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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(AMENDMENT NO. 1)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-12091
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MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
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Delaware 22-3436215
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
20 Wight Avenue, Suite 100
Hunt Valley, MD 21030
(Address of principal executive offices)
410-229-4400
(Registrant's telephone number, including area code)
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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 is required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 63,487,435 shares of Common
Stock, par value $.01 per share, as of April 30, 2003, excluding 14,409,151
shares held by the registrant, its subsidiaries and certain Company trusts,
which are not entitled to vote.
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1
MILLENNIUM CHEMICALS INC.
TABLE OF CONTENTS
Page
----
Explanatory Note.................................................................... 2
Part I FINANCIAL INFORMATION
Item 1 Financial Statements......................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 27
Item 4 Controls and Procedures...................................................... 36
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................................. 37
Signature........................................................................... 38
Certifications...................................................................... 40
Explanatory Note
Millennium Chemicals Inc. (the "Company") is filing this amendment to its
Quarterly Report on Form 10-Q for the period ended March 31, 2003 to reflect
restatements of its financial statements for the years ended December 31, 1998
through 2002 and for the first quarter of 2003. Included herein are restated
consolidated statements of operations and consolidated statements of cash flows
for each of the three months ended March 31, 2003 and 2002, and restated
consolidated balance sheets as of March 31, 2003 and December 31, 2002. The
restatements correct errors in:
o the accounting for deferred taxes relating to the Company's investment
in Equistar Chemicals, LP ("Equistar"), a partnership in which the
Company owns a 29.5% interest;
o the calculation of the Company's minimum pension benefit liability as
reflected in its balance sheet at December 31, 2002 and its pension
expense for the year then ended, as a result of actuarial valuation
errors by the Company's independent actuarial valuation firm; and
o the accounting for a five-year precious metals agreement entered into
in April 1998 that had been characterized as an operating lease and
should have been characterized as a secured financing.
These errors, all of which were discovered in July 2003, were initially reported
by the Company on August 6, 2003, in a press release, a copy of which was
appended as an exhibit to a Current Report on Form 8-K of the same date.
In addition, during the course of its review of its deferred tax assets
related to its investment in Equistar, the Company reexamined the deferred tax
asset associated with its French subsidiaries and concluded that, due to the
unlikelihood of realizing the value of that asset, it should be eliminated as of
December 31, 2002. Finally, as a consequence of its review of its accounting
with respect to its investment in Equistar, the Company elected to further amend
its Consolidated Statements of Operations for the years 1998 through 2002 to
reclassify to Selling, development and administrative expense various costs
associated with its investment in Equistar and previously included in (Loss)
earnings on Equistar investment in those Consolidated Statements of Operations.
A detailed discussion of the restatements of the Company's financial
statements reflected in this amended Quarterly Report, including a summary of
the aggregate effect of the changes implemented by the restatements, as well as
the reclassification of costs associated with the Company's investment in
Equistar, is set forth in Note 2 to the Consolidated Financial Statements
included in this amended Quarterly Report. Changes also have been made to
2
the following additional items of the Quarterly Report on Form 10-Q as a result
of the changes to the financial statements, principal among which are the
following:
o Item 1, Financial Statements, has been revised to reflect the
restatements and the reclassification. In addition, the phrase "other
environmental proceedings" has been deleted to reflect the fact that
there are no environmental proceedings other than those involving
environmental remediation activities;
o Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations, has been revised to reflect the
restatements and the reclassification; and
o Item 4, Controls and Procedures, has been updated to reflect the
evaluation made by the Company in connection with this Amendment.
This Amendment does not reflect events that have occurred after May 12,
2003, the date the Quarterly Report on Form 10-Q was originally filed.
Information with respect to those events has been or will be set forth, as
appropriate, in the Company's Quarterly Reports on Form 10-Q for the three-month
periods ended June 30, 2003 and September 30, 2003. On November 12, 2003, the
Company filed with the Securities and Exchange Commission an amendment to its
Annual Report on Form 10-K for the year ended December 31, 2002 to reflect
changes therein required as a consequence of the above-described financial
statement restatements and reclassification and adjustments to its prior
financial statements for the timing of income and expense recognition associated
with legal, environmental and other reserves established for certain of the
Company's predecessor businesses, as more fully described in such amendment to
the Company's Annual Report on Form 10-K. These adjustments for the timing of
income and expense recognition did not change any of the financial information
presented in the Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2003 as filed on May 12, 2003 and, accordingly, are not discussed in
this Amendment.
Disclosure Concerning Forward-Looking Statements
The statements in this Quarterly Report on Form 10-Q/A (the "Quarterly
Report") that are not historical facts are, or may be deemed to be,
"forward-looking statements" ("Cautionary Statements") as defined in the Private
Securities Litigation Reform Act of 1995. Some of these statements can be
identified by the use of forward-looking terminology such as "prospects,"
"outlook," "believes," "estimates," "intends," "may," "will," "should,"
"anticipates," "expects" or "plans," or the negative or other variation of these
or similar words, or by discussion of trends and conditions, strategy or risks
and uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements in other
filings that the Company makes with the Securities and Exchange Commission, in
press releases or in oral statements made by or with the approval of one of its
authorized executive officers.
These forward-looking statements are only present expectations as at the
time of the original filing of the Company's Quarterly Report on Form 10-Q.
Actual events or results may differ materially. Factors that could cause such a
difference include:
o the cyclicality and volatility of the chemical industries in which the
Company and Equistar Chemicals, LP ("Equistar") operate, particularly
fluctuations in the demand for ethylene, its derivatives and acetyls
and the sensitivity of these industries to capacity additions;
o general economic conditions in the geographic regions where the
Company and Equistar generate sales, and the impact of government
regulation and other external factors, in particular, the events in
the Middle East;
o the ability of Equistar to distribute cash to its partners and
uncertainties arising from the Company's shared control of Equistar
and the Company's contractual commitments regarding possible future
capital contributions to Equistar;
o changes in the cost of energy and raw materials, particularly natural
gas and ethylene, and the ability of the Company and Equistar to pass
on cost increases to their customers;
o the ability of raw material suppliers to fulfill their commitments;
3
o the ability of the Company and Equistar to achieve their productivity
improvement, cost reduction and working capital targets, and the
occurrence of operating problems at manufacturing facilities of the
Company or Equistar;
o risks of doing business outside the United States, including currency
fluctuations;
o the cost of compliance with the extensive environmental regulations
affecting the chemical industry and exposure to liabilities for
environmental remediation and other environmental matters relating to
the Company's and Equistar's current and former operations;
o pricing and other competitive pressures;
o legal proceedings relating to present and former operations (including
proceedings based on alleged exposure to lead-based paints and lead
pigments, asbestos and other materials), ongoing or future tax audits,
and other claims; and
o the Company's substantial indebtedness and its impact on the Company's
cash flow, business operations and ability to obtain additional
financing.
A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003, as initially filed with the Securities
and Exchange Commission on May 12, 2003. Some of these Cautionary Statements are
discussed in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Quarterly Report. Readers are
cautioned not to place undue reliance on forward-looking or Cautionary
Statements, which reflect management's opinions only as of the date hereof. The
Company undertakes no obligation to update any forward-looking or Cautionary
Statement. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by the Cautionary Statements in this
Quarterly Report. Readers are advised to consult any further disclosures the
Company may make on related subjects in subsequent 10-Q, 8-K and 10-K reports to
the Securities and Exchange Commission.
In this Quarterly Report, references to the Company are to the Company and
its consolidated subsidiaries, except as the context otherwise requires.
Non-GAAP Financial Measures
Financial measures based on accounting principles generally accepted in the
United States of America ("GAAP") are commonly referred to as GAAP financial
measures. For this purpose, a non-GAAP financial measure is generally defined by
the Securities and Exchange Commission as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be so adjusted in the most
comparable GAAP measure. From time to time the Company discloses so-called
non-GAAP financial measures, primarily EBITDA, Pro Forma EBITDA, Pro Forma
Operating Income, Pro Forma Net Sales and Pro Forma Depreciation and
Amortization. EBITDA represents income from operations before interest, taxes,
depreciation and amortization, other income items, equity earnings and the
cumulative effect of accounting changes. EBITDA is a key measure used by the
banking and investing communities in their evaluation of economic performance.
Accordingly, management believes that disclosure of EBITDA provides useful
information to investors because it is frequently cited by financial analysts in
evaluating companies' performance. Pro Forma EBITDA and Pro Forma Operating
Income include the Company's underlying interest (29.5%) in Equistar's results.
Pro Forma Net Sales and Pro Forma Depreciation and Amortization include net
sales and depreciation and amortization, respectively, in accordance with GAAP
together with the Company's underlying interest in Equistar's corresponding
amounts. The Company believes this pro forma information provides useful
information to investors regarding its underlying interest in Equistar. EBITDA
and the pro forma measures identified above are not a measure of operating
performance computed in accordance with GAAP and should not be considered as a
substitute for GAAP measures. Additionally, these measures may not be comparable
to similarly named measures of other companies.
The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding certain items that are unusual in nature or
not comparable from period to period and that are included in GAAP measures of
earnings. Management believes that excluding these items generally helps
investors to compare
4
operating performance between two periods. Such adjusted data is not reported
without an explanation of the items that are excluded.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
March 31, December 31,
2003 2002
----------- ------------
(Restated - (Restated -
See Note 2) See Note 2)
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ............................................................. $ 125 $ 125
Trade receivables, net ................................................................ 225 210
Inventories ........................................................................... 393 406
Other current assets .................................................................. 82 78
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Total current assets ............................................................... 825 819
Property, plant and equipment, net ....................................................... 852 862
Investment in Equistar ................................................................... 520 563
Other assets ............................................................................. 46 46
Goodwill ................................................................................. 106 106
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Total assets ....................................................................... $2,349 $2,396
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Notes payable ......................................................................... $ 3 $ 4
Other short-term borrowings ........................................................... 13 14
Current maturities of long-term debt .................................................. 8 12
Trade accounts payable ................................................................ 240 274
Income taxes payable .................................................................. 44 44
Accrued expenses and other liabilities ................................................ 132 127
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Total current liabilities .......................................................... 440 475
Long-term debt ........................................................................... 1,246 1,212
Deferred income taxes .................................................................... 313 337
Other liabilities ........................................................................ 388 388
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Total liabilities .................................................................. 2,387 2,412
Commitments and contingencies (Note 10)
Minority interest ........................................................................ 23 19
Shareholders' deficit
Preferred stock (par value $.01 per share, authorized 25,000,000 shares, none issued
and outstanding) ................................................................... -- --
Common stock (par value $.01 per share, authorized 225,000,000 shares; issued
77,896,586 shares at March 31, 2003 and December 31, 2002) ......................... 1 1
Paid in capital ....................................................................... 1,296 1,297
Accumulated deficit ................................................................... (812) (776)
Cumulative other comprehensive loss ................................................... (289) (299)
Treasury stock, at cost (14,456,833 and 14,766,279 shares at March 31, 2003 and
December 31, 2002, respectively) ................................................... (270) (275)
Deferred compensation ................................................................. 13 17
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Total shareholders' deficit ........................................................ (61) (35)
------ ------
Total liabilities and shareholders' deficit ..................................... $2,349 $2,396
====== ======
See Notes to Consolidated Financial Statements.
6
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Millions, except per share data)
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated - (Restated
See Note 2) See Note 2)
Net sales ................................................................. $ 415 $ 351
Operating costs and expenses
Cost of products sold .................................................. 331 293
Depreciation and amortization .......................................... 27 25
Selling, development and administrative expense ........................ 30 26
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Operating income .................................................... 27 7
Interest expense .......................................................... (23) (22)
Interest income ........................................................... 1 1
Loss on Equistar investment ............................................... (43) (37)
Other expense, net ........................................................ -- (1)
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Loss before income taxes, minority interest and cumulative effect
of accounting change ................................................... (38) (52)
Benefit from income taxes ................................................. 15 20
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Loss before minority interest and cumulative effect of accounting change... (23) (32)
Minority interest ......................................................... (3) (1)
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Loss before cumulative effect of accounting change ........................ (26) (33)
Cumulative effect of accounting change .................................... (1) (305)
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Net loss .................................................................. $ (27) $ (338)
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Basic and diluted loss per share:
Before cumulative effect of accounting change .......................... $(0.41) $(0.52)
From cumulative effect of accounting change ............................ (0.02) (4.80)
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After cumulative effect of accounting change ........................... $(0.43) $(5.32)
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See Notes to Consolidated Financial Statements.
