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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 333-64641
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Philipp Brothers Chemicals, Inc.
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(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 was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Number of shares of each class of common stock outstanding as of March 31, 2002:
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
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PHILIPP BROTHERS CHEMICALS, INC.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Financial Statements .............................. 3
Condensed Consolidated Balance Sheets ....................... 4
Condensed Consolidated Statements of Operations and
Comprehensive Income ...................................... 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity .................................................... 6
Condensed Consolidated Statements of Cash Flows ............. 7
Notes to Condensed Consolidated Financial Statements ........ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 27
PART II OTHER INFORMATION
Item 5. Other Information ........................................... 28
Item 6. Exhibits and Reports on Form 8-K ............................ 28
SIGNATURES ............................................................ 29
2
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2001
and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this
Form 10-Q under the caption "Certain Factors Affecting Future Operating
Results." Unless the context otherwise requires, references in this report to
the "Company" refers to the Company and/or one or more of its subsidiaries, as
applicable.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
3
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
March 31, June 30,
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,584 $ 14,845
Trade receivables, less allowance
for doubtful accounts of $2,593
at March 31, 2002 and
$2,369 at June 30, 2001 63,675 77,910
Other receivables 4,905 4,800
Inventories 98,269 83,796
Prepaid expenses and other current assets 17,704 17,448
--------- ---------
TOTAL CURRENT ASSETS 199,137 198,799
PROPERTY, PLANT AND EQUIPMENT, net 96,730 102,323
INTANGIBLES 12,413 5,832
OTHER ASSETS 23,350 23,065
--------- ---------
$ 331,630 $ 330,019
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 5,808 $ 4,222
Loans payable to banks 43,922 28,463
Current portion of long-term debt 5,467 5,404
Accounts payable 50,126 51,304
Accrued expenses and other current
liabilities 32,602 35,378
--------- ---------
TOTAL CURRENT LIABILITIES 137,925 124,771
LONG-TERM DEBT 143,660 139,464
OTHER LIABILITIES 10,355 12,926
--------- ---------
TOTAL LIABILITIES 291,940 277,161
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 54,673 48,980
Common stock -- 378
Common stock of subsidiary 95 95
--------- ---------
TOTAL REDEEMABLE SECURITIES 54,768 49,453
--------- ---------
STOCKHOLDERS' EQUITY:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 878 878
Retained earnings (9,088) 9,741
Accumulated other comprehensive
income (loss)
gain on derivative instruments 542 --
currency translation adjustment (7,933) (7,737)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (15,078) 3,405
--------- ---------
$ 331,630 $ 330,019
========= =========
See notes to unaudited Condensed Consolidated Financial Statements.
4
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES $ 96,310 $ 103,802 $ 288,956 $ 259,941
COST OF GOODS SOLD (2002 includes $4,783 73,343 75,312 207,637 188,912
of incremental depreciation for planned
asset shutdown - See Note 2)
--------- --------- --------- ---------
GROSS PROFIT 22,967 28,490 81,319 71,029
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 26,696 27,174 79,025 70,695
--------- --------- --------- ---------
OPERATING INCOME (3,729) 1,316 2,294 334
OTHER:
Interest expense 4,609 5,183 13,926 13,202
Interest (income) (8) 16 (311) (387)
Other expense, net 93 1,137 1,118 1,234
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (8,423) (5,020) (12,439) (13,715)
PROVISION (BENEFIT) FOR INCOME TAXES 649 (1,171) 697 (4,129)
--------- --------- --------- ---------
NET LOSS (9,072) (3,849) (13,136) (9,586)
OTHER COMPREHENSIVE INCOME (LOSS)-
Gain on derivative instruments 109 (168) 542 --
Change in currency translation adjustment (984) (3,955) (196) (4,727)
--------- --------- --------- ---------
COMPREHENSIVE LOSS $ (9,947) $ (7,972) $ (12,790) $ (14,313)
========= ========= ========= =========
See notes to unaudited Condensed Consolidated Financial Statements.
