant and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent (incorporated by reference to Exhibit 4.1 to the Registrant's
Form 8-A dated September 28, 1999).
4.2 Form of $600 Million 364-Day Credit Agreement dated as of October
28, 1999, by and among the Registrant, certain subsidiaries of the
Registrant, various banks, The Chase Manhattan Bank, as Syndication
Agent, Citibank, N.A., as Administrative Agent and Bank of America,
N.A. and Deutsche Bank Securities Inc., as Co-Documentation Agents
(incorporated by reference to Exhibit 4.1 to the Registrant's Form
10-Q for the quarter ended September 30, 1999 ("September 30, 1999
10-Q")).
4.3 Form of $125 Million Amended and Restated 364-Day Credit Agreement
dated as of September 24, 2001, among the Registrant, certain
subsidiaries of the Registrant, various banks, The Chase Manhattan
Bank, as Syndication Agent, Citibank, N.A., as Administrative Agent,
Bank of America, N.A., as Documentation Agent and J.P. Morgan
Securities Inc., as Lead Arranger and Sole Bookrunner (incorporated
by reference to Exhibit 4.1 to the Registrant's Form 10-Q for the
quarter ended September 30, 2001 ("September 30, 2001 10-Q")).
4.4 First Amendment dated as of December 21, 2001, to the Amended and
Restated 364-Day Credit Agreement dated as of October 28, 1999, (as
amended and restated in the form of the Amended and Restated Credit
Agreement as of September 24, 2001) among the Registrant, certain
subsidiaries of the Registrant, various banks, J.P. Morgan Bank
(formerly known as The Chase Manhattan Bank), as Syndication Agent,
Citicorp USA, Inc. (as successor to Citibank, N.A.), as
Administrative Agent, and Bank of America, N.A. and Deutsche Bank
Alex Brown Inc., as Co-Documentation Agents (incorporated by
reference to Exhibit 4.7 to the Registrant's 2001 Form 10-K).
4.5 Waiver No. 1 dated as of June 30, 2001, to the 364-Day Credit
Agreement dated as of October 28, 1999 as amended as of October 26,
2000, among the Registrant, certain subsidiaries of the Registrant,
various banks, The Chase Manhattan Bank, as Syndication Agent,
Citibank, N.A., as Administrative Agent and Bank of America, N.A.
and Deutsche Bank Securities Inc., as Co- Documentation Agents
(incorporated by reference to Exhibit No. 4.1 to the Registrant's
Form 10-Q for the quarter ended June 30, 2001 ("June 30, 2001
10-Q")).
4.6 Form of $400 Million Five-Year Credit Agreement dated as of October
28, 1999, by and among the Registrant, certain subsidiaries of the
Registrant, various banks, The Chase Manhattan Bank, as Syndication
Agent, Citibank, N.A., as Administrative Agent and Bank of America,
N.A. and Deutsche Bank Securities Inc., as Co-Documentation Agents
(incorporated by reference to Exhibit 4.2 to the September 30, 1999
10-Q).
4.7 First Amendment dated as of September 24, 2001, to the Five- Year
Credit Agreement dated as of October 28, 1999, by and among the
Registrant, certain subsidiaries of the Registrant, various banks,
The Chase Manhattan Bank, as Syndication Agent, Citibank, N.A., as
Administrative Agent, Bank of America, N.A.and Deutsche Bank Alex
Brown Inc., as Co-Documentation Agents, and J.P. Morgan Securities
Inc., as Lead Arranger and Sole Bookrunner (incorporated by
reference to Exhibit 4.2 to the September 30, 2001 10-Q).
4.8 Second Amendment dated as of December 21, 2001, to the Five-Year
Credit Agreement dated as of October 28, 1999, by and among the
Registrant, certain subsidiaries of the Registrant, various banks,
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Syndication Agent, Citicorp USA, Inc. (as successor to Citibank,
N.A.), as Administrative Agent and Bank of America, N.A. and
Deutsche Bank Alex Brown Inc., as Co-Documentation Agents
(incorporated by reference to Exhibit 4.11 to the Registrant's 2001
Form 10-K).