7
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Millions)
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated (Restated -
See Note 2) See Note 2)
Cash flows from operating activities:
Net loss...................................................................... $(27) $(338)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of accounting change..................................... 1 305
Depreciation and amortization.............................................. 27 25
Deferred income tax benefit ............................................... (21) (24)
Loss on Equistar investment................................................ 43 37
Minority interest.......................................................... 3 1
Other, net................................................................. (2) --
Changes in assets and liabilities:
(Increase) decrease in trade receivables................................ (13) 5
Decrease in inventories................................................. 18 42
Decrease (increase) in other current assets............................. 1 (16)
Increase in other assets................................................ -- (2)
Decrease in trade accounts payable...................................... (36) (58)
Increase (decrease) in accrued expenses and other liabilities and income
taxes payable........................................................ 4 (1)
Decrease in other liabilities........................................... (12) (9)
---- -----
Cash used in operating activities.......................................... (14) (33)
---- -----
Cash flows from investing activities:
Capital expenditures.......................................................... (8) (13)
---- -----
Cash used in investing activities.......................................... (8) (13)
---- -----
Cash flows from financing activities:
Dividends to shareholders..................................................... (9) (9)
Proceeds from long-term debt.................................................. 96 97
Repayment of long-term debt................................................... (66) (87)
(Decrease) increase in notes payable.......................................... (1) 1
---- -----
Cash provided by financing activities...................................... 20 2
---- -----
Effect of exchange rate changes on cash.......................................... 2 1
---- -----
Decrease in cash and cash equivalents............................................ -- (43)
Cash and cash equivalents at beginning of year................................... 125 114
---- -----
Cash and cash equivalents at end of period....................................... $125 $ 71
==== =====
See Notes to Consolidated Financial Statements.
8
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in millions, except share data)
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the accompanying unaudited interim consolidated financial statements
do not include all of the disclosures normally required by accounting principles
generally accepted in the United States of America for complete financial
statements. The accompanying consolidated financial statements should be read in
conjunction with the financial statements and disclosures included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 2002. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position and results of operations for the interim periods.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Minority interest represents the minority
ownership of the Company's Brazilian subsidiary and the La Porte Methanol
Company. All significant intercompany accounts and transactions have been
eliminated. The Company's 29.5% investment in Equistar, a joint venture between
the Company and Lyondell Chemical Company ("Lyondell"), is accounted for by the
equity method; accordingly, the Company's share of Equistar's pre-tax net income
or loss is included in net income or loss. Certain prior year balances have been
reclassified to conform to the current year presentation, principally $2 of
selling, development and administrative ("S,D&A") costs allocated to the
Company's investment in Equistar and previously reported in Loss on Equistar
investment for each of the three months ended March 31, 2003 and 2002 have been
reclassified to Selling, development and administrative expense in the Company's
Consolidated Statements of Operations.
Note 2 - Restatement of Financial Statements
The Company restated its financial statements for the years 1998 through
2002 and for the first quarter of 2003, to correct errors in its accounting for
deferred taxes relating to its Equistar investment, the calculation of its
pension benefit obligations and its accounting for a multi-year precious metals
agreement. The Company's independent auditors, PricewaterhouseCoopers LLP
("PwC"), concur with the Company's decision to restate its financial statements.
Deferred tax assets and liabilities and deferred tax expense for the years
1998 through 2002 and for the first quarter of 2003 were restated to
appropriately account for the Company's book and tax basis differences
associated with its investment in Equistar in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). The accounting for deferred taxes associated with Equistar was
previously based on the difference between book and tax basis of a subsidiary
that holds the partnership investment. Deferred tax is now based on the
difference between book and tax basis of the actual partnership interest held by
the subsidiary. The effect of the adjustments to deferred tax assets and
liabilities was to increase net deferred tax liabilities by $425, increase
Accumulated deficit by $440 and decrease Cumulative other comprehensive loss by
$15 at December 31, 2002. The effect of the adjustments to Benefit from income
taxes for the three months ended March 31, 2003 was an increase of $24, and for
the three months ended March 31, 2002 was less than $1. In addition, during the
course of its review of its deferred taxes, the Company concluded that its
realization of a deferred tax asset of $10 related to its French subsidiaries
was unlikely. The elimination of this deferred tax asset as of December 31, 2002
resulted in an increase of $10 in net deferred tax liabilities and Accumulated
deficit.
The Company's accrued pension benefit costs, included in Other liabilities,
and its net periodic pension benefit cost were restated for 2002 and for the
first quarter of 2003. The restatement corrected errors in the calculation of
the Company's pension liability. The Company's principal actuarial firm
incorrectly utilized participant data in its 2002 actuarial valuation and
underestimated the accumulated pension benefit obligation at December 31, 2002
for the Company's largest domestic pension plan. The effect of these corrections
was to increase accrued pension benefit cost by $53, decrease net deferred tax
liabilities by $19, increase Accumulated deficit by $1 and increase Cumulative
other comprehensive loss by $33 at December 31, 2002. The changes to net
periodic pension benefit cost due to this restatement for the three months ended
March 31, 2003 and 2002 were each less than $1.
The Company also restated its financial statements for the years 1998
through 2002 and for the first quarter of 2003 due to a change in accounting
treatment for a five-year agreement entered into in 1998 that provides the
Company with the right to use gold owned by a third party, as more fully
described in Note 7. The Company previously accounted for this agreement as an
operating lease but is now accounting for this agreement as a secured financing.
As a result, Other assets were increased by $4, Current liabilities were
increased by $13, net deferred tax
9
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
liabilities were decreased by $4, and Accumulated deficit was increased by $5 at
December 31, 2002. This restatement changed Operating income for the three
months ended March 31, 2003 by less than $1 and decreased Operating income for
the three months ended March 31, 2002 by $1. Net loss changed by less than $1
for the three months ended March 31, 2003, and increased by $1 for the three
months ended March 31, 2002 as a result of this restatement.
A summary of the aggregate effect of these restatements and the
reclassification described in Note 1 on the Company's Consolidated Balance
Sheets and Consolidated Statements of Operations for the periods presented
herein is shown below.
March 31, 2003 December 31, 2002
------------------------- -------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Changes to Consolidated Balance Sheets:
Deferred income taxes - asset .......................... $ 75 $ -- $ 75 $ --
Other assets ........................................... 42 46 42 46
Total assets ........................................... 2,420 2,349 2,467 2,396
Other short-term borrowings ............................ -- 13 -- 14
Accrued expenses and other liabilities ................. 132 132 128 127
Total current liabilities .............................. 427 440 462 475
Deferred income taxes - liability ...................... -- 313 -- 337
Other liabilities ...................................... 335 388 335 388
Total liabilities ...................................... 2,008 2,387 2,009 2,412
Accumulated deficit .................................... (380) (812) (320) (776)
Cumulative other comprehensive loss .................... (271) (289) (281) (299)
Total shareholders' equity (deficit) ................... 389 (61) 439 (35)
Total liabilities and shareholders' equity (deficit) ... 2,420 2,349 2,467 2,396
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------------- -------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
Changes to Consolidated Statements of Operations:
Cost of products sold ................................. $ 330 $ 331 $ 293 $ 293
Selling, development and administrative expense ....... 29 30 23 26
Operating income ...................................... 29 27 10 7
Loss on Equistar investment ........................... (45) (43) (39) (37)
Loss before income taxes, minority interest and
cumulative effect of accounting change ............. (38) (38) (51) (52)
(Provision for) benefit from income taxes ............. (9) 15 20 20
Loss before minority interest and cumulative effect of
accounting change .................................. (47) (23) (31) (32)
Loss before cumulative effect of accounting change .... (50) (26) (32) (33)
Net loss .............................................. (51) (27) (337) (338)
Basic and diluted loss per share:
Before cumulative effect of accounting change ...... (0.78) (0.41) (0.50) (0.52)
After cumulative effect of accounting change ....... (0.80) (0.43) (5.30) (5.32)
10
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 3 - Earnings per Share and Stock-Based Compensation
The weighted-average number of equivalent shares of common stock
outstanding used in computing earnings per share is as follows:
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Weighted-average common stock outstanding - basic and diluted ... 63,852,822 63,476,591
========== ==========
The calculation of diluted earnings per share for the three months ended
March 31, 2003 does not include 53,957 restricted shares issued under a Company
incentive plan, and 219,140 shares held by certain of the Company's employee
benefit plan trusts. The calculation of diluted earnings per share for the three
months ended March 31, 2002 does not include 91,740 options to purchase common
stock, 78,944 restricted shares issued under a Company incentive plan, and
220,995 shares held by certain of the Company's employee benefit plan trusts.
The effect of including these options and shares would be antidilutive.
SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123")
encourages a fair value based method of accounting for employee stock options
and similar equity instruments, which generally would result in the recording of
additional compensation expense in the Company's financial statements. SFAS No.
123 also allows the Company to continue to account for stock-based compensation
using the intrinsic value for equity instruments under Accounting Principles
Board Opinion No. 25 ("APB Opinion No. 25"). The Company has elected to account
for such instruments using APB Opinion No. 25 and related interpretations, and
thus has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized for the stock option plans in the
accompanying financial statements as all options granted had an exercise price
equal to the market value of the underlying Common Stock on the date of grant.
Disclosure on a pro forma basis of net income and related per-share amounts
as if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based compensation is omitted because the effect on pro forma net
income is not significant.
Note 4 - Recent Accounting Developments
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets. This standard
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. Accretion expense and depreciation expense related to the liability and
capitalized asset retirement costs, respectively, are recorded in subsequent
periods. The Company's asset retirement obligations arise from activities
associated with the eventual remediation of sites used for landfills and mining
and include estimated liabilities for closure, restoration, and post-closure
care. None of the Company's assets are legally restricted for purposes of
settling these obligations. The Company reported an after-tax transition charge
of $1 as the cumulative effect of this accounting change. The impact of adoption
was insignificant to the Company's reported assets and liabilities. The ongoing
annual expense resulting from the initial adoption of SFAS No. 143 is not
expected to be significant. Activity associated with the asset retirement
obligations other than the effect of initial adoption of SFAS No. 143 was not
significant for the three months ended March 31, 2003. Disclosure on a pro forma
basis of net income and related per-share amounts as if SFAS No. 143 had been
applied during all periods presented is omitted because the effect on pro forma
net income is not significant. The pro forma amount of the aggregate asset
retirement obligation at March 31, 2003, January 1, 2003, March 31, 2002, and
January 1, 2002, as if SFAS No. 143 had been applied during all periods affected
is $12, $12, $11, and $11, respectively.
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). Under this new standard, all goodwill,
including goodwill acquired before initial application of the standard, is not
amortized but must be tested for impairment at least annually at the reporting
unit level, as defined in the standard. Accordingly, the Company reported a
charge for the cumulative effect of this accounting change of $275 in the first
quarter of 2002 to write off certain of its goodwill related to its Acetyls
business based upon the
11
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Company's estimate of fair value for this business considering expected future
profitability and cash flows. Also in accordance with SFAS No. 142, Equistar
reported an impairment of its goodwill in the first quarter of 2002. The
write-off at Equistar required an adjustment of $30 to reduce the carrying value
of the Company's investment in Equistar to its approximate proportional share of
Equistar's Partners' capital.
Note 5 - European Receivables Securitization Program
Since March 2002, the Company has been transferring its interest in certain
European trade receivables to an unaffiliated third party as its basis for
issuing commercial paper under a revolving securitization arrangement (annually
renewable up to five years) with maximum availability of 70 million euro, which
is treated, in part, as a sale under accounting principles generally accepted in
the United States of America. Accordingly, transferred trade receivables that
qualify as a sale, $65 and $61 outstanding at March 31, 2003 and December 31,
2002, respectively, are removed from the Company's Consolidated Balance Sheets.
The Company continues to carry its retained interest in a portion of the
transferred assets that do not qualify as a sale, $10 and $9 at March 31, 2003
and December 31, 2002, respectively, in Trade receivables, net in its
Consolidated Balance Sheets at amounts that approximate net realizable value
based upon the Company's historical collection rate for these trade receivables.
Unused availability under this arrangement at March 31, 2003 was 1 million euro.
For the three months ended March 31, 2003 and 2002, cumulative gross proceeds
from this securitization arrangement were $95 and $43, respectively. Cash flows
from this securitization arrangement are reflected as operating activities in
the Consolidated Statements of Cash Flows. The cost of sale associated with this
arrangement was $1 for the three months ended March 31, 2003 and was not
significant for the three months ended March 31, 2002. Administration and
servicing of the trade receivables under the arrangement remains with the
Company. Servicing liabilities associated with the transaction are not
significant.
Note 6 - Inventories
Inventories are stated at the lower of cost or market value.
March 31, December 31,
2003 2002
--------- ------------
Finished products.................................... $229 $210
In-process products.................................. 29 30
Raw materials........................................ 77 106
Maintenance parts and supplies....................... 58 60
---- ----
$393 $406
==== ====
Note 7 - Long-Term Debt and Credit Arrangements
In June 2002, the Company received approximately $100 in net proceeds
($102.5 in gross proceeds) from the completion of an offering by Millennium
America Inc. ("Millennium America"), a wholly owned indirect subsidiary of the
Company, of $100 additional principal amount at maturity of 9.25% Senior Notes
due June 15, 2008 (the "9.25% Senior Notes"). The gross proceeds of the offering
were used to repay all outstanding borrowings at that time under the Company's
revolving loan portion (the "Revolving Loans") of its five-year credit agreement
(the "Credit Agreement") and to repay $65 outstanding under the term loan
portion (the "Term Loans") of the Credit Agreement. The Company and Millennium
America guarantee the obligations under the Credit Agreement.