5
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months and Nine Months Ended March 31, 2002
(In Thousands)
Preferred
Stock Common Stock Accumulated
---------- --------------------- Other
Series Class Class Paid-in Retained Comprehensive
"A" "A" "B" Capital Earnings (loss) income- Total
-------- -------- -------- -------- -------- ------------- --------
BALANCE, JULY 1, 2001 $ 521 $ 1 $ 1 $ 878 $ 9,741 $ (7,737) $ 3,405
Accretion of redeemable
preferred securities to fair
market value (590) (590)
Dividends on Series B and C
redeemable preferred stock (1,837) (1,837)
Gain on derivative
instruments 145 145
Foreign currency
translation adjustment (1,566) (1,566)
Net loss (2,365) (2,365)
-------- -------- -------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 2001 $ 521 $ 1 $ 1 $ 878 $ 4,949 $ (9,158) $ (2,808)
======== ======== ======== ======== ======== ======== ========
Accretion of redeemable
preferred securities to fair
market value (2,085) (2,085)
Dividends on Series B and C
redeemable preferred stock (1,882) (1,882)
Gain on derivative
instruments 288 288
Foreign currency
translation adjustment 2,354 2,354
Net loss (1,699) (1,699)
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 $ 521 $ 1 $ 1 $ 878 $ (717) $ (6,516) $ (5,832)
======== ======== ======== ======== ======== ======== ========
Accretion of redeemable
preferred securities to fair
market value 2,675 2,675
Dividends on Series B and C
redeemable preferred stock (1,974) (1,974)
Gain on derivative
instruments 109 109
Foreign currency
translation adjustment (984) (984)
Net loss (9,072) (9,072)
-------- -------- -------- -------- -------- -------- --------
BALANCE, MARCH 31, 2002 $ 521 $ 1 $ 1 $ 878 $ (9,088) $ (7,391) $(15,078)
======== ======== ======== ======== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2002 and 2001
(In Thousands)
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net loss $(13,136) $ (9,586)
Adjustments to reconcile net loss to
net cash provided
by operating activities:
Depreciation and amortization 17,159 10,256
Other 2,154 (2,038)
Changes in operating assets and liabilities
net of effect of businesses acquired:
Accounts receivable 13,199 1,138
Inventories (16,152) (1,202)
Prepaid expenses and other current assets (2,038) 854
Other assets (842) (3,165)
Accounts payable (1,450) 5,683
Accrued expenses and other current liabilities 1,520 (360)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 414 1,580
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (8,665) (10,326)
Acquisition of a business (7,182) (51,700)
Other investing 561 (457)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,286) (62,483)
-------- --------
FINANCING ACTIVITIES:
Cash overdraft 1,481 3,344
Net increase in short-term debt 15,248 25,485
Proceeds from long-term debt 2,316 1,578
Proceeds from issuance of redeemable
preferred stock -- 45,000
Payments of long-term debt (4,324) (836)
Other financing -- (942)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,721 73,629
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (110) (45)
-------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (261) 12,681
CASH AND CASH EQUIVALENTS at beginning of period 14,845 2,403
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 14,584 $ 15,084
======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
7
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
1. General
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments, except for the incremental depreciation of $4,783
in 2002 for the planned asset shutdown - See Note 2) necessary to present fairly
its financial position as of March 31, 2002 and its results of operations and
cash flows for the three months and nine months ended March 31, 2002 and 2001.
The condensed consolidated balance sheet as of June 30, 2001 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. Additionally, it should be noted
that the accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with accounting standards appropriate
for interim financial statements. While the Company believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the Company's consolidated financial statements for the year
ended June 30, 2001.
Certain prior year amounts in the accompanying condensed consolidated
financial statements and related notes have been reclassified to conform to the
fiscal 2002 presentation. Such reclassifications include a reclassification of
freight income of $1,599 and $4,612 for the three months and nine months ended
March 31, 2001, respectively, from selling, general and administrative expenses
to net sales on the Condensed Consolidated Statements of Operations and
Comprehensive Income, as a result of the adoption of the Emerging Issues Task
Force Issue No. 00-10 "Accounting for Shipping and Handling Revenues and Costs."
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No.
141") and No. 142 "Goodwill and Other Intangibles" ("SFAS No. 142"). SFAS No.