4.9 Third Amendment dated as of May 8, 2002, to the Five-Year Credit
Agreement dated as of October 28, 1999, by and among the Registrant,
certain subsidiaries of the Registrant, various banks, JPMorgan
Chase (formerly known as The Chase Manhattan Bank), as Syndication
Agent, Citicorp USA, Inc. (as successor to Citibank, N.A.), as
Administrative Agent and Bank of America, N.A. and Deutsche Bank
Securities Inc. (formerly known as Deutsche Bank Alex Brown Inc.),
as Co-Documentation Agents (incorporated by reference to Exhibit 4.1
to the Registrant's June 30, 2002 10-Q).
74
4.10 Fourth Amendment dated as of June 20, 2003, to the Five-Year Credit
Agreement dated as of October 28, 1999, by and among the Registrant,
certain subsidiaries of the Registrant, various banks, JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
Syndication Agent, Citicorp, USA, Inc. (as successor to Citibank,
N.A. in its capacity as Administrative Agent, and Bank of America,
N.A. and Deutsche Bank Securities Inc. (formerly known as Deutsche
Bank Alex Brown Inc.) as Co-Documentation Agents (incorporated by
reference to Exhibit 99.2 to the Registrant's Form 8-K dated June
26, 2003).
4.11 Fifth Amendment and Waiver dated as of October 17, 2003, to the
Five-Year Credit Agreement dated as of October 28, 1999, by and
among the Registrant, certain subsidiaries of the Registrant,
various banks, JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank), as Syndication Agent, Citicorp USA, Inc. (as
successor to Citibank, N.A. in its capacity as Administrative
Agent), as Administrative Agent, and Bank of America, N.A. and
Deutsche Bank Securities Inc. (formerly known as Deutsche Bank Alex
Brown Inc.) as Co-Documentation Agents (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended
September 30, 2003 ("September 30, 2003 10-Q")).
4.12 Sixth Amendment and Waiver dated as of November 10, 2003, to the
Five-Year Credit Agreement dated as of October 28, 1999, by and
among the Registrant, certain subsidiaries of the Registrant,
various banks, JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank), as Syndication Agent, Citicorp USA, Inc. (as
successor to Citibank, N.A. in its capacity as Administrative
Agent), as Administrative Agent, and Bank of America, N.A. and
Deutsche Bank Securities Inc. (formerly known as Deutsche Bank Alex
Brown Inc.) as Co-Documentation Agents (incorporated by reference to
Exhibit 10.2 to the September 30, 2003 10-Q).
4.13 Waiver No. 1 dated as of June 30, 2001, to the Five-Year Credit
Agreement dated as of October 28, 1999, by and among the Registrant,
certain subsidiaries of the Registrant, various banks, The Chase
Manhattan Bank, as Syndication Agent, Citibank, N.A., as
Administrative Agent and Bank of America, N.A. and Deutsche Bank
Securities Inc., as Co-Documentation Agents (incorporated by
reference to Exhibit 4.2 to the June 30, 2001 10-Q).
4.14 Form of Indenture, dated as of March 1, 2000, by and between the
Registrant and Citibank, N.A., relating to $600 Million of 8 1/2%
Senior Notes due 2005, including as Annex A thereto, Form of Senior
Note Pledge Agreement by and among the Registrant, certain foreign
subsidiaries of the Registrant, and Citibank, N.A., as Collateral
Agent (incorporated by reference to Exhibit 4.13 of the 1999 Form
10-K).
4.15 Form of Purchase Agreement, dated as of March 2, 2000, by and among
the Registrant, as Seller, and Merrill Lynch, ABN AMRO Incorporated,
Banc of America Securities LLC, Chase Securities Inc., Deutsche Bank
Securities Inc., Goldman, Sachs & Co. and Salomon Smith Barney Inc.
(together, the "Initial Purchasers"), relating to $600 Million of 8
1/2% Senior Notes due 2005 (incorporated by reference to Exhibit
4.14 of the 1999 Form 10-K).
4.16 Form of Indenture, dated as of February 1, 1993, by and between
Witco and the Chase Manhattan Bank, N.A., as Trustee, relating to
Witco's 6.60% Notes due 2003, 7.75% Debentures due 2023, 6 1/8%
Notes due 2006 and 6 7/8% Debentures due 2026, including form of
securities (incorporated by reference to Post-Effective Amendment
No. 2 to the Registration Statement on Form S-3, Registration No.
33-58066, filed March 19, 1993).