The Company had $56 outstanding ($45 of outstanding borrowings and
outstanding letters of credit of $11) of the maximum available credit line of
$175 under the Revolving Loans and, accordingly, had $119 of unused availability
under such facility, and had $48 outstanding under the Term Loans at March 31,
2003. In addition to letters of credit outstanding under the Credit Agreement,
the Company had outstanding letters of credit under other arrangements of $11 at
March 31, 2003. The Company had unused availability under short-term uncommitted
lines of credit, other than the Credit Agreement, of $44 and $34 at March 31,
2003 and April 30, 2003, respectively.
On April 25, 2003, the Company received approximately $107 in net proceeds
($109 in gross proceeds) from the completion of an offering by Millennium
America of $100 additional principal amount at maturity of the 9.25% Senior
Notes. The proceeds of the offering were used to repay all of the $85 of
borrowings outstanding under the
12
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Company's Revolving Loans and for general corporate purposes. At April 30, 2003,
the Company had $13 outstanding (no outstanding borrowings and outstanding
letters of credit of $13) under the Revolving Loans and, accordingly, had $162
of unused availability under such facility, and had $48 outstanding under the
Term Loans. In addition to letters of credit outstanding under the Credit
Agreement, the Company had outstanding letters of credit under other
arrangements of $11 at April 30, 2003.
The Revolving Loans are available in US dollars, British pounds and euros.
The Revolving Loans may be borrowed, repaid and reborrowed from time to time.
The Revolving Loans include a $50 letter of credit subfacility and a swingline
facility in the amount of $25. As of March 31, 2003, $11 was outstanding under
the letter of credit subfacility, and no amount under the swingline facility.
The Term Loans may be prepaid in part or in total at the option of the Company
at any time, but any such amounts prepaid may not be reborrowed. The interest
rates on the Revolving Loans and the Term Loans are floating rates based upon
margins over LIBOR, NIBOR, or the Administrative Agent's prime lending rate, as
the case may be. Such margins, as well as the facility fee, are based on the
Company's Leverage Ratio, as defined.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. The Company was in compliance with all covenants under the
Credit Agreement in effect at March 31, 2003. Due to its expectation that it
would not be in compliance at June 30, 2003, the Company obtained an amendment
to the Credit Agreement on April 25, 2003, which amended the Leverage Ratio and
Interest Coverage Ratio, each as defined in the Credit Agreement, as described
below.
The financial covenants in the Credit Agreement include a Leverage Ratio
and an Interest Coverage Ratio. The Leverage Ratio is the ratio of Total
Indebtedness to cumulative EBITDA for the prior four fiscal quarters, each as
defined. The Interest Coverage Ratio is the ratio of cumulative EBITDA for the
prior four fiscal quarters to Net Interest Expense, for the same period, each as
defined. To permit the Company to be in compliance, these covenants were amended
in the fourth quarter of 2001, in the second quarter of 2002, and in the second
quarter of 2003. The amendment in the second quarter of 2002 was conditioned
upon consummation of the offering of $100 additional principal amount of the
9.25% Senior Notes and retirement of the Credit Agreement debt described above.
The latest amendment was not conditioned on the sale of 9.25% Senior Notes.
Under the covenants, as amended in April of 2003, the Company is required to
maintain a Leverage Ratio of no more than 5.75 to 1.00 for the second quarter of
2003; 5.50 to 1.00 for the third quarter of 2003; 5.25 to 1.00 for the fourth
quarter of 2003; 5.00 to 1.00 for the first and second quarters of 2004; 4.75 to
1.00 for the third and fourth quarters of 2004; and 4.00 to 1.00 for the first
quarter of 2005 and thereafter; and an Interest Coverage Ratio of no less than
2.25 to 1.00 for the second, third and fourth quarters of 2003; 2.50 to 1.00 for
the first, second, third and fourth quarters of 2004; and 3.00 to 1.00 for the
first quarter of 2005 and thereafter. The covenants in the Credit Agreement also
limit, among other things, the ability of the Company and/or certain
subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii)
create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay
dividends on, or purchase, the Company's stock; (v) make restricted payments;
(vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage in
mergers or acquisitions; (ix) engage in domestic accounts receivable
securitization transactions; and (x) enter into restrictive agreements. In the
event the Company sells certain assets as specified in the Credit Agreement, the
Term Loans must be prepaid with a portion of the net cash proceeds of such sale.
The obligations under the Credit Agreement are collateralized by: (1) a pledge
of 100% of the stock of the Company's existing and future domestic subsidiaries
and 65% of the stock of certain of the Company's existing and future foreign
subsidiaries, in both cases other than subsidiaries that hold immaterial assets
(as defined in the Credit Agreement); (2) all the equity interests held by the
Company's subsidiaries in Equistar and the La Porte Methanol Company (which
pledges are limited to the right to receive distributions made by Equistar and
the La Porte Methanol Company, respectively); and (3) all present and future
accounts receivable, intercompany indebtedness and inventory of the Company's
domestic subsidiaries, other than subsidiaries that hold immaterial assets.
Millennium America also has outstanding $500 aggregate principal amount of
7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes") and $250
aggregate principal amount of 7.625% Senior Debentures due November 15, 2026
(the "7.625% Senior Debentures") that are fully and unconditionally guaranteed
by the Company. The indenture under which the 7.00% Senior Notes and 7.625%
Senior Debentures were issued contains certain covenants that limit, among other
things: (i) the ability of Millennium America and its Restricted Subsidiaries
(as defined) to grant liens or enter into sale/leaseback transactions; (ii) the
ability of the Restricted Subsidiaries to incur additional indebtedness; and
(iii) the ability of Millennium America and the Company to merge, consolidate or
transfer substantially all of their respective assets. This indenture allows the
Company to
13
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
grant security on loans of up to 15% of Consolidated Net Tangible Assets
("CNTA"), as defined, of Millennium America. Accordingly, based upon CNTA and
secured borrowing levels at March 31, 2003, any reduction in CNTA below
approximately $1,600 would decrease the Company's availability under the
Revolving Loans by 15% of any such reduction.
The 9.25% Senior Notes were issued by Millennium America and are guaranteed
by the Company. The indenture under which the 9.25% Senior Notes were issued
contains certain covenants that limit, among other things, the ability of the
Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." The basket is reduced by the amount of each such
restricted payment and is increased by: (i) 50% of the Company's Cumulative Net
Income (as defined in such indenture) since July 1, 2001 (or is reduced by 100%
of its Cumulative Net Income if such amount is negative); (ii) the net cash
proceeds from the sale by the Company of its common stock to third parties; and
(iii) 50% of any cash distributions received from Equistar. As of May 12, 2003,
the date of filing of the original Quarterly Report on Form 10-Q, and after
taking into consideration the restatements and reclassification in this Form
10-Q/A, the amount of the restricted payments basket is $12 and includes results
through March 31, 2003. The indenture also requires the calculation of a
Consolidated Coverage Ratio, defined as the ratio of the aggregate amount of
EBITDA, as defined, for the four most recent fiscal quarters to Consolidated
Interest Expense, as defined, for the four most recent quarters. If this ratio
were to cease to be greater than 2.00 to 1.00 (2.25 to 1.00 after June 15,
2003), there would be certain restrictions on the Company's ability to incur
additional indebtedness and pay dividends, repurchase capital stock or make
certain other restricted payments. However, if the 9.25% Senior Notes were to
receive investment grade credit ratings from both Standard & Poor's ("S&P") and
Moody's Investor Services, Inc. ("Moody's") and meet certain other requirements
as specified in the indenture, certain of these covenants would no longer apply.
At March 31, 2003, the Company was in compliance with all covenants in the
indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625%
Senior Debentures.
The Company is currently rated BB+ by S&P and Ba1 by Moody's, which are
both non-investment grade ratings. On March 7, 2003, S&P lowered the Company's
credit rating from investment grade rating BBB- to non-investment grade rating
BB+ with a negative outlook, reflecting S&P's concern regarding the Company's
ability to generate the cash flow necessary to substantially improve its
financial profile during a period of economic uncertainties and higher raw
material costs. Moody's affirmed the Company's non-investment grade rating on
June 19, 2002, but revised its ratings outlook to negative from stable,
reflecting Moody's concern over the Company's cash flow performance in the
fourth quarter of 2001 and the first quarter of 2002. As a result of the
non-investment grade rating by both S&P and Moody's, the Company was required to
provide in April of 2003 a $2.5 letter of credit in accordance with a real
estate lease, which resulted in an equal reduction of availability under the
Revolving Loans. Furthermore, the Company could be required to cash
collateralize the mark-to-market positions of certain derivative instruments
dependent upon the market value of these instruments. Based on the current
market value of the instruments, the Company is not required to place any funds
on deposit with the counterparty to these transactions.
The Company uses gold as a component in a catalyst in the Company's La
Porte, Texas facility. In April 1998, the Company entered into an agreement that
provides the Company with the right to use gold owned by a third party for a
five-year term. As a result of a change in accounting for this agreement, the
Company's financial statements were restated as more fully described in Note 2.
In April 2003, the Company renewed this agreement for a one-year term. The
renewed agreement requires the Company to either deliver the gold to the
counterparty at the end of the term or pay to the counterparty an amount equal
to its then-current value. The renewed agreement provides that if the Company is
downgraded below BB by S&P or Ba2 by Moody's, the third party could require the
Company to purchase the gold at its then-current value. The value of the gold
and the Company's obligation under this agreement was $13 and $14 at March 31,
2003 and December 31, 2002, respectively. The Company's obligation under this
agreement is included in Other short-term borrowings. The change in value of the
gold and the Company's obligation under this agreement, which is included in
Selling, development and administrative expense,
14
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
was a gain of $1 for the three months ended March 31, 2003, and a loss of $1 for
the three months ended March 31, 2002. In April 2003, the Company entered into a
forward purchase agreement in order to mitigate the risk of change in the market
price of gold.
Note 8 - Derivative Instruments and Hedging Activities
The Company is exposed to market risk, such as changes in currency exchange
rates, interest rates and commodity pricing. To manage the volatility relating
to these exposures, the Company selectively enters into derivative transactions
pursuant to the Company's policies for hedging practices. Designation is
performed on a specific exposure basis to support hedge accounting. The changes
in fair value of these hedging instruments are offset in part or in whole by
corresponding changes in the fair value or cash flows of the underlying
exposures being hedged. The Company does not hold or issue derivative financial
instruments for speculative or trading purposes.
Foreign Currency Exposure Management: The Company manufactures and sells
its products in a number of countries throughout the world and, as a result, is
exposed to movements in foreign currency exchange rates. The primary purpose of
the Company's foreign currency hedging activities is to manage the volatility
associated with foreign currency purchases and foreign currency sales. The
Company utilizes forward exchange contracts with various terms. As of March 31,
2003, these contracts had expiration dates no later than March 31, 2004.
The Company utilizes forward exchange contracts with contract terms
normally lasting less than three months to protect against the adverse effect
that exchange rate fluctuations may have on foreign currency denominated trade
receivables and trade payables. These derivatives have not been designated as
hedges for accounting purposes. The gains and losses on both the derivatives and
the foreign currency denominated trade receivables and payables are recorded in
current earnings. Net amounts included in earnings, which offset similar amounts
from foreign currency denominated trade receivables and payables, were not
significant in the three months ended March 31, 2003 and were losses of $2 in
the three months ended March 31, 2002.
In addition, the Company utilizes forward exchange contracts that qualify
as cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales and inventory purchases. Gains and losses on
these instruments are deferred in other comprehensive income ("OCI") until the
underlying transaction is recognized in earnings. The earnings impact is
reported either in Net sales or Cost of products sold to match the underlying
transaction being hedged. Net amounts on forward exchange contracts designated
as cash flow hedges reclassified to earnings to match the gain or loss on the
underlying transaction being hedged were insignificant for the three months
ended March 31, 2003 and 2002. Hedge ineffectiveness had no significant impact
on earnings for the first quarter of 2003 and 2002. No forward exchange contract
cash flow hedges were discontinued during the first quarter of 2003 and 2002.
The Company estimates that net losses of approximately $6 ($4 net of tax) on
foreign currency cash flow hedges included in OCI at March 31, 2003 will be
reclassified to earnings during the next twelve months.