141 and No. 142 are effective for the Company on July 1, 2002. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The statement requires that goodwill and
indefinite lived intangible assets no longer be amortized and be tested for
impairment at least annually. The amortization period of intangible assets with
finite lives will no longer be limited to forty years. The Company is currently
assessing the impact of these statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 is effective for the Company on July
1, 2002. The statement establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. The Company is currently assessing the impact of this
statement.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 is effective for the
Company on July 1, 2002. The statement addresses significant issues relating to
the implementation of FASB Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS No. 121"),
and the development of a single accounting model, based on the framework
established in FAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company is currently
assessing the impact of this statement.
The results of operations for the three months and nine months ended March
31, 2002 and 2001 may not be indicative of results for the full year.
2. Risks and Uncertainties
Due to lower levels of economic activity and increased global competition,
the Company believes that cash flows from operations and available borrowing
arrangements may not provide sufficient working capital to operate the Company's
existing business, to make budgeted capital expenditures, and to service
interest and current principal coming due on outstanding debt over the ensuing
12 month period. Accordingly, the Company is considering the divestiture of
certain business operations, reducing the level of capital expenditures, and
initiating additional cost reduction programs to provide funds to meet future
obligations on a timely basis. At March 31, 2002, the Company had $4,400 and
$8,100 available on its domestic and foreign credit facilities, respectively,
and is in compliance with its financial covenant requirements under these
facilities.
8
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
The Company's Odda, Norway operation has suffered operating losses during
fiscal 2001 and for the nine months ended March 31, 2002. Odda is included in
the Industrial Chemicals segment and had third party revenues of $18,188 and
$15,932, and operating losses (before the effect of the $4,783 incremental
depreciation discussed below) of $4,399 and $3,195, for the nine month periods
ended March 31, 2002 and 2001, respectively. The Company has initiated and
completed a number of cost cutting and efficiency initiatives. However,
continued competitive pricing pressures on Odda's primary products and
increasing raw material and production costs have more than offset the favorable
impact of initiatives undertaken to date. The Company has evaluated the future
operation of Odda under a number of scenarios, ranging from ceasing production
of certain products to a complete shutdown of the operation. During the third
quarter of fiscal 2002 the Company decided to cease production of two of Odda's
three primary products as of June 30, 2002, and focus its resources on the
remaining product line. Third party revenues of the remaining product line were
$9,647 for the nine months ended March 31, 2002. The decision to cease
production of these two products requires the Company to accelerate the
depreciation of the directly related property, plant, and equipment so these
assets will be fully depreciated by June 30, 2002. This change in expected
remaining useful life has increased depreciation and amortization by $4,783 for
the three months and nine months ended March 31, 2002, with an additional charge
to depreciation and amortization of $9,305 planned for the fourth quarter. The
Company is also in negotiations with the government of Norway for certain
financial assistance.
The Company has evaluated this decision to cease production of two
products and the related estimated undiscounted future cash flows from the
remaining product line under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-lived Assets and For Long-lived Assets To
Be Disposed Of" and believes no impairment of long-lived assets of Odda (with a
carrying value of $18,946) exists at March 31, 2002.
The Company has a domestic net deferred tax asset of approximately $12,219
at March 31, 2002. The Company has incurred domestic losses in recent fiscal
years; however, with the acquisition of the Pfizer animal health business and
the sale of the Agtrol crop protection business in 2001, the Company had
anticipated a return to profitability in fiscal 2002 and, accordingly, the
Company has considered the deferred tax assets more likely than not of
realization. As indicated previously, the Company has experienced lower levels
of economic activity than anticipated across its global operations, including
the United States. As a result, the Company currently anticipates a small
domestic loss for fiscal 2002. As indicated above, significant cost reduction
activities have already been undertaken in several domestic businesses to adjust
the cost base to current levels of economic activity, and the Company
anticipates domestic profitability for fiscal 2003 and beyond. Consequently, the
Company continues to consider the deferred tax assets more likely than not of
recovery and no valuation allowance has been provided. The Company's position
will continue to be reassessed each reporting period in light of domestic
operating performance.