4.17 Form of First Supplemental Indenture, dated February 1, 1996, by and
among Witco, Chase Manhattan Bank, N.A., the Initial Trustee, and
Fleet National Bank of Connecticut, the Note Trustee, relating to
Witco's 6 1/8% Notes due 2006 and 6 7/8% Notes due 2026
(incorporated by reference to Registration Statement on Form S-3,
Registration Number 33-065203, filed January 25, 1996).
4.18 Form of $600 Million of 8.50% Senior Notes due 2005, dated June 9,
2000, registered for public trading with the Securities and Exchange
Commission and issued in exchange for identical securities sold in
March 2000, which were not registered for public trading
(incorporated by reference to Exhibit 4 of the Registrant's Form
10-Q for the quarter ended June 30, 2000).
10.1+ Supplemental Medical Reimbursement Plan (incorporated by reference
to Exhibit 10(n) to the Crompton & Knowles Form 10-K for the fiscal
year ended December 27, 1980 ("1980 Form 10-K")).
75
10.2+ Supplemental Dental Reimbursement Plan (incorporated by reference to
Exhibit 10(o) to the 1980 Form 10-K).
10.3+ Form of Employment Agreement dated as of July 29, 2002, by and
between the Registrant and various of its executive officers
(incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-Q for the period ended September 30, 2002 ("September 30, 2002
Form 10-Q")).
10.4+ Form of Employment Agreement dated as of August 21, 1996, between a
subsidiary of the Registrant and three executive officers of the
Registrant (incorporated by reference to Exhibit 10.28 to the
UCC/Uniroyal Form 10-K for the fiscal year ended September 28, 1996
("1996 Form 10-K")).
10.5+ Form of Supplemental Retirement Agreement dated as of August 21,
1996, between a subsidiary of the Registrant and two executive
officers of the Registrant (incorporated by reference to Exhibit
10.29 to the 1996 Form 10-K).
10.6+ Form of Supplemental Retirement Agreement dated as of August 21,
1996, between a subsidiary of the Registrant and two executive
officers of the Registrant (incorporated by reference to Exhibit
10.30 to the 1996 Form 10-K).
10.7+ Supplemental Retirement Agreement Trust Agreement dated October 20,
1993, between Crompton & Knowles and Shawmut Bank, N.A.
(incorporated by reference to Exhibit 10(I) to the Crompton &
Knowles Form 10-K for the fiscal year ended December 25, 1993).
10.8(i)+ Crompton Corporation Benefit Equalization Plan, amended as of April
30, 2002 (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the period ended March 31, 2002 ("March
31, 2002 Form 10-Q").
10.8(ii)+ Crompton Corporation Amended Benefit Equalization Plan, dated
October 22, 2002 (incorporated by reference to Exhibit 10.2 to the
Registrant's September 30, 2002 Form 10-Q).
10.9+ Amended Benefit Equalization Plan Trust Agreement dated October 20,
1993, between Crompton & Knowles and Shawmut Bank, N.A.
(incorporated by reference to Exhibit 10(n) to the Crompton &
Knowles Form 10-K for the fiscal year ended December 25, 1993).
10.10+ Amended Crompton Corporation 1988 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.10 to the Registrant's 2001
Form 10-K).
10.11 Trust Agreement dated as of May 15, 1989, between Crompton & Knowles
and Shawmut Worcester County Bank, N.A. and First Amendment thereto
dated as of February 8, 1990 (incorporated by reference to Exhibit
10(w) to the Crompton & Knowles Form 10-K for the fiscal year ended
December 30, 1989).
10.12+ Restricted Stock Plan for Directors of Crompton & Knowles approved
by the stockholders on April 9, 1991 (incorporated by reference to
Exhibit 10(z) to the Crompton & Knowles Form 10-K for the fiscal
year ended December 28, 1991).
10.13+ Amended 1993 Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.21 to the Crompton &
Knowles Form 10-K for the fiscal year ended December 26, 1998).
10.14+ UCC Purchase Right Plan, as amended and restated as of March 16,
1995 (incorporated by reference to Exhibit 10.1 to the UCC Form 10-Q
for the period ended April 2, 1995).