Commodity Price Risk Management: Raw materials used by the Company are
subject to price volatility caused by demand and supply conditions and other
unpredictable factors. The Company selectively uses commodity swap arrangements
and commodity options to manage the volatility related to anticipated purchases
of natural gas with various terms. As of March 31, 2003, these instruments had
expiration dates no later than January 2004. Certain of these market instruments
are designated as cash flow hedges. The mark-to-market gain or loss on
qualifying hedges is included in OCI to the extent effective, and reclassified
into Cost of products sold in the period during which the hedged transaction
affects earnings. The mark-to-market gains or losses on ineffective portions of
hedges are recognized in Cost of products sold immediately. During the three
months ended March 31, 2003 and 2002, net gains of $1 and net losses of $2,
respectively, on commodity swaps designated as cash flow hedges were
reclassified to Cost of products sold to match the gain on the underlying
transaction being hedged. Hedge ineffectiveness had no significant impact on
loss for the first quarter of 2003 and 2002. Net gains on commodity swap cash
flow hedges that were discontinued in the first quarter of 2003 were
insignificant and no commodity swap cash flow hedges were discontinued in 2002.
The Company estimates that net gains on commodity swaps included in OCI at March
31, 2003 that will be reclassified to earnings during the next twelve months
will not be significant.
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
In addition, the Company utilizes commodity swap and option arrangements to
manage the volatility related to anticipated purchases of certain commodities, a
portion of which exposes the Company to natural gas price risk. These
derivatives have not been designated as hedges for accounting purposes. The
gains and losses on these market instruments are recorded in current earnings.
Net gains included in earnings were not significant in the three months ended
March 31, 2003.
Interest Rate Risk Management: The Company selectively uses derivative
instruments to manage its ratio of debt bearing fixed interest rates to debt
bearing variable interest rates. At March 31, 2003, the Company had outstanding
interest rate swap agreements with a notional amount of $225, which are
designated as fair value hedges of underlying fixed-rate obligations. The fair
value of these interest rate swap agreements was approximately $5 at March 31,
2003 resulting in an increase to long-term debt carrying value and the
recognition of a corresponding swap asset. The gains and losses on both the
interest rate swaps and the hedged portion of the underlying debt are recorded
in Interest expense. In addition, at March 31, 2003, the Company had outstanding
an interest forward rate agreement with a notional amount of $50, which is
designated as a cash flow hedge of outstanding variable rate debt. The Company
also had interest forward rate agreements with a notional amount of $100, which
have not been designated as hedges for accounting purposes. The gains and losses
on these derivatives are recorded in the current period in interest expense. The
fair value of these interest rate swap agreements was not significant at March
31, 2003. Hedge ineffectiveness had no significant impact on earnings for the
first quarter of 2003 and 2002.
Note 9 - Comprehensive Loss
The following table sets forth the components of other comprehensive income
(loss) and total comprehensive loss:
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated - (Restated -
See Note 2) See Note 2)
Net loss.................................................... $(27) $(338)
Other comprehensive income (loss)
Net (losses) gains on derivative financial instruments... (3) 5
Minimum pension liability adjustment..................... -- 1
Currency translation adjustment.......................... 13 (1)
---- -----
Total comprehensive loss.................................... $(17) $(333)
==== =====
Note 10 - Commitments and Contingencies
Legal and Environmental: The Company and various Company subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. These include several proceedings alleging injurious exposure
of plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries. Typically, such
proceedings involve claims made by many plaintiffs against many defendants in
the chemical industry. Millennium Petrochemicals is one of a number of
defendants in 80 active premises-based asbestos cases (i.e., where the alleged
exposure to asbestos-containing materials was to employees of third-party
contractors or subcontractors on the premises of certain facilities, and did not
relate to any products manufactured or sold by the Company or any of its
predecessors). Millennium Petrochemicals is also one of a number of defendants
in one inactive premises-based asbestos case where the court placed the claim on
a formal registry for dormant claims, and for which no defense costs are being
incurred. Millennium Petrochemicals is responsible for these premises-based
cases as a result of its indemnification obligations under the Company's
agreements with Equistar; however, Equistar will be required to indemnify
Millennium Petrochemicals for any such claims filed on or after December 1, 2004
related to the assets or businesses contributed by Millennium Petrochemicals to
Equistar. Various other Company subsidiaries and alleged former subsidiaries are
among a number of defendants in 50 active premises-based asbestos cases. The
Company believes that it has valid defenses to these proceedings and is
defending them vigorously. However, litigation is subject to uncertainties and
the Company is unable to guarantee the outcome of these proceedings. In
addition, the Company is subject to known
16
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
liabilities as to which it is currently not possible to make an estimate, and
may be subject to potential unknown liabilities associated with its present and
former operations, including environmental liabilities, arising from the
operations of its predecessors and prior owners or operators of its sites or
operations for which it may be responsible.
Together with other alleged past manufacturers of lead-based paint and lead
pigments for use in paint, the Company, a current subsidiary, as well as alleged
predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, counties, school districts, individuals and the State of
Rhode Island, and seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and public nuisance. Legal proceedings
relating to lead pigment or paint are in various procedural stages or pre-trial,
post-trial and post-dismissal settings.
One proceeding relating to lead pigment or paint was tried in 2002. On
October 29, 2002, after a trial in which the jury deadlocked, the court in the
State of Rhode Island v. Lead Industry Association, Inc., et al, commenced in
the Superior Court of Providence, Rhode Island, on October 13, 1999, declared a
mistrial. The sole issue before the jury in this phase of the proceeding was
whether lead pigment in paint in and on public and private Rhode Island
buildings constitutes a "public nuisance." On March 20, 2003, the court denied
the motions for the judgment as a matter of law filed by both sides during and
after the trial. The State of Rhode Island may seek a new trial.
There are eleven pending legal proceedings relating to lead pigment or
paint in various pre-trial stages. There are three pending legal proceedings
relating to lead pigment or paint that were dismissed after summary judgment was
granted by the court in favor of the defendants, but are now pending appeal.
There are four legal proceedings relating to lead pigment or paint which have
been voluntarily dismissed by the plaintiffs. There is also one legal proceeding
relating to lead pigment or paint that was dismissed after summary judgment was
granted by the court in favor of the defendants, but which has not been
appealed. There are four legal proceedings relating to lead pigment or paint
that were abated under the laws of the State of Texas pending the resolution of
an appeal in another legal proceeding involving lead pigment or paint where
summary judgment was granted by the court in favor of one defendant. During the
abatement period, expected to last one to two years, no defense costs will be
incurred for the abated legal proceedings. Finally, there are six legal
proceedings relating to lead pigment or paint that have been filed with a court,
are pending, but have yet to be formally served on the Company, any of its
subsidiaries, or alleged predecessor companies.
The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has not accrued
any liabilities for any lead-based paint and lead pigment litigation. The
Company has insurance policies that potentially provide approximately one
billion dollars in indemnity coverage for lead-based paint and lead pigment
litigation. As a result of insurance coverage litigation initiated by the
Company, an Ohio trial court issued a decision in 2002 effectively requiring
certain insurance carriers to resume paying defense costs in the lead-based
paint and lead pigment cases. Indemnity coverage was not at issue in the Ohio
court's decision. The insurance carriers may appeal the Ohio decision regarding
defense costs, and they have in the past and may in the future attempt to deny
indemnity coverage if there is ever a settlement or an adverse judgment in any
lead-based paint or lead pigment case.
In 1986, a predecessor of a company that is now a subsidiary of the Company
sold its recently acquired Glidden Paints business. As part of that sale, the
seller agreed to indemnify the purchaser against certain claims made during the
first eight years after the sale; the purchaser agreed to indemnify the seller
against such claims made after the eight-year period. With the exception of the
two cases discussed below, all pending lead-based paint and lead pigment
litigation involving the Company and its subsidiaries, including the Rhode
Island case, was filed after the eight-year period. Accordingly, the Company
believes that it is entitled to full indemnification from the purchaser against
lead-based paint and lead pigment cases filed after the eight-year period. The
purchaser disputes that it has such an indemnification obligation, and claims
that the seller must indemnify it. Since the Company's defense costs to date
largely have been covered by insurance and there never has been a settlement
paid by, nor any judgment rendered against, the Company (or any other company
sued in any lead-based paint or lead pigment litigation), the parties'
indemnification claims have not been ruled on by a court.
17
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
A current subsidiary and an alleged predecessor company are parties to the
only two remaining cases originally filed within the eight-year period following
the 1986 sale of the Glidden Paints business referred to above. In the first of
these cases, The City of New York, et al. v. Lead Industries Association, Inc.,
et al., commenced in the Supreme Court of the State of New York on June 8, 1989,
the New York City Housing Authority brought an action relating to tens of
thousands of public housing units. All claims in that case have been dropped
except for those relating to two housing projects. The other remaining case,
Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common
Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes five minors as
plaintiffs. Dispositive motions were filed in that case in late 2002 and have
yet to be ruled on by the court.
The Company believes that it has valid defenses to all pending lead-based
paint and lead pigment proceedings and is vigorously defending them. However,
litigation is inherently subject to many uncertainties. There can be no
assurance that additional lead-based paint and lead pigment litigation will not
be filed against the Company or its subsidiaries in the future asserting similar
or different legal theories and seeking similar or different types of damages
and relief. While an outcome such as that reached in the Rhode Island proceeding
may have a positive effect on the lead-based paint and lead pigment litigation
against the Company, its subsidiaries and other defendants by reducing the
number and nature of future claims and proceedings, other adverse court rulings
or determinations of liability, among other factors, could encourage an increase
in the number of future claims and proceedings. In addition, from time to time,
legislation and administrative regulations have been enacted or proposed to
impose obligations on present and former manufacturers of lead-based paint and
lead pigment respecting asserted health concerns associated with such products
or to overturn successful court decisions. Due to the uncertainties involved,
the Company is unable to predict the outcome of lead-based paint and lead
pigment litigation, the number or nature of possible future claims and
proceedings, or the effect that any legislation and/or administrative
regulations may have on the Company or its subsidiaries. In addition, management
cannot reasonably estimate the scope or amount of the costs and potential
liabilities related to such litigation, or any such legislation and regulations.
Accordingly, the Company has not accrued any liabilities for such litigation.
However, based upon, among other things, the outcome of such litigation to date,
including the dismissal of most of the over 50 lawsuits brought in recent years,
management does not currently believe that the costs or potential liabilities
ultimately determined to be attributable to the Company arising out of such
litigation will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
The Company's businesses are subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances concerning, among other things,
emissions to the air, discharges and releases to land and water, the generation,
handling, storage, transportation, treatment and disposal of wastes and other
materials and the remediation of environmental pollution caused by releases of
wastes and other materials (collectively, "Environmental Laws"). The operation
of any chemical manufacturing plant and the distribution of chemical products
entail risks under Environmental Laws, many of which provide for substantial
fines and criminal sanctions for violations. There can be no assurance that
significant costs or liabilities will not be incurred with respect to the
Company's operations and activities. In particular, the production of TiO[u]2,
TiCl[u]4, VAM, acetic acid, methanol and certain other chemicals involves the
handling, manufacture or use of substances or compounds that may be considered
to be toxic or hazardous within the meaning of certain Environmental Laws, and
certain operations have the potential to cause environmental or other damage.
Significant expenditures including facility-related expenditures could be
required in connection with any investigation and remediation of threatened or
actual pollution, triggers under existing Environmental Laws tied to production
or new requirements under Environmental Laws.
The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flow in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the Texas Commission on Environmental Quality (the
"TCEQ") submitted a plan to the United States Environmental Protection Agency
("EPA") requiring the eight-county Houston/Galveston, Texas area to come into
compliance with the National Ambient Air Quality Standard for ozone by 2007.
These requirements, if implemented, would mandate significant reductions of
nitrogen oxide ("NOx") emissions requiring increased capital investment by
Equistar of between $200 and $260 before the 2007 regulatory deadline, as well
as create higher annual operating costs. This result could potentially affect
cash distributions from Equistar to the Company. In January 2001, Equistar,
individually and as part of an industry coalition, filed a lawsuit in State
District Court in Travis County, Texas seeking adoption of an alternative plan
for air quality improvement. In response to the lawsuit, the TCEQ conducted an
accelerated scientific review during 2001 and 2002. In December
18
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
2002, the TCEQ adopted revised rules, which changed the required NOx emission
reduction levels from 90% to 80% while requiring new controls on emissions of
highly reactive volatile organic compounds ("HRVOCs"), such as ethylene,
propylene, butadiene and butanes. These new rules still require approval by the
EPA. Based on the 80% NOx reduction requirement, Equistar estimates that its
aggregate related capital expenditures could total between $165 and $200 before
the 2007 deadline, and could result in higher annual operating costs. Equistar
is still assessing the impact of the new HRVOC control requirements.
Additionally, the TCEQ plans to make a final review of these rules, with final
rule revisions to be adopted by May 2004. The timing and amount of these
expenditures are subject to regulatory and other uncertainties, as well as
obtaining the necessary permits and approvals. At this time, there can be no
guarantee as to the ultimate capital cost of implementing any final plan
developed to ensure ozone attainment by the 2007 deadline.