3. Acquisition
On November 30, 2000, the Company purchased the animal health business of
Pfizer, Inc. and certain of its subsidiaries ("Pfizer"). Under the terms of the
purchase agreement, the Company is required to pay Pfizer contingent purchase
price based on a percentage of future net revenues of a particular product. The
term of the contingent payments is five years from November 30, 2000. The
maximum contingent purchase price due under this arrangement is limited to
$55,000, with a maximum annual payment of $12,000. Contingent purchase price
paid will be allocated to related production equipment and product intangibles.
The Company has recorded $7,469, allocated to related production equipment, and
$7,249, related to product intangibles, under this arrangement as of March 31,
2002, of which $8,123 has been paid as of March 31, 2002. Under the terms of the
agreement, the Company has elected to defer $5,682 of the payment until June 30,
2006. The deferred payment bears interest at an annual rate of 13%. In addition,
the Company is required to pay Pfizer contingent purchase price up to a maximum
of $10,000 over five years on other products based on certain gross profit
levels of the medicated feed additives business. No amounts have been accrued
under this arrangement.
The unaudited consolidated results of operations on a pro-forma basis as
if such acquisition had occurred at the beginning of the nine-month period ended
March 31, 2001 are as follows:
Net sales .................................... $ 307,534
Net (loss) income ............................ (10,413)
The impact of purchase accounting adjustments relating to the inventory
acquired from Pfizer increased the loss before income taxes for the three months
and nine months ended March 31, 2002 by $343 and $3,257, respectively, and for
the three months and nine months ended March 31, 2001 by $4,601 and $5,682,
respectively. Exclusive of these charges the loss before income taxes for the
three months and nine months ended March 31, 2002 would have been $8,080 and
$9,182,
9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
respectively, and for the three months and nine months ended March 31, 2001
would have been $419 and $8,033, respectively.
4. Inventories
Inventories are valued at the lower of cost or market. Cost is principally
determined using the first-in, first-out (FIFO) and average methods; however,
certain subsidiaries of the Company use the last-in, first-out (LIFO) method for
valuing inventories.
Inventories at March 31, 2002 and June 30, 2001 consist of the following:
March 31, June 30,
2002 2001
--------- --------
Raw materials $30,028 $22,614
Work-in-process 3,722 4,257
Finished goods 64,519 56,925
------- -------
Total inventory $98,269 $83,796
======= =======
5. Contingencies
a. Litigation
The Company's subsidiary, Phibro-Tech, Inc., has been named as a
potentially responsible party ("PRP") in connection with an action commenced by
the EPA, involving a third party fertilizer manufacturing site in South
Carolina. Phibro-Tech, Inc. was also named as a PRP involving a third party site
in California. Settlements have been reached in both of these actions and
adequate reserves have been established.
The Company and its subsidiary, C.P. Chemicals, Inc., are involved in
litigation alleging that operations at the Sewaren, New Jersey site have
affected the adjoining owner's property. Active settlement discussions are
taking place and at this time the Company does not believe there will be a
material net cost to any settlement.
The Company and its subsidiaries are a party to a number of claims and
lawsuits arising in the normal course of business, including patent
infringement, product liability and governmental regulation concerning
environmental and other matters. Certain of these actions seek damages in
various amounts. All such claims are being contested, and the Company believes
the resolution of these matters will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.
b. Environmental Remediation
The Company's domestic subsidiaries are subject to various federal, state
and local environmental laws and regulations which govern the management of
chemical wastes. The most significant regulation governing the Company's
recycling activities is the Resource Conservation and Recovery Act of 1976
("RCRA"). The Company has been issued final RCRA "Part B" permits to operate as
hazardous waste treatment and storage facilities at its facilities in Santa Fe
Springs, California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina
and Sewaren, New Jersey. The Company has ceased operations at its Union City,
California facility. Costs for closure cannot be determined at this time.
On or about November 15, 2001, the Company was advised by the State of
California that the State intended to file a civil complaint against the Company
for alleged violations arising out of operations at the Santa Fe Springs,
California facility. The Company is engaged in negotiations with the State of
California at this time. The amount of any penalty that may be assessed cannot
be determined at this time, but is not expected to be material.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the United States
Environmental Protection Agency relating to a third party superfund site in
Rhode Island. The Company is investigating the matter, which relates to events
in the 1950's and 1960's.