10.15+ Form of Amended and Restated 1996-1998 Long Term Performance Award
Agreement entered into in 1996 between Crompton & Knowles or one of
its subsidiaries and thirteen of the executive officers of Crompton
& Knowles (incorporated by reference to Exhibit 10.27 to the
Crompton & Knowles Form 10-K for the fiscal year ended December 27,
1997).
10.16 Second Amended and Restated Lease Agreement between the Middlebury
Partnership, as Lessor, and Uniroyal, as Lessee, dated as of August
28, 1997 (incorporated by reference to Exhibit 10 to the
UCC/Uniroyal 10-Q for the quarter ended September 27, 1997).
76
10.17 Form of Receivables Sale Agreement, dated as of December 11, 1998,
by and among Crompton & Knowles, as Initial Collection Agent,
Crompton & Knowles Receivables Corporation, as Seller, ABN AMRO Bank
N.V., as Agent, the Enhancer, and the Liquidity Provider, and
Windmill Funding Corporation (incorporated by reference to Exhibit
10.291 to the Crompton & Knowles Form 10-K for the fiscal year ended
December 26, 1998 ("1998 Form 10-K")).
10.171 Amended and Restated Receivables Sale Agreement, dated as of January
18, 2002, among Crompton & Knowles Receivables Corporation, as the
Seller, the Registrant, as the Initial Collection Agent, ABN AMRO
Bank N.V., as the Agent, certain liquidity providers, ABN AMRO Bank,
N.V., as the Enhancer, and Amsterdam Funding Corporation
(incorporated by reference to Exhibit 10.201 to the Registrant's
2001 Form 10-K).
10.172 First Amendment dated as of January 17, 2003, to the Amended and
Restated Receivables Sale Agreement, dated as of January 18, 2002,
among Crompton & Knowles Receivables Corporation, as the Seller, the
Registrant, as the Initial Collection Agent, ABN AMRO Bank N.V., as
the Agent, certain liquidity providers, ABN AMRO Bank, N.V., as the
Enhancer, and Amsterdam Funding Corporation (incorporated by
reference to Exhibit 10.202 to the Registrant's Form 10-K for the
fiscal year ended December 31, 2002).
10.173 Form of Receivables Purchase Agreement, dated as of December 11,
1998, by and among Crompton & Knowles, as Initial Collection Agent,
and certain of its subsidiaries, as Sellers, Crompton & Knowles
Receivables Corporation, as Buyer, and ABN AMRO Bank N.V., as Agent
(incorporated by reference to Exhibit 10.292 to the 1998 Form 10-K).
10.174 Amendment Number 1 dated as of December 9, 1999, to the Receivables
Purchase Agreement, dated as of December 11, 1998, by and among CK
Witco Corporation (as successor by merger to Crompton & Knowles), as
Initial Collection Agent, and certain of its subsidiaries, as
Sellers, Crompton & Knowles Receivables Corporation, as Buyer, and
ABN AMRO Bank N.V., as Agent (incorporated by reference to Exhibit
10.265 to Form 10-K for the fiscal year ended December 31, 2000
("2000 Form 10-K")).
10.175 Amendment Number 2 dated as of November 20, 2000, to the Receivables
Purchase Agreement, dated as of December 11, 1998, by and among the
Registrant (as successor to Crompton & Knowles), as Initial
Collection Agent, and certain of its subsidiaries, as Sellers,
Crompton & Knowles Receivables Corporation, as Buyer, and ABN AMRO
Bank N.V., as Agent (incorporated by reference to Exhibit 10.266 to
the 2000 Form 10-K).
10.176 Amendment Number 3 dated as of February 1, 2001, to the Receivables
Purchase Agreement dated as of December 11, 1998, by and among the
Registrant (as successor to Crompton & Knowles), as Initial
Collection Agent, and certain of its subsidiaries, as Sellers,
Crompton & Knowles Receivables Corporation, as Buyer, and ABN AMRO
Bank N.V., as Agent (incorporated by reference to Exhibit 10.267 to
the 2000 Form 10-K).
10.177 Amendment Number 4 dated as of April 15, 2003, to the Receivables
Purchase Agreement dated as of December 11, 1998, by and among the
Registrant (as successor to Crompton & Knowles), as initial
Collection Agent, and certain of its subsidiaries, as Sellers,
Crompton & Knowles Receivables Corporation, as Buyer, and ABN AMRO
Bank N.V., as Agent (incorporated by reference to Exhibit 10.2 to
the 10-Q for the quarter ended March 31, 2003 ("March 31, 2003
10-Q").