From time to time, various agencies may serve cease and desist orders or
notices of violation on an operating unit or deny its applications for certain
licenses or permits, in each case alleging that the practices of the operating
unit are not consistent with regulations or ordinances. In some cases, the
relevant operating unit may seek to meet with the agency to determine mutually
acceptable methods of modifying or eliminating the practice in question. On
April 14, 2003, a subsidiary of the Company received Proposed Director's Final
Findings and Orders from the Ohio Environmental Protection Agency (the "Ohio
EPA"), for alleged violations of Ohio environmental regulations. The Ohio EPA
proposed a penalty in the amount of one hundred seventy-five thousand dollars.
The Company disputes the findings of the Ohio EPA. The Company and the Ohio EPA
are currently negotiating a resolution of this matter. The Company believes that
its operating units generally operate in compliance with applicable regulations
and ordinances in a manner that should not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties (the "PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites or facilities currently or
previously owned, operated or used by the Company's current or former
subsidiaries or their predecessors, some of which are on the Superfund National
Priorities List of the EPA or similar state lists. These proceedings seek
cleanup costs, damages for personal injury or property damage, or both. Based
upon third-party technical reports, the projections of outside consultants or
outside counsel, or both, the Company has estimated its individual exposure at
these sites to be between ten thousand dollars and $26. In the most significant
of these proceedings, a subsidiary is named as one of four PRPs at the Kalamazoo
River Superfund Site in Michigan. The site involves contamination of river
sediments and floodplain soils with polychlorinated biphenyls. Originally
commenced on December 2, 1987 in the United States District Court for the
Western District of Michigan as Kelly v. Allied Paper, Inc., et al., the matter
was stayed and is being addressed under the Comprehensive Environmental
Response, Compensation and Liability Act. In October 2000, the Kalamazoo River
Study Group (the "KRSG"), of which one of the Company's subsidiaries is a
member, submitted to the State of Michigan a Draft Remedial Investigation and
Draft Feasibility Study (the "Draft Study"), which evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
collective cost of approximately $73. During 2001, additional sampling
activities were performed in discrete parts of the river. At the end of 2001,
the EPA took responsibility for the site at the request of the State. While the
State has submitted comments to the EPA on the Draft Study, the EPA has yet to
similarly comment. The Company has estimated its liability at this site based
upon the KRSG's recommended remedy. Guidance as to how the EPA will likely
proceed with further evaluation and remediation, if required, at the Kalamazoo
site is expected by early 2004. At that time, the Company's estimate of its
liability will be reevaluated. The Company's ultimate liability for the
Kalamazoo site will depend on many factors that have not yet been determined,
including the ultimate remedy selected by the EPA, the number and financial
viability of the other members of the KRSG as well as of other PRPs outside the
KRSG, and the determination of the final allocation among the members of the
KRSG and other PRPs.
The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities, is between $67 and $90 and has accrued $73 as of March 31, 2003. The
Company expects that cash expenditures related to these potential liabilities
will be made over a number of years, and will not be concentrated in any single
year. This accrual also reflects the fact that certain Company subsidiaries have
contractual obligations to indemnify other parties against certain environmental
and other liabilities. For example, the Company agreed as part of its demerger
(i.e., spin-off) from Hanson plc ("Hanson"), a company incorporated in the
United Kingdom, on October 1, 1996 to indemnify Hanson and certain of its
subsidiaries against certain of such contractual indemnification obligations,
and Millennium Petrochemicals agreed as part of the December 1, 1997 formation
of Equistar to indemnify Equistar for certain liabilities related to the assets
contributed by Millennium Petrochemicals
19
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
to Equistar in excess of $7, which threshold was exceeded in 2001. The terms of
these indemnification agreements do not limit the maximum potential future
payments to the indemnified parties. The maximum amount of future
indemnification payments is dependent upon many factors and is not practicable
to estimate.
No assurance can be given that actual costs for environmental matters will
not exceed accrued amounts or that estimates made with respect to
indemnification obligations will be accurate. In addition, it is possible that
costs will be incurred with respect to contamination, indemnification
obligations or other environmental matters that currently are unknown or as to
which it is currently not possible to make an estimate.
On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit against
Millennium Inorganic Chemicals Inc., a wholly owned operating subsidiary of the
Company, alleging breach of contract and other related causes of action arising
out of a contract between the two parties for the supply of packaging equipment.
In the suit, Slidell seeks unspecified monetary damages. The Company believes it
has substantial defenses to these allegations and has filed a counterclaim
against Slidell.
The Company believes that it has valid defenses to the legal proceedings
described above and intends to defend these legal proceedings vigorously.
However, litigation is subject to many uncertainties and the Company cannot
guarantee the outcome of these proceedings. Based upon information currently
available, the Company does not believe that the outcome of these proceedings
will, either individually or in the aggregate, have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
20
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 11 - Operations by Business Segment
The Company's principal operations are managed and grouped as three
separate business segments: Titanium Dioxide and Related Products, Acetyls and
Specialty Chemicals. Operating income and expense not identified with the three
separate business segments, including certain of the Company's S,D&A costs not
allocated to its three business segments, employee-related costs from
predecessor businesses and certain other expenses, are reflected as Other. The
following is a summary of the Company's operations by business segment:
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated - (Restated -
See Note 2) See Note 2)
Net sales
Titanium Dioxide and Related Products ........... $288 $262
Acetyls ......................................... 102 65
Specialty Chemicals ............................. 25 24
---- ----
Total ........................................ $415 $351
==== ====
Operating income (loss)
Titanium Dioxide and Related Products ........... $ 21 $ 10
Acetyls ......................................... 7 (8)
Specialty Chemicals ............................. 2 4
Other ........................................... (3) 1
---- ----
Total ........................................ $ 27 $ 7
==== ====
Depreciation and amortization
Titanium Dioxide and Related Products ........... $ 22 $ 20
Acetyls ......................................... 3 3
Specialty Chemicals ............................. 2 2
---- ----
Total ........................................ $ 27 $ 25
==== ====
Capital expenditures
Titanium Dioxide and Related Products ........... $ 7 $ 12
Acetyls ......................................... -- --
Specialty Chemicals ............................. 1 1
Other ........................................... -- --
---- ----
Total ........................................ $ 8 $ 13
==== ====
March 31, December 31,
2003 2002
--------- ------------
Goodwill
Titanium Dioxide and Related Products ........... $ 58 $ 58
Acetyls ......................................... 48 48
---- ----
Total ........................................ $106 $106
==== ====
21
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 12 - Information on Equistar
The following is summarized financial information for Equistar:
March 31, December 31,
2003 2002
--------- ------------
Current assets ..................................... $1,180 $1,126
Noncurrent assets .................................. 3,863 3,926
------ ------
Total assets .................................... $5,043 $5,052
====== ======
Current liabilities ................................ $ 984 $ 714
Noncurrent liabilities ............................. 2,284 2,417
Partners' capital .................................. 1,775 1,921
------ ------
Total liabilities and partners' capital ......... $5,043 $5,052
====== ======
Three Months Ended
March 31,
-------------------
2003 2002
------ -------
Net sales .......................................... $1,641 $ 1,136
Operating loss ..................................... (96) (75)
Loss before cumulative effect of accounting
change .......................................... (146) (126)
Cumulative effect of accounting change ............. -- (1,053)
Net loss ........................................... (146) (1,179)
The Company recorded $30 related to its share of Equistar's write-down of
goodwill during the three months ended March 31, 2002. Even though the Company's
share (i.e., 29.5%) of Equistar's write-down is higher than the amount recorded
by the Company, most of the write-down was previously taken by the Company in
1999 when it wrote down its investment in Equistar by $639.
On March 31, 2003, Equistar completed transactions involving a 15-year
propylene supply arrangement and the sale of a polypropylene production facility
in Pasadena, Texas. Equistar received total cash proceeds of approximately $194,
including the value of the polypropylene inventory sold. Approximately $159 of
the total cash proceeds represented a partial prepayment under the propylene
supply arrangement.
In April 2003, Equistar completed a private placement of $450 of 10.625%
senior notes due in 2011. The proceeds, net of associated fees, are being used
to prepay $300 of 8.5% notes due in the first quarter of 2004, approximately
$122 of the $296 of outstanding term loans under Equistar's credit facility and
prepayment premiums of approximately $17.
22
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information
Millennium America, a wholly owned indirect subsidiary of the Company, is a
holding company for all of the Company's operating subsidiaries other than its
operations in the United Kingdom, France, Brazil and Australia. Millennium
America is the issuer of the 7% Senior Notes, the 7.625% Senior Debentures, and
the 9.25% Senior Notes, and is the principal borrower under the Credit
Agreement. Millennium America guarantees all obligations under the Credit
Agreement. The 7% Senior Notes, the 7.625% Senior Debentures and the 9.25%
Senior Notes, as well as outstanding amounts under the Credit Agreement, are
guaranteed by the Company. Accordingly, the following Condensed Consolidating
Balance Sheets at March 31, 2003 and December 31, 2002, and the Condensed
Consolidating Statements of Operations and Cash Flows for each of the three
month periods ended March 31, 2003 and 2002, are provided for the Company as
supplemental financial information to the Company's consolidated financial
statements to disclose the financial position, results of operations and cash
flows of (i) the Company, (ii) Millennium America, and (iii) all subsidiaries of
the Company other than Millennium America (the "Non-Guarantor Subsidiaries").
The investment in subsidiaries of Millennium America and the Company are
accounted for by the equity method; accordingly, the shareholders' deficit of
Millennium America and the Company are presented as if each of those companies
and their respective subsidiaries were reported on a consolidated basis.
23
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals Inc.