In connection with applying for RCRA "Part B" permits, the Company has
been required to perform extensive site investigations at certain of its
operating facilities and inactive sites to identify possible contamination and
to provide the regulatory authorities with plans and schedules for remediation.
Some soil and groundwater contamination has been identified at several plant
sites and will require corrective action over the next several years.
10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Based upon information available, the Company estimates the cost of
further investigation and remediation of identified soil and groundwater
problems at operating sites, closed sites and third party sites to be
approximately $1,349 as of March 31, 2002, which is included in current and
long-term liabilities.
6. Business Segments
The Company has four reportable segments--Animal Health and Nutrition,
Industrial Chemicals, Distribution, and All Other. The Company previously
reported two reportable segments - Agchem and Industrial Chemicals; however, due
principally to organizational changes during fiscal 2001, including those
associated with the acquisition of the animal health business from Pfizer and
the sale of the Agtrol crop protection business, segment reporting was revised
at June 30, 2001. Prior period segment information has been revised to conform
to the fiscal 2002 segment presentation. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets a broad range of feed
additive products including trace minerals, anticoccidials, antibiotics,
vitamins, vitamin premixes, and other animal health products. The Company's
Industrial Chemicals segment manufactures and markets pigments and other mineral
products which include copper oxide, which is produced by the Company's
recycling operation, mineral oxides, and alkaline etchants. The Company's
Distribution segment markets and distributes a variety of industrial, specialty
and fine organic chemicals, and intermediates produced by others. The Company's
All Other segment manufactures and markets a variety of specialty custom
chemicals and copper-based fungicides, as well as providing management and
recycling of coal combustion residues.
Segment data for the three and nine months ended March 31, 2002 and 2001 are as
follows:
Animal Corporate
Health & Industrial All Expenses &
Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ -------- ----------- --------
Three Months Ended March 31, 2002
Revenues -external customers $ 59,378 $ 19,249 $ 8,326 $ 9,357 $ -- $ 96,310
-intersegment 874 3,590 658 87 (5,209) --
-------- -------- -------- -------- -------- --------
Total revenues $ 60,252 $ 22,839 $ 8,984 $ 9,444 $ (5,209) $ 96,310
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 6,246 $ (6,067) $ 635 $ (750) $ (3,793) $ (3,729)
======== ======== ======== ======== ======== ========
Animal Corporate
Health & Industrial All Expenses &
Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ -------- ----------- --------
Three Months Ended March 31, 2001
Revenues -external customers $ 58,545 $ 20,001 $ 11,141 $ 14,115 $ -- $103,802
-intersegment 1,622 5,775 500 -- (7,897) --
-------- -------- -------- -------- -------- --------
Total revenues $ 60,167 $ 25,776 $ 11,641 $ 14,115 $ (7,897) $103,802
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 4,614 $ (397) $ 1,119 $ (1,744) $ (2,276) $ 1,316
======== ======== ======== ======== ======== ========
Animal Corporate
Health & Industrial All Expenses &
Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ -------- ----------- --------
Nine Months Ended March 31, 2002
Revenues -external customers $180,477 $ 53,988 $ 26,144 $ 28,347 $ -- $288,956
-intersegment 3,141 11,730 1,654 117 (16,642) --
-------- -------- -------- -------- -------- --------
Total revenues $183,618 $ 65,718 $ 27,798 $ 28,464 $(16,642) $288,956
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 23,870 $(12,809) $ 2,224 $ (860) $(10,131) $ 2,294
======== ======== ======== ======== ======== ========
11
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Animal Corporate
Health & Industrial All Expenses &
Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ -------- ----------- --------
Nine Months Ended March 31, 2001
Revenues -external customers $135,755 $ 56,638 $ 32,513 $ 35,035 $ -- $259,941
-intersegment 3,896 15,643 1,415 -- (20,954) --
-------- -------- -------- -------- -------- --------
Total revenues $139,651 $ 72,281 $ 33,928 $ 35,035 $(20,954) $259,941
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 11,107 $ (797) $ 2,964 $ (5,383) $ (7,557) $ 334
======== ======== ======== ======== ======== ========
7. Divestitures
On May 4, 2001, the Company sold its Agtrol U.S. business, a division of
the Company's Phibro-Tech, Inc. subsidiary, to Nufarm, Inc. ("Nufarm"), the U.S.