10.178 Letter Agreement dated as of January 18, 2002, to the Receivables
Purchase Agreement dated as of December 11, 1998, by an among the
Registrant (as successor to Crompton & Knowles), as Initial
Collection Agent, and certain of its subsidiaries, as Sellers,
Crompton & Knowles Receivables Corporation, as Buyer, and Crompton
Sales Company, Inc. and ABN AMRO Bank N.V., as Agent (incorporated
by reference to Exhibit 10.206 to the Registrant's 2001 Form 10-K).
10.179 Letter Agreement dated as of April 15, 2003, to the Receivables
Purchase Agreement dated as of December 11, 1998, by and among the
Registrant (as successor to Crompton & Knowles), as Initial
Collection Agent, and certain of its subsidiaries, as Sellers,
Crompton & Knowles Receivables Corporation, as Buyer, and Crompton
Europe B.V., Crompton B.V. and ABN AMRO Bank N.V. as Agent
(incorporated by reference to Exhibit 10.3 of the March 31, 2003
10-Q).
77
10.18+ Amended Crompton Corporation 1998 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.21 to the Registrant's 2001
Form 10-K).
10.19+ Amended and Restated Employment Agreement by and between Crompton &
Knowles and Vincent A. Calarco dated May 31, 1999 (incorporated by
reference to Exhibit 10.1 to the Crompton & Knowles Form 10-Q for
the quarter ended June 26, 1999).
10.20+ Form of Merger Synergy Restricted Stock Agreement, dated as of
October 19, 1999, by and between the Registrant and various of its
executive officers (incorporated by reference to Exhibit 10.32 to
the 1999 Form 10-K).
10.21+ Form of Supplemental Retirement Agreement, dated as of October 21,
1999, by and between the Registrant and various of its executive
officers (incorporated by reference to Exhibit 10.35 of the 1999
Form 10-K).
10.22+ Form of 2001-2002 Long Term Incentive Award Agreement, dated as of
January 31, 2001, by and between the Registrant and various of its
executive officers (incorporated by reference to Exhibit 10 to the
10-Q for the quarter ended March 31, 2001).
10.23+ Form of 2001 Management Incentive Plan dated as of March 20, 2001,
by and between the Registrant and various key management personnel
(incorporated by reference to Exhibit 10.26+ to the Registrant's
2001 Form 10-K).
10.24+ Form of 2002 Management Incentive Plan dated as of February 8, 2002,
by and between the Registrant and various key management personnel
(incorporated by reference to Exhibit 10.27+ to the Registrant's
2001 Form 10-K).
10.25+ Form of 2002-2004 Long-Term Incentive Award Agreement, dated as of
March 26, 2002, by and between the Registrant and various of its
executive officers (incorporated by reference to Exhibit 10.1 to the
Registrant's March 31, 2002 Form 10-Q).
10.26 Form of 2003 Management Incentive Plan dated as of April 28, 2003 by
and between the Registrant and various key management personnel
(filed herewith*).
10.27 Form of Amendment 2003-1 to the Supplemental Retirement Agreement
dated various dates in December 2003 by and between the Registrant
and various of its executive officers (filed herewith*).
10.28+ Employment Agreement by and between the Registrant and Robert L.
Wood dated January 7, 2004 (filed herewith*).
10.29+ Form of 2004 Management Incentive Plan dated as of February 18, 2004
by and between the Registrant and various key management personnel
(filed herewith*).
10.30+ Form of 2004-2006 Long Term Incentive Award Agreement dated February
3, 2004 by and between the Registrant and various of its executive
officers (filed herewith*).
21 Subsidiaries of the Registrant (filed herewith*).
23 Consent of independent auditors. (See Item 15(a) 2 herein.) (filed
herewith*).
24 Power of attorney from directors and executive officers of the
Registrant authorizing signature of this report. (Original on file
at principal executive offices of Registrant.) (filed herewith*).
31.1 Certification of Periodic Financial Reports by the Registrant's
Chief Executive Officer (Section 302) (filed herewith*).
31.2 Certification of Periodic Financial Reports by the Registrant's
Chief Financial Officer (Section 302) (filed herewith*).