America Inc. Chemicals Inc. Non-Guarantor and
(Issuer) (Guarantor) Subsidiaries Eliminations Subsidiaries
------------ -------------- ------------- ------------ --------------
March 31, 2003 (Restated - See Note 2)
--------------------------------------
ASSETS
Inventories ...................................... $ -- $ -- $ 393 $ -- $ 393
Other current assets ............................. 6 -- 426 -- 432
Property, plant and equipment, net ............... -- -- 852 -- 852
Investment in Equistar ........................... -- -- 520 -- 520
Investment in subsidiaries ....................... 287 78 -- (365) --
Other assets ..................................... 15 -- 31 -- 46
Goodwill ......................................... -- -- 106 -- 106
Due from parent and affiliates, net .............. 701 -- -- (701) --
------ ---- ------ ------- ------
Total assets .................................. $1,009 $ 78 $2,328 $(1,066) $2,349
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current maturities of long-term debt ............. $ 3 $ -- $ 5 $ -- $ 8
Other current liabilities ........................ 31 -- 401 -- 432
Long-term debt ................................... 1,230 -- 16 -- 1,246
Deferred income taxes ............................ -- -- 313 -- 313
Other liabilities ................................ -- -- 388 -- 388
Due to parent and affiliates, net ................ -- 139 562 (701) --
------ ---- ------ ------- ------
Total liabilities ............................. 1,264 139 1,685 (701) 2,387
Minority interest ................................ -- -- 23 -- 23
Shareholders' (deficit) equity ................... (255) (61) 620 (365) (61)
------ ---- ------ ------- ------
Total liabilities and shareholders' (deficit)
equity ..................................... $1,009 $ 78 $2,328 $(1,066) $2,349
====== ==== ====== ======= ======
December 31, 2002 (Restated - See Note 2)
-----------------------------------------
ASSETS
Inventories ...................................... $ -- $ -- $ 406 $ -- $ 406
Other current assets ............................. 10 -- 403 -- 413
Property, plant and equipment, net ............... -- -- 862 -- 862
Investment in Equistar ........................... -- -- 563 -- 563
Investment in subsidiaries ....................... 349 95 -- (444) --
Other assets ..................................... 15 -- 31 -- 46
Goodwill ......................................... -- -- 106 -- 106
Due from parent and affiliates, net .............. 638 -- -- (638) --
------ ---- ------ ------- ------
Total assets .................................. $1,012 $ 95 $2,371 $(1,082) $2,396
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current maturities of long-term debt ............. $ 3 $ -- $ 9 $ -- $ 12
Other current liabilities ........................ 8 -- 455 -- 463
Long-term debt ................................... 1,196 -- 16 -- 1,212
Deferred income taxes ............................ -- -- 337 -- 337
Other liabilities ................................ -- -- 388 -- 388
Due to parent and affiliates, net ................ -- 130 508 (638) --
------ ---- ------ ------- ------
Total liabilities ............................. 1,207 130 1,713 (638) 2,412
Minority interest ................................ -- -- 19 -- 19
Shareholders' (deficit) equity ................... (195) (35) 639 (444) (35)
------ ---- ------ ------- ------
Total liabilities and shareholders' (deficit)
equity ..................................... $1,012 $ 95 $2,371 $(1,082) $2,396
====== ==== ====== ======= ======
24
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except per share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals
America Inc. Chemicals Inc. Non-Guarantor Inc. and
(Issuer) (Guarantor) Subsidiaries Eliminations Subsidiaries
------------ -------------- ------------- ------------ ------------
Three Months Ended March 31, 2003
(Restated - See Note 2)
-----------------------
Net sales......................................... $ -- $ -- $ 415 $ -- $ 415
Cost of products sold............................. -- -- 331 -- 331
Depreciation and amortization..................... -- -- 27 -- 27
Selling, development and administrative expense... -- -- 30 -- 30
----- ----- ----- ---- -----
Operating income............................... -- -- 27 -- 27
Interest expense, net............................. (22) -- -- -- (22)
Intercompany interest income (expense), net....... 24 (1) (23) -- --
Loss on Equistar investment....................... -- -- (43) -- (43)
Equity in loss of subsidiaries.................... (40) (26) - 66 --
Other expense, net................................ -- -- (3) -- (3)
Income taxes...................................... (1) -- 16 -- 15
Cumulative effect of accounting change............ -- -- (1) -- (1)
----- ----- ----- ---- -----
Net loss....................................... $ (39) $ (27) $ (27) $ 66 $ (27)
===== ===== ===== ==== =====
Three Months Ended March 31, 2002
(Restated - See Note 2)
-----------------------
Net sales......................................... $ -- $ -- $ 351 $ -- $ 351
Cost of products sold............................. -- -- 293 -- 293
Depreciation and amortization..................... -- -- 25 -- 25
Selling, development and administrative expense... -- -- 26 -- 26
----- ----- ----- ---- -----
Operating income............................... -- -- 7 -- 7
Interest (expense) income, net.................... (22) -- 1 -- (21)
Intercompany interest income (expense), net....... 27 (1) (26) -- --
Loss on Equistar investment....................... -- -- (37) -- (37)
Equity in loss of subsidiaries.................... (347) (337) -- 684 --
Other expense, net................................ -- -- (2) -- (2)
Income taxes...................................... (2) -- 22 -- 20
Cumulative effect of accounting change............ -- -- (305) -- (305)
----- ----- ----- ---- -----
Net loss....................................... $(344) $(338) $(340) $684 $(338)
===== ===== ===== ==== =====
25
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except per share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals
America Inc. Chemicals Inc. Non-Guarantor Inc. and
(Issuer) (Guarantor) Subsidiaries Eliminations Subsidiaries
------------ -------------- ------------- ------------ ------------
Three Months Ended
March 31, 2003
--------------
Cash flows from operating activities ............. $ 25 $(1) $(38) $-- $(14)
---- --- ---- --- ----
Cash flows from investing activities
Capital expenditures .......................... -- -- (8) -- (8)
---- --- ---- --- ----
Cash used in investing activities .......... -- -- (8) -- (8)
---- --- ---- --- ----
Cash flows from financing activities
Dividends to shareholders ..................... -- (9) -- -- (9)
Proceeds from long-term debt .................. 95 -- 1 -- 96
Repayment of long-term debt ................... (61) -- (5) -- (66)
Intercompany .................................. (64) 10 54 -- --
Decrease in notes payable ..................... -- -- (1) -- (1)
---- --- ---- --- ----
Cash (used in) provided by financing
activities .............................. (30) 1 49 -- 20
---- --- ---- --- ----
Effect of exchange rate changes on cash .......... -- -- 2 -- 2
---- --- ---- --- ----
(Decrease) increase in cash and cash
equivalents ................................... (5) -- 5 -- --
Cash and cash equivalents at beginning of
year .......................................... 6 -- 119 -- 125
---- --- ---- --- ----
Cash and cash equivalents at end of period ....... $ 1 $-- $124 $-- $125
==== === ==== === ====
Three Months Ended
March 31, 2002
--------------
Cash flows from operating activities ............. $ 18 $(2) $(49) $-- $(33)
---- --- ---- --- ----
Cash flows from investing activities
Capital expenditures .......................... -- -- (13) -- (13)
---- --- ---- --- ----
Cash used in investing activities .......... -- -- (13) -- (13)
---- --- ---- --- ----
Cash flows from financing activities
Dividends to shareholders ..................... -- (9) -- -- (9)
Proceeds from long-term debt .................. 95 -- 2 -- 97
Repayment of long-term debt ................... (85) -- (2) -- (87)
Intercompany .................................. (31) 11 20 -- --
Increase in notes payable ..................... -- -- 1 -- 1
---- --- ---- --- ----
Cash (used in) provided by financing
activities .............................. (21) 2 21 -- 2
---- --- ---- --- ----
Effect of exchange rate changes on cash .......... -- -- 1 -- 1
---- --- ---- --- ----
Decrease in cash and cash equivalents ............ (3) -- (40) -- (43)
Cash and cash equivalents at beginning of
year .......................................... 5 -- 109 -- 114
---- --- ---- --- ----
Cash and cash equivalents at end of period ....... $ 2 $-- $ 69 $-- $ 71
==== === ==== === ====
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Restatement of Financial Statements
The Company restated its financial statements for the years 1998 through
2002 and for the first quarter of 2003, to correct errors in its accounting for
deferred taxes relating to its Equistar investment, the calculation of its
pension benefit obligations and its accounting for a multi-year precious metals
agreement. The Company's independent auditors, PwC, concur with the Company's
decision to restate its financial statements.
Deferred tax assets and liabilities and deferred tax expense for the years
1998 through 2002 and for the first quarter of 2003 were restated to
appropriately account for the Company's book and tax basis differences
associated with its investment in Equistar in accordance with SFAS No. 109. The
accounting for deferred taxes associated with Equistar was previously based on
the difference between book and tax basis of a subsidiary that holds the
partnership investment. Deferred tax is now based on the difference between book
and tax basis of the actual partnership interest held by the subsidiary. The
effect of the adjustments to deferred tax assets and liabilities was to increase
net deferred tax liabilities by $425 million, increase Accumulated deficit by
$440 million and decrease Cumulative other comprehensive loss by $15 million at
December 31, 2002. The effect of the adjustments to Benefit from income taxes
for the three months ended March 31, 2003 was an increase of $24 million, and
for the three months ended March 31, 2002 was less than $1 million. In addition,
during the course of its review of its deferred taxes, the Company concluded
that its realization of a deferred tax asset of $10 million related to its
French subsidiaries was unlikely. The elimination of this deferred tax asset as
of December 31, 2002 resulted in an increase of $10 million in net deferred tax
liabilities and Accumulated deficit.
The Company's accrued pension benefit costs, included in Other liabilities,
and its net periodic pension benefit cost were restated for 2002 and for the
first quarter of 2003. The restatement corrected errors in the calculation of
the Company's pension liability. The Company's principal actuarial firm
incorrectly utilized participant data in its 2002 actuarial valuation and
underestimated the accumulated pension benefit obligation at December 31, 2002
for the Company's largest domestic pension plan. The effect of these corrections
was to increase accrued pension benefit cost by $53 million, decrease net
deferred tax liabilities by $19 million, increase Accumulated deficit by $1
million and increase Cumulative other comprehensive loss by $33 million at
December 31, 2002. The changes to net periodic pension benefit cost due to this
restatement for the three months ended March 31, 2003 and 2002 were each less
than $1 million.
The Company also restated its financial statements for the years 1998
through 2002 and for the first quarter of 2003 due to a change in accounting
treatment for a five-year agreement entered into in 1998 that provides the
Company with the right to use gold owned by a third party, as more fully
described in Note 7 to the Consolidated Financial Statements included in this
Quarterly Report. The Company previously accounted for this agreement as an
operating lease but is now accounting for this agreement as a secured financing.
As a result, Other assets were increased by $4 million, Current liabilities were
increased by $13 million, net deferred tax liabilities were decreased by $4
million, and Accumulated deficit was increased by $5 million at December 31,
2002. This restatement changed Operating income by less than $1 million for the
three months ended March 31, 2003 and decreased Operating income for the three
months ended March 31, 2002 by $1 million.
In addition, $2 million of S,D&A costs allocated to the Company's
investment in Equistar and previously reported in Loss on Equistar investment
for each of the three months ended March 31, 2003 and 2002 have been
reclassified to Selling, development and administrative expense in the Company's
Consolidated Statements of Operations.
The Company has filed an amendment to its Annual Report on Form 10-K for
the year ended December 31, 2002 to reflect the above-described corrections.
Introduction
The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls, and Specialty
Chemicals. Operating income and expense not identified with the three separate
business segments, including certain of the Company's S,D&A costs not allocated
to its three business segments, employee-related costs from predecessor
businesses and certain other expenses, are reflected as Other. The Company also
holds a 29.5% interest in Equistar, which is accounted for using the equity
method (see Note 1 to the Consolidated Financial Statements included in this
Quarterly Report.) A discussion of Equistar's financial results for the relevant
27
period is included below, as the Company's interest in Equistar represents a
significant component of the Company's assets and Equistar's results can have a
significant effect on the Company's consolidated results of operations.
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the discussion included
in its Annual Report on Form 10-K for the year ended December 31, 2002, as
amended. The Company has restated its financial statements for the years 1998
through 2002 and for the first quarter of 2003 as described in "Restatement of
Financial Statements" above and in Note 2 to the Consolidated Financial
Statements included in this Quarterly Report.
In connection with the forward-looking statements that appear in the
following information, please carefully review the Cautionary Statements in the
"Disclosure Concerning Forward-Looking Statements" on Pages 2 and 3 of this
Quarterly Report.
Results of Consolidated Operations
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated)* (Restated)*
(Millions, except share data)
Net sales.............................................. $ 415 $ 351
Operating income....................................... 27 7
Loss on Equistar investment............................ (43) (37)
Loss before cumulative effect of accounting change..... (26) (33)
Net loss............................................... (27) (338)
Basic and diluted loss per share:
Before cumulative effect of accounting change....... (0.41) (0.52)
After cumulative effect of accounting change........ (0.43) (5.32)
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
The Company's first quarter loss before the cumulative effect of accounting
changes was $26 million or $0.41 per share for 2003 and $33 million or $0.52 per
share for 2002. The cumulative effect of the accounting change for SFAS No. 143,
reported in the first quarter of 2003 due to required changes in the method for
recognition of asset retirement obligations, was $1 million or $0.02 per share.
The cumulative effect of the accounting change for SFAS No. 142, reported in the
first quarter of 2002 due to the write-off of certain of the Company's and
Equistar's goodwill, was $305 million or $4.80 per share.
First quarter 2003 operating income of $27 million increased by $20 million
from the first quarter of 2002, as operating income increased by $11 million in
the Titanium Dioxide and Related Products business segment and by $15 million in
the Acetyls business segment, but was down by $2 million in the Specialty
Chemicals business segment and down by $4 million in Other operating income and
expense not identified with the three separate business segments.
Net sales of $415 million for the first quarter of 2003 increased by $64
million or 18% compared to the same period of 2002 primarily due to higher sales
prices in the Titanium Dioxide and Related Products business segment and higher
sales prices and sales volume in the Acetyls business segment. TiO[u]2 and
acetyls average selling prices, after reaching a low in the first quarter of
2002, rose steadily from the second quarter of 2002 through the end of the first
quarter of 2003 as certain of the Company's worldwide price increases for
TiO[u]2 and for Acetyls' principal products announced during 2002 and the first
quarter of 2003 were gradually realized. Foreign currency strength against the
US dollar, except for the Brazilian real, also contributed to this price
improvement. Specialty Chemicals revenue increased by $1 million or 4% over the
prior year quarter.
28
Manufacturing costs were generally higher for most of the Company's
products in the first quarter of 2003 as compared with the same period of 2002
primarily due to higher utility and feedstock costs, particularly natural gas
and ethylene, the unfavorable effect of translating local currency manufacturing
costs into a weaker US dollar, and maintenance and environmental costs,
partially offset by higher fixed cost absorption due to higher plant operating
rates. In the Acetyls business segment, 2002 costs were increased by $7 million
due to unfavorable fixed-price natural gas purchase contracts, which expired at
the end of the first quarter of 2002.
First quarter 2003 S,D&A costs of $30 million increased by $4 million or
15% from the prior year quarter, primarily due to increased employee-related
costs, lower foreign currency transaction gains and a full quarter of costs
related to the Company's European receivables securitization program in the
three months ended March 31, 2003 compared to the same period last year.
The Company reported a pre-tax loss on its investment in Equistar of $43
million for the first quarter of 2003, an increase of $6 million compared to a
pre-tax loss of $37 million for the same quarter last year. The pre-tax loss for
the first quarter of 2003 includes $4 million representing the Company's share
of Equistar's loss on the sale of assets (see Note 12 to the Consolidated
Financial Statements included in this Quarterly Report). Product margins for
Equistar's Petrochemicals and Polymers segments were lower in the first quarter
of 2003 compared to the same quarter last year as a result of rapid increases in
raw material and energy costs. Equistar implemented significant price increases
in the first quarter of 2003 for substantially all of its petrochemicals and
polymers products; however, the timing of implementation of these price
increases was such that Equistar experienced decreases in average product
margins in the first quarter of 2003 compared to the first quarter of 2002.