subsidiary of Nufarm Limited, a publicly listed Australian based company. On
June 14, 2001, the Company sold its Agtrol international business to Nufarm. The
sales included inventory and intangible assets to Nufarm and did not include
plant, equipment, or other manufacturing assets. Phibro-Tech also entered into
agreements to supply copper fungicide products to Nufarm from its Sumter, South
Carolina plant for five years, and from its Bordeaux, France plant for three
years. On December 24, 2001, the Company transferred certain receivables and
rebate liabilities, at net carrying value, from Agtrol U.S. sales prior to May
1, 2001, to Nufarm, with no recourse.
Revenues and operating losses relating to the Agtrol business amounted to
$10,673 and $1,501, respectively, for the three months ended March 31, 2001, and
$23,947 and $5,473, respectively, for the nine months ended March 31, 2001.
8. Condensed Consolidating Financial Statements
In June 1998, the Company issued $100 million of 9 7/8% Senior
Subordinated Notes due 2008 (the "Notes"). In connection with the issuance of
these Notes, the Company's U.S. Subsidiaries fully and unconditionally
guaranteed such Notes on a joint and several basis. Foreign subsidiaries do not
presently guarantee the Notes.
The following condensed consolidating financial data summarizes the
assets, liabilities and results of operations and cash flows of the Parent,
Guarantor Subsidiaries and Non-Guarantor Subsidiaries. The Parent is Philipp
Brothers Chemicals, Inc. ("PBC"). The U.S. Guarantor Subsidiaries include all
domestic subsidiaries of PBC including the following: C.P. Chemicals, Inc.,
Phibro-Tech, Inc., Mineral Resource Technologies, Inc., Prince Agriproducts,
Inc., The Prince Manufacturing Company (PA), The Prince Manufacturing Company
(IL), PhibroChem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro
Animal Health Holdings, Inc. and Phibro Animal Health U.S., Inc. The U.S.
Guarantor and Foreign Non-Guarantor Subsidiaries are directly or indirectly
wholly owned as to voting stock by PBC.
Investments in subsidiaries are accounted for by the Parent using the
equity method. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
The principal consolidation adjustments are to eliminate investments in
subsidiaries and intercompany balances and transactions. Separate financial
statements of the U.S. Guarantor Subsidiaries and the Non-Guarantor Subsidiaries
are not presented because such financial statements would not be material to
investors.
12
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of March 31, 2002
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,942 $ 538 $ 12,104 $ 14,584
Trade receivables 3,301 25,070 35,304 63,675
Other receivables 1,056 1,502 2,347 4,905
Inventory 2,935 45,790 49,544 98,269
Prepaid expenses and other 4,089 3,771 9,844 17,704
--------------------------------------------------------------------------------
Total current assets 13,323 76,671 109,143 -- 199,137
--------------------------------------------------------------------------------
Property, plant & equipment, net 438 30,109 66,183 96,730
Intangibles 32 1,771 10,610 12,413
Investment in subsidiaries 48,766 2,258 (6,854) (44,170) --
Intercompany 74,168 (31,414) (8,460) (34,294) --
Other assets 92,971 (71,283) 1,662 23,350
--------------------------------------------------------------------------------
Total assets $ 229,698 $ 8,112 $ 172,284 $ (78,464) $ 331,630
================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Cash overdraft $ -- $ 5,808 $ -- $ 5,808
Loan payable to banks 40,564 -- 3,358 43,922
Current portion of long term debt 2,540 461 2,466 5,467
Accounts payable 648 24,637 24,841 50,126
Accrued expenses and other 8,704 7,446 16,452 32,602
--------------------------------------------------------------------------------
Total current liabilities 52,456 38,352 47,117 -- 137,925
--------------------------------------------------------------------------------
Long term debt 127,732 (69,452) 119,674 (34,294) 143,660
Other liabilities 2,187 4,804 3,364 10,355
Redeemable securities:
Series B and C preferred stock 54,673 -- -- 54,673
Common stock 481 -- (481) --
Common stock of subsidiary -- 95 -- 95
--------------------------------------------------------------------------------
55,154 95 (481) -- 54,768
--------------------------------------------------------------------------------