32.1 Certification of Periodic Financial Reports by the Registrant's
Chief Executive Officer (Section 906) (filed herewith*).
78
32.2 Certification of Periodic Financial Reports by the Registrant's
Chief Financial Officer (Section 906) (filed herewith*).
* Copies of these Exhibits are annexed to this report on Form 10-K
provided to the Securities and Exchange Commission and the New York Stock
Exchange.
+ This Exhibit is a compensatory plan, contract or arrangement in which
one or more directors or executive officers of the Registrant participate.
(b) The following Reports on Form 8-K have been filed during the fourth
quarter of 2003 through the date of this filing:
During the fiscal fourth quarter of 2003, and through the date of this filing,
the following Reports on Form 8-K have been filed:
(i) Report on Form 8-K/A dated October 14, 2003, reporting on Item 2
(Acquisition or Disposition of Assets) and Item 7 (Financial
Statements and Exhibits);
(ii) Report on Form 8-K dated October 22, 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);*
(iii) Report on Form 8-K dated January 12, 2004, reporting on Item 5
(Other Events and Regulation FD Disclosure) and Item 7 (Financial
Statements and Exhibits);
(iv) Report on Form 8-K dated February 2, 2004, reporting on Item 7
(Financial Statements and Exhibits) and Item 12 (Results of
Operations and Financial Condition); and*
(v) Report on Form 8-K dated March 15, 2004, reporting on Item 5 (Other
Events and Regulation FD Disclosure) and Item 7 (Financial
Statements and Exhibits).
* 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.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CROMPTON CORPORATION
(Registrant)
Date: March 16, 2004 By: /s/ Peter Barna
-------------------
Peter Barna
Senior Vice President &
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Name Title
Robert L. Wood* President, Chief Executive Officer and Director
(Principal Executive Officer)
Vincent A. Calarco* Chairman of the Board and Director
Peter Barna Senior Vice President
(Chief Financial Officer)
Michael F. Vagnini* Vice President and Controller
(Principal Accounting Officer)
Robert A. Fox* Director
Roger L. Headrick* Director
Leo I. Higdon, Jr.* Director
C. A. Piccolo* Director
Bruce F. Wesson* Director
Patricia K. Woolf* Director
Date: March 16, 2004 *By: /s/Peter Barna
Peter Barna
as attorney-in-fact
80
Schedule II
Valuation and Qualifying Accounts
(In thousands of dollars)
Additions
Balance at charged to Balance
beginning costs and at end
of Year expenses Deductions Other (6) of Year
---------- ---------- ---------- --------- -------
Fiscal Year ended December 31, 2003:
Allowance for doubtful accounts $ 16,291 $ 5,087 $ (4,031)(1) $ 467 $17,814
Accumulated amortization of cost in
excess of acquired net assets N/A (2)
Accumulated amortization of other
intangible assets 74,592 14,521 (2,851)(3) 1,393 87,655
Reserve for customer rebates 21,810 52,050 (47,004)(4) 592 27,448
Fiscal Year ended December 31, 2002:
Allowance for doubtful accounts $ 17,485 $ 5,157 $ (6,509)(1) $ 158 $16,291
Accumulated amortization of cost in
excess of acquired net assets N/A (2)
Accumulated amortization of other
intangible assets 62,495 11,557 (678) 1,218 74,592
Reserve for customer rebates 25,726 52,906 (57,112)(4) 290 21,810
Fiscal Year ended December 31, 2001:
Allowance for doubtful accounts $ 22,922 $ 4,499 $ (9,808)(1) $ (128) $17,485
Accumulated amortization of cost in
excess of acquired net assets 65,868 20,179 (2,568)(5) (220) 83,259
Accumulated amortization of other
intangible assets 51,204 11,609 (74) (244) 62,495
Reserve for customer rebates 30,214 53,186 (57,477)(4) (197) 25,726
(1) Represents primarily accounts written off as uncollectible (net of
recoveries).
(2) Effective with the January 1, 2002 implementation of FASB Statement No.
142, goodwill is no longer amortized.
(3) Represents primarily the write-off of fully amortized intangible assets.
(4) Represents primarily payments to customers.
(5) Represents primarily the impairment of goodwill related to the rubber
chemicals and trilene business units.
(6) Represents primarily the translation effect of accounts denominated in
foreign currencies.
81