Outlook for 2003
The Company announced additional price increases for TiO[u]2 during the
first quarter of 2003; however, contracts with most of the Company's
large-volume TiO[u]2 customers include periods of price protection. Therefore,
the benefits of TiO[u]2 price increases, if implementation is successful, may
not be fully realized by the Company for several months after the effective
date of the price increases. The success of price increases is dependent on
continuing economic recovery and accompanying strong customer demand. Earnings
in the TiO[u]2 business segment are expected to improve in the second quarter of
over the first quarter as sales volume should increase seasonally due to the
North American and European coatings season. Manufacturing costs per metric ton
are also expected to improve with higher operating rates and global TiO[u]2
price increases should continue to be gradually realized.
Acetyls profitability in the second quarter of 2003 is expected to be lower
than in the first quarter as anticipated lower natural gas feedstock costs are
expected to be offset by the adverse effects of an extended acetic acid plant
shutdown.
Specialty Chemicals earnings in the second quarter of 2003 are expected to
be comparable to the first quarter of 2003 as new product sales growth
continues. Crude sulfate turpentine ("CST") costs are expected to slightly
increase in the second quarter.
While Equistar's raw material and energy costs peaked in late February and
early March 2003, they have since moderated. Sales price increases in Equistar's
core ethylene chain and co-products, coupled with the moderation of raw material
and energy costs, have improved ethylene production economics, particularly for
production using crude oil-based raw materials. However, the combination of
higher product prices and global economic and political uncertainty is
negatively impacting demand and Equistar sales volume early in the second
quarter of 2003. Global economic weakness, combined with uncertainty following
the war in Iraq, make it difficult to provide a near-term outlook. Nevertheless,
product margins have improved and Equistar believes that, barring further
economic deterioration, undue pricing pressure or a resumption of raw material
and energy cost increases, the industry is positioned to show a significant
near-term improvement as demand recovers. More importantly, the longer-term
fundamentals in its business lines are favorable, and Equistar's operations are
expected to benefit when current global events and economic uncertainties are
resolved.
With the Company's continued focus on cost reduction, improved prices for
its major products, and moderation of natural gas prices from the very high
levels experienced in the first quarter of 2003, overall prospects for the
Company's majority-owned businesses are expected to be favorable for 2003
compared to 2002; however, the current global economic uncertainties and
volatile energy markets could significantly adversely affect these prospects as
well as the prospects of Equistar.
29
Independent Review
The Company recently commissioned a review by an outside independent third
party of its business plan, strategic options and competitive position. The
findings of this review, first, confirmed the attractiveness of the TiO[u]2 and
acetyls businesses and their ability to offer an opportunity for above-average
returns over the next several years. Second, they affirmed the importance of
continuous improvement in our cost structure while delivering improved value to
our customers. Accordingly, the Company currently intends to focus its resources
primarily on efforts to increase its efficiency and improve its profitability.
Third, the Company's interest in Equistar provides considerable potential for
future cash generation and debt reduction; current industry expectations
regarding improvements in the ethylene/polyethylene cycle correspond well with
the Company's long-term debt maturity schedule. At the same time, the Company
will continue to review its strategic options for Equistar.
The Company currently is undertaking a fresh and independent review of its
organizational structure to ensure alignment with the efficiency and
profitability priorities mentioned above.
Segment Analysis
Titanium Dioxide and Related Products
Three Months Ended
March 31,
------------------
2003 2002
---- ----
(Millions)
Net sales................................................... $288 $262
Operating income............................................ 21 10
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Operating income for the first quarter of 2003 of $21 million increased by
$11 million or 110% compared to the same quarter of 2002 as higher selling
prices ($34 million) more than offset the unfavorable effects of higher
manufacturing and other cost of sales ($20 million), higher S,D&A expenses ($2
million) and lower sales volume ($1 million).
Sales revenue in the first quarter of 2003 of $288 million increased by $26
million or 10% compared to the prior year quarter due to higher average selling
prices and foreign currency strength against the US dollar, except for the
Brazilian real, partially offset by lower sales volume. The first quarter
average TiO[u]2 selling price was 16% higher than the prior year quarter in US
dollar terms and 10% higher in local currencies. US dollar TiO[u]2 prices in the
first quarter of 2003 were higher than prices in the first quarter of 2002 in
all major geographic regions and across all major markets, reflecting the
realization of all or portions of the worldwide price increases for TiO[u]2
previously announced by the Company and most major producers during 2002 and the
first quarter of 2003, as well as the favorable effect of translating sales
denominated in stronger foreign currencies into US dollars. This was partially
offset by a 5% decrease in sales volume, as generally poorer weather compared to
the prior year and uncertain economic conditions held back demand and delayed
the traditional March start of the North American and European coatings seasons.
TiO[u]2 sales volume was lower than the prior year in all major geographic
regions globally except Central and South America.
Operating income in the first quarter of 2003 was decreased by $20 million
as a result of higher manufacturing and other cost of sales per metric ton in
2003 compared with the prior year quarter. TiO[u]2 manufacturing cost per metric
ton in the first quarter of 2003 was 12% higher than the same quarter last year
due to the unfavorable effect of translating local currency manufacturing costs
into a weaker US dollar, and higher costs for raw materials and utilities
(including higher natural gas costs) and increased maintenance and environmental
costs. These were partially offset by higher fixed cost absorption due to
increased production volume. The overall operating rate of the Company's TiO[u]2
plants in the first quarter of 2003 was 88%, up from 81% in the same period last
year.
S,D&A expenses increased by $2 million or 7% compared to the prior year
quarter, primarily due to increased employee-related costs, lower foreign
currency transaction gains and a full quarter of costs related to the Company's
European receivables securitization program in the three months ended March 31,
2003 compared to the same period last year.
30
Acetyls
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated)* (Restated)*
(Millions)
Net sales................................................... $102 $65
Operating income (loss)..................................... 7 (8)
----------
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Operating income in the Acetyls business segment of $7 million for the
three months ended March 31, 2003 increased by $15 million from an operating
loss of $8 million in the first quarter of 2002, primarily due to higher average
selling prices ($27 million) and lower S,D&A expenses ($2 million), partially
offset by increased production costs ($14 million).
Net sales for the first quarter of 2003 of $102 million increased by $37
million or 57% from the prior year, primarily due to selling prices that were
significantly above prior year levels. The aggregate US dollar price for vinyl
acetate monomer ("VAM") and acetic acid increased by 34% from the first quarter
of 2002 as worldwide price increases that were announced during 2002 and the
first quarter of 2003 for Acetyls' principal products were realized. Aggregate
first quarter of 2003 sales volume for VAM and acetic acid increased by 17% over
the first quarter of 2002, driven primarily by increased demand for acetic acid.
In the first quarter of 2003, production costs for VAM and acetic acid were
15% higher in comparison to the first quarter of 2002, primarily due to higher
utility and feedstock costs, particularly natural gas and ethylene. Natural gas
prices and, as a result, the cost of ethylene, increased significantly in the
first quarter of 2003 due to cold weather in certain regions of the US and
events in the Middle East. Feedstock costs during the first quarter of 2002 were
increased by $7 million due to unfavorable fixed-price natural gas purchase
contracts.
First quarter 2003 S,D&A expenses in the Acetyls business segment were $2
million lower than S,D&A expenses in the same period of 2002.
Specialty Chemicals
Three Months Ended
March 31,
------------------
2003 2002
------- --------
(Millions)
Net sales................................................... $25 $24
Operating income............................................ 2 4
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Operating income for the three months ended March 31, 2003 of $2 million
was $2 million or 50% lower than the three months ended March 31, 2002. The
decrease was primarily due to higher manufacturing and other cost of sales ($3
million), partially offset by higher sales volume ($1 million).
Net sales for the three months ended March 31, 2003 increased by $1 million
or 4% to $25 million compared to the three months ended March 31, 2002. The
weighted-average selling price for Specialty Chemicals products decreased by 1%
from the first quarter of 2002 due to the Company's implementation of a
competitive pricing structure in 2003 to regain and maintain market share. Sales
volume was up 7% from the first quarter of 2002 as volumes increased across all
product lines, particularly those sold in the European market.
31
The average cost of CST, the principal raw material for the business,
remained relatively level with the prior year quarter. Production costs and
other cost of sales increased in the first quarter of 2003 compared to the first
quarter of 2002 due to higher costs for raw materials other than CST and
production of a greater proportion of higher-cost products. Distribution costs
were higher due to increased freight costs resulting from higher export sales.
For the three months ended March 31, 2003, S,D&A costs were similar to
S,D&A costs in the same period of 2002.
Other
Three Months Ended
March 31,
-------------------------
2003 2002
----------- -----------
(Restated)* (Restated)*
(Millions)
Operating (loss) income..................................... $(3) $1
----------
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
Operating (loss) income not identified with the three separate business
segments for the three months ended March 31, 2003 was $4 million less than the
three months ended March 31, 2002, primarily due to lower income from employee
benefit plans related to predecessor businesses and other expenses not allocated
to the separate business segments.
Equistar
Three Months Ended
March 31,
-------------------------
2003 2002(1)
----------- -----------
(Restated)* (Restated)*
(Millions)
Loss, as reported by Equistar............................... $(146) $(126)
===== =====
Loss on Equistar investment, as reported by the Company..... (43) (37)
===== =====
----------
(1) Before cumulative effect of accounting change.
* The Company's financial statements have been restated as disclosed in Note
2 to the Consolidated Financial Statements included in this Quarterly
Report.
Three Months Ended March 31, 2003 Compared to the Three Months Ended March 31,
2002
The Company reported a pre-tax loss on its investment in Equistar of $43
million for the first quarter of 2003, an increase of $6 million compared to a
pre-tax loss of $37 million for the same quarter last year. The pre-tax loss for
the first quarter of 2003 includes $4 million representing the Company's share
of Equistar's loss on the sale of assets (see Note 12 to the Consolidated
Financial Statements included in this Quarterly Report).
Equistar reported a net loss in the first quarter of 2003 of $146 million
compared to a net loss before the cumulative effect of the change in accounting
for goodwill of $126 million in the first quarter of 2002. Results for the first
quarter of 2003 included a loss of $12 million from the sale of assets, and
results for the first quarter of 2002 included a $33 million negative impact
from certain above-market fixed price feedstock purchase contracts. The increase
in net loss was primarily due to lower product margins as a result of rapid
increases in raw material and energy costs in the first quarter of 2003 compared
to the first quarter of 2002. In addition, demand was adversely impacted by the
global economic uncertainties and product price increases.
32
Equistar's Petrochemicals segment reported an operating loss for the first
quarter of 2003 of $32 million, an $8 million greater loss than the $24 million
loss reported for the same quarter last year. Excluding approximately $33
million of additional costs incurred in the first quarter of 2002 as a result of
certain above-market fixed price feedstock purchase contracts entered into in
early 2001, which largely expired by the end of the first quarter of 2002, the
operating loss increased by $41 million. The greater operating loss in the first
quarter of 2003 is primarily due to lower product margins. Revenues of $1.5
billion in the first quarter of 2003 were 55% higher than revenues in the same
period last year due to higher sales prices, partially offset by lower sales
volume. However, dramatically higher raw material and energy costs in the first
quarter of 2003 offset the higher average sales prices, resulting in lower
product margins.
Equistar's Polymers segment reported an operating loss of $35 million for
the first quarter of 2003, a $14 million greater loss than the $21 million loss
reported in the first quarter of 2002. The operating loss in the first quarter
of 2003 includes the $12 million loss on the sale of assets. Lower margins as a
result of increases in raw material costs, primarily ethylene and propylene, as
well as higher energy costs and, to a lesser extent, lower sales volume
contributed to the increase in net loss. Benchmark ethylene and propylene costs
were 49% and 54% higher, respectively, in the first quarter of 2003 compared to
the first quarter of 2002. In response to the higher raw material costs, price
increases were implemented in the first quarter of 2003. However, the timing of
implementation of these price increases was such that it did not fully offset
the impact of the raw material and energy cost increases.
Liquidity and Capital Resources
The Company has historically financed its activities primarily through cash
generated from its operations and cash distributions from Equistar, as well as
debt financings. Cash generated from operations is to a large extent dependent
on economic, financial, competitive and other factors affecting the Company's
businesses. The amount of cash distributions received from Equistar is affected
by Equistar's results of operations and current and expected future cash flow
requirements. The Company has not received any cash distributions from Equistar
since 2000 and it is unlikely the Company will receive any cash distributions
from Equistar in 2003.
Cash used in operating activities for the quarter ended March 31, 2003 was
$14 million compared to $33 million used in the quarter ended March 31, 2002.
The $19 million decrease in cash used in operating activities was primarily due
to higher operating income before depreciation and amortization ($22 million)
and favorable movements in other current assets compared to unfavorable
movements in the prior year ($17 million), partially offset by movements in
trade working capital (accounts receivable, inventory and accounts payable) that
were unfavorable to a greater extent than the prior year ($20 million).