Stockholders' Equity
Series A preferred stock 521 -- -- 521
Common stock 2 32 -- (32) 2
Paid in capital 878 34,041 -- (34,041) 878
Retained earnings (9,088) 210 9,887 (10,097) (9,088)
Accumulated other comprehensive
income (loss)- gain on derivative
instruments -- -- 542 542
currency translation adjustment (144) 30 (7,819) (7,933)
--------------------------------------------------------------------------------
Total stockholders' equity (7,831) 34,313 2,610 (44,170) (15,078)
--------------------------------------------------------------------------------
Total liabilities and equity $ 229,698 $ 8,112 $ 172,284 $ (78,464) $ 331,630
================================================================================
13
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended March 31, 2002
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 6,337 $ 53,002 $ 44,308 $ (7,337) $ 96,310
Cost of goods sold 5,034 36,663 38,983 (7,337) 73,343
-------------------------------------------------------------------------------
Gross profit 1,303 16,339 5,325 -- 22,967
Selling, general, and
administrative expenses 4,402 14,036 8,258 -- 26,696
-------------------------------------------------------------------------------
Operating (loss) income (3,099) 2,303 (2,933) -- (3,729)
Interest expense 574 427 3,608 4,609
Interest income (5) -- (3) (8)
Other (income) expense 6 (79) 166 93
Intercompany allocation (4,843) 4,843 -- --
Loss relating to subsidiaries 8,578 -- -- (8,578) --
-------------------------------------------------------------------------------
(Loss) income before income taxes (7,409) (2,888) (6,704) 8,578 (8,423)
Provision (benefit) for income taxes 1,663 (1,049) 35 649
-------------------------------------------------------------------------------
Net (loss) income $ (9,072) $ (1,839) $ (6,739) $ 8,578 $ (9,072)
===============================================================================
14
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Nine Months Ended March 31, 2002
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 19,516 $ 160,863 $ 129,706 $ (21,129) $ 288,956
Cost of goods sold 15,431 110,578 102,757 (21,129) 207,637
--------------------------------------------------------------------------------
Gross profit 4,085 50,285 26,949 -- 81,319
Selling, general, and
administrative expenses 12,259 41,255 25,511 79,025
--------------------------------------------------------------------------------
Operating (loss) income (8,174) 9,030 1,438 -- 2,294
Interest expense 1,769 1,995 10,162 13,926
Interest income (15) -- (296) (311)
Other (income) expense (298) (72) 1,488 1,118
Intercompany allocation (9,778) 9,778 -- --
Loss relating to subsidiaries 11,901 -- -- (11,901) --
--------------------------------------------------------------------------------
(Loss) income before income taxes (11,753) (2,671) (9,916) 11,901 (12,439)
Provision (benefit) for income taxes 1,383 (185) (501) 697
--------------------------------------------------------------------------------
Net (loss) income $ (13,136) $ (2,486) $ (9,415) $ 11,901 $ (13,136)
================================================================================
15
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2002
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $(13,136) $ (2,486) $ (9,415) $ 11,901 $ (13,136)
Adjustments to reconcile net (loss)
income to cash (used in) provided by
operating activities:
Depreciation and amortization 795 3,986 12,378 17,159
Other (594) 136 2,612 2,154
Changes in operating assets and
liabilities net of effect of
business acquired:
Accounts receivable 1,278 6,163 5,758 13,199
Inventory 318 (3,521) (12,949) (16,152)
Prepaid expenses and other 892 (909) (2,021) (2,038)
Other assets 260 (838) (264) (842)
Intercompany (4,443) 3,675 12,669 (11,901) --
Accounts payable (1,095) 343 (698) (1,450)
Accrued expenses and other 902 (5,130) 5,748 1,520
-----------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (14,823) 1,419 13,818 -- 414
-----------------------------------------------------------------------------
Investing activities:
Capital expenditures (74) (3,918) (4,673) (8,665)
Acquisition of a business -- -- (7,182) (7,182)
Other investing -- 412 149 561
-----------------------------------------------------------------------------
Net cash used in
investing activities (74) (3,506) (11,706) -- (15,286)
-----------------------------------------------------------------------------
Financing activities:
Cash overdraft (13) 1,494 -- 1,481
Net increase (decrease) in
short term debt 16,093 -- (845) 15,248
Proceeds from long term debt 2,000 316 -- 2,316
Payments of long term debt (2,533) (395) (1,396) (4,324)
-----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 15,547 1,415 (2,241) -- 14,721
-----------------------------------------------------------------------------
Effect of exchange rate changes on cash -- -- (110) (110)
-----------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 650 (672) (239) -- (261)
Cash and cash equivalents at
beginning of period 1,292 1,210 12,343 14,845
-----------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 1,942 $ 538 $ 12,104 $ -- $ 14,584
=============================================================================
16
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of June 30, 2001
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,292 $ 1,210 $ 12,343 $ 14,845
Trade receivables 4,624 32,291 40,995 77,910
Other receivables 791 1,913 2,096 4,800
Inventory 2,715 44,050 37,031 83,796
Prepaid expenses and other 5,461 2,745 9,242 17,448
-------------------------------------------------------------------------------
Total current assets 14,883 82,209 101,707 -- 198,799
-------------------------------------------------------------------------------
Property, plant & equipment, net 626 30,143 71,554 102,323
Intangibles 87 1,915 3,830 5,832
Investment in subsidiaries 63,490 1,542 (6,138) (58,894) --
Intercompany 54,322 (22,808) 3,852 (35,366) --
Other assets 93,466 (71,571) 1,170 23,065
-------------------------------------------------------------------------------
Total assets $ 226,874 $ 21,430 $ 175,975 $ (94,260) $ 330,019
===============================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Cash overdraft $ 13 $ 4,209 $ -- $ 4,222
Loan payable to banks 24,471 -- 3,992 28,463
Current portion of long term debt 2,541 493 2,370 5,404
Accounts payable 1,743 23,359 26,202 51,304
Accrued expenses and other 7,859 11,780 15,739 35,378
-------------------------------------------------------------------------------
Total current liabilities 36,627 39,841 48,303 -- 124,771
-------------------------------------------------------------------------------
Long term debt 127,263 (60,654) 108,221 (35,366) 139,464
Other liabilities 2,129 5,731 5,066 12,926
Redeemable securities:
Series B and C preferred stock 48,980 -- -- 48,980
Common stock 877 -- (499) 378
Common stock of subsidiary -- 95 -- 95
-------------------------------------------------------------------------------
49,857 95 (499) -- 49,453
-------------------------------------------------------------------------------
Stockholders' Equity
Series A preferred stock 521 -- -- 521
Common stock 2 32 -- (32) 2
Paid in capital 878 34,041 -- (34,041) 878
Retained earnings 9,741 2,325 22,496 (24,821) 9,741
Accumulated other comprehensive
(loss) income-currency
translation adjustment (144) 19 (7,612) (7,737)
-------------------------------------------------------------------------------
Total stockholders' equity 10,998 36,417 14,884 (58,894) 3,405
-------------------------------------------------------------------------------
Total liabilities and equity $ 226,874 $ 21,430 $ 175,975 $ (94,260) $ 330,019
===============================================================================
17
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended March 31, 2001
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 8,814 $ 60,537 $ 50,888 $ (16,437) $ 103,802
Cost of goods sold 7,156 43,864 40,729 (16,437) 75,312
--------------------------------------------------------------------------------
Gross profit 1,658 16,673 10,159 -- 28,490
Selling, general, and
administrative expenses 4,180 15,392 7,602 27,174
--------------------------------------------------------------------------------
Operating (loss) income (2,522) 1,281 2,557 -- 1,316
Interest expense 3,639 (71) 1,615 5,183
Interest (income) (5) (9) 30 16
Other expense 29 340 768 1,137
Intercompany allocation (4,699) 2,991 1,708 --
Loss relating to subsidiaries 2,445 -- -- (2,445) --
--------------------------------------------------------------------------------
(Loss) income before income taxes (3,931) (1,970) (1,564) 2,445 (5,020)
Benefit