Cash used in investing activities for capital expenditures in the quarter
ended March 31, 2003 was $8 million compared to $13 million used for capital
expenditures in the first quarter of 2002. The 38% decrease in capital spending
from the first quarter of 2002 reflects the Company's continued focus on
optimization of its asset base. Capital spending for 2003 is expected to be
approximately $60 million.
Cash provided by financing activities was $20 million in the first quarter
of 2003 compared to $2 million provided in the first quarter of 2002. Financing
activities in 2003 included $29 million of net debt proceeds, while 2002
included $11 million of net debt proceeds. Dividends paid to shareholders
totaled $9 million in both years.
On April 25, 2003, the Company received approximately $107 million in net
proceeds ($109 million in gross proceeds) from the completion of an offering by
Millennium America of $100 million additional principal amount at maturity of
the 9.25% Senior Notes. The proceeds of the offering were used to repay all of
the $85 million of borrowings outstanding under the Company's Revolving Loans
and for general corporate purposes. At April 30, 2003, the Company had $13
million outstanding (no outstanding borrowings and outstanding letters of credit
of $13 million) under the Revolving Loans and, accordingly, had $162 million of
unused availability under such facility, and had $48 million outstanding under
the Term Loans. In addition to letters of credit outstanding under the Credit
Agreement, the Company had outstanding letters of credit under other
arrangements of $11 million at April 30, 2003. The Company had unused
availability under short-term uncommitted lines of credit, other than the Credit
Agreement, of $34 million at April 30, 2003.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. The Company was in compliance with all covenants under the
Credit Agreement in effect at March 31, 2003. Due to its expectation that it
would not be in compliance at June 30, 2003, the Company obtained an amendment
to the Credit Agreement on April 25, 2003, which amended the Leverage Ratio and
Interest Coverage Ratio, each as defined in the Credit Agreement, as described
below.
33
The financial covenants in the Credit Agreement include a Leverage Ratio
and an Interest Coverage Ratio. The Leverage Ratio is the ratio of Total
Indebtedness to cumulative EBITDA for the prior four fiscal quarters, each as
defined. The Interest Coverage Ratio is the ratio of cumulative EBITDA for the
prior four fiscal quarters to Net Interest Expense, for the same period, each as
defined. To permit the Company to be in compliance, these covenants were amended
in the fourth quarter of 2001, in the second quarter of 2002, and in the second
quarter of 2003. The amendment in the second quarter of 2002 was conditioned
upon consummation of the offering of $100 million additional principal amount of
the 9.25% Senior Notes and retirement of the Credit Agreement debt described in
Note 7 to the Consolidated Financial Statements included in this Quarterly
Report. The latest amendment was not conditioned on the sale of 9.25% Senior
Notes. Under the covenants, as amended in April of 2003, the Company is required
to maintain a Leverage Ratio of no more than 5.75 to 1.00 for the second quarter
of 2003; 5.50 to 1.00 for the third quarter of 2003; 5.25 to 1.00 for the fourth
quarter of 2003; 5.00 to 1.00 for the first and second quarters of 2004; 4.75 to
1.00 for the third and fourth quarters of 2004; and 4.00 to 1.00 for the first
quarter of 2005 and thereafter; and an Interest Coverage Ratio of no less than
2.25 to 1.00 for the second, third and fourth quarters of 2003; 2.50 to 1.00 for
the first, second, third and fourth quarters of 2004; and 3.00 to 1.00 for the
first quarter of 2005 and thereafter. The covenants in the Credit Agreement also
limit, among other things, the ability of the Company and/or certain
subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii)
create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay
dividends on, or purchase, the Company's stock; (v) make restricted payments;
(vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage in
mergers or acquisitions; (ix) engage in domestic accounts receivable
securitization transactions; and (x) enter into restrictive agreements. In the
event the Company sells certain assets as specified in the Credit Agreement, the
Term Loans must be prepaid with a portion of the net cash proceeds of such sale.
The obligations under the Credit Agreement are collateralized by: (1) a pledge
of 100% of the stock of the Company's existing and future domestic subsidiaries
and 65% of the stock of certain of the Company's existing and future foreign
subsidiaries, in both cases other than subsidiaries that hold immaterial assets
(as defined in the Credit Agreement); (2) all the equity interests held by the
Company's subsidiaries in Equistar and the La Porte Methanol Company (which
pledges are limited to the right to receive distributions made by Equistar and
the La Porte Methanol Company, respectively); and (3) all present and future
accounts receivable, intercompany indebtedness and inventory of the Company's
domestic subsidiaries, other than subsidiaries that hold immaterial assets.
Millennium America also has outstanding $500 million aggregate principal
amount of 7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes")
and $250 million aggregate principal amount of 7.625% Senior Debentures due
November 15, 2026 (the "7.625% Senior Debentures") that are fully and
unconditionally guaranteed by the Company. The indenture under which the 7.00%
Senior Notes and 7.625% Senior Debentures were issued contains certain covenants
that limit, among other things: (i) the ability of Millennium America and its
Restricted Subsidiaries (as defined) to grant liens or enter into sale/leaseback
transactions; (ii) the ability of the Restricted Subsidiaries to incur
additional indebtedness; and (iii) the ability of Millennium America and the
Company to merge, consolidate or transfer substantially all of their respective
assets. This indenture allows the Company to grant security on loans of up to
15% of Consolidated Net Tangible Assets ("CNTA"), as defined, of Millennium
America. Accordingly, based upon CNTA and secured borrowing levels at March 31,
2003, any reduction in CNTA below approximately $1.6 billion would decrease the
Company's availability under the Revolving Loans by 15% of any such reduction.
CNTA was approximately $2.0 billion at March 31, 2003.
The 9.25% Senior Notes were issued by Millennium America and are guaranteed
by the Company. The indenture under which the 9.25% Senior Notes were issued
contains certain covenants that limit, among other things, the ability of the
Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." The basket is reduced by the amount of each such
restricted payment and is increased by: (i) 50% of the Company's Cumulative Net
Income (as defined in such indenture) since July 1, 2001 (or is reduced by 100%
of its Cumulative Net Income if such amount is negative); (ii) the net cash
proceeds from the sale by the Company of its common stock to third parties; and
(iii) 50% of any cash distributions received from Equistar. As of May 12, 2003,
the date of filing of the original Quarterly Report on Form 10-Q, and after
taking into consideration the restatements and reclassification reflected in
this Form 10-Q/A, the amount of the restricted payments basket is $12 million
and includes results through March 31, 2003. The indenture also requires the
calculation of a Consolidated Coverage Ratio, defined as the ratio of the
aggregate amount of EBITDA, as defined, for the four most recent fiscal quarters
to Consolidated Interest Expense, as defined, for the four most recent quarters.
If this ratio were to cease to be
34
greater than 2.00 to 1.00 (2.25 to 1.00 after June 15, 2003), there would be
certain restrictions on the Company's ability to incur additional indebtedness
and pay dividends, repurchase capital stock or make certain other restricted
payments. However, if the 9.25% Senior Notes were to receive investment grade
credit ratings from both Standard & Poor's ("S&P") and Moody's Investor
Services, Inc. ("Moody's") and meet certain other requirements as specified in
the indenture, certain of these covenants would no longer apply.
At March 31, 2003, the Company was in compliance with all covenants in the
indentures governing the 9.25% Senior Notes, 7.00% Senior Notes, and 7.625%
Senior Debentures.
The Company is currently rated BB+ by S&P and Ba1 by Moody's, which are
both non-investment grade ratings. On March 7, 2003, S&P lowered the Company's
credit rating from investment grade rating BBB- to non-investment grade rating
BB+ with a negative outlook, reflecting S&P's concern regarding the Company's
ability to generate the cash flow necessary to substantially improve its
financial profile during a period of economic uncertainties and higher raw
material costs. Moody's affirmed the Company's non-investment grade rating on
June 19, 2002, but revised its ratings outlook to negative from stable,
reflecting Moody's concern over the Company's cash flow performance in the
fourth quarter of 2001 and the first quarter of 2002. As a result of the
non-investment grade rating by both S&P and Moody's, the Company was required to
provide in April of 2003 a $2.5 million letter of credit in accordance with a
real estate lease, which resulted in an equal reduction of availability under
the Revolving Loans. Furthermore, the Company could be required to cash
collateralize the mark-to-market positions of certain derivative instruments
dependent upon the market value of these instruments. Based on the current
market value of the instruments, the Company is not required to place any funds
on deposit with the counterparty to these transactions.
The Company uses gold as a component in a catalyst in the Company's La
Porte, Texas facility. In April 1998, the Company entered into an agreement that
provides the Company with the right to use gold owned by a third party for a
five-year term. As a result of a change in accounting for this agreement, the
Company's financial statements were restated as more fully described in Note 2
to the Consolidated Financial Statements included in this Quarterly Report. In
April 2003, the Company renewed this agreement for a one-year term. The renewed
agreement requires the Company to either deliver the gold to the counterparty at
the end of the term or pay to the counterparty an amount equal to its
then-current value. The renewed agreement provides that if the Company is
downgraded below BB by S&P or Ba2 by Moody's, the third party could require the
Company to purchase the gold at its then-current value. The value of the gold
and the Company's obligation under this agreement was $13 million and $14
million at March 31, 2003 and December 31, 2002, respectively. The Company's
obligation under this agreement is included in Other short-term borrowings. The
change in value of the gold and the Company's obligation under this agreement,
which is included in Selling, development and administrative expense, was a gain
of $1 million for the three months ended March 31, 2003, and a loss of $1
million for the three months ended March 31, 2002. In April 2003, the Company
entered into a forward purchase agreement in order to mitigate the risk of
change in the market price of gold.
The Company's focus in 2003 is to sustain the benefits of cost reduction
efforts achieved to date, and manage working capital and capital spending to
levels deemed reasonable given the current state of business performance. The
Company believes these efforts, along with the borrowing availability under the
Credit Agreement, will be sufficient to fund the Company's cash requirements in
2003.
Critical Accounting Policies
The preparation of the Company's financial statements requires management
to apply generally accepted accounting principles to the Company's specific
circumstances and make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
There have been no revisions to the critical accounting policies discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002, as amended by the Company's Form 10-K/A.
Recent Accounting Developments
See Note 4 to the Consolidated Financial Statements included in this
Quarterly Report for discussion of recent accounting developments.
35
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms
of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Company's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
Within 90 days prior to filing the initial Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2003, the Company carried out an
evaluation, under the supervision and with the participation of the
Company's management, including the Company's principal executive officer
and the Company's principal financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures.
In addition, in October and early November 2003, prior to filing this
Amendment to the Quarterly Report on Form 10-Q, the Company carried out a
further evaluation, also under the supervision and with the participation
of the Company's management, including the Company's principal executive
officer and the Company's principal financial officer, of the effectiveness
of the design and operation of the Company's disclosure controls and
procedures. Based on both of these evaluations, the Company's principal
executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures are effective.
(b) In light of the restatements described in Note 2 to the Consolidated
Financial Statements included in this Amendment to the Quarterly Report on
Form 10-Q, the Company is considering whether any changes to enhance the
Company's internal control processes and procedures are warranted. There
have been no changes in the Company's internal controls over financial
reporting that occurred since the date of the further evaluation described
above that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
36
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
4.1 Exchange and Registration Rights Agreement. *
10.1 Third Amendment dated as of April 25, 2003 to the Credit Agreement
dated June 18, 2001, with the Bank of America, N.A. and JP Morgan
Chase Bank and the lenders party thereto (Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002). *
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. **
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. **
32.1 Certificate of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Furnished, not filed, in accordance
with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).**
32.2 Certificate of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Furnished, not filed, in accordance
with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
229.601(b)(32)(ii)).**
99.1 Information relevant to forward-looking statements. * For a revised
and updated statement regarding information relevant to
forward-looking statements, please see Exhibit 99.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
which is incorporated by reference herein.
(b) Reports on Form 8-K.
Current Reports on Form 8-K dated March 25, 2003, March 27, 2003, March 31,
2003, April 1, 2003, April 14, 2003, April 22, 2003, April 23, 2003, April
28, 2003 and April 29, 2003 were filed during the quarter ended March 31,
2003 and through May 12, 2003, the date the original Form 10-Q was filed
with the Securities and Exchange Commission. Such Current Reports either
filed or furnished information to the Securities and Exchange Commission.
* Filed as an exhibit to the Company's Form 10-Q for the quarter ended March
31, 2003, as such Form 10-Q was filed with the Securities and Exchange
Commission on May 12, 2003, and incorporated by reference herein.
** Filed herewith.
37
SIGNATURE
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.
MILLENNIUM CHEMICALS INC.
Date: November 14, 2003 By: /s/ JOHN E. LUSHEFSKI
------------------------------------
John E. Lushefski
Executive Vice President and
Chief Financial Officer
(as duly authorized officer and
principal financial officer)
38
Exhibit Index
Exhibit
Number Description of Document
------- -----------------------
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
39
STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as................................ 'SS'
Characters normally expressed as subscript shall be preceded by......... [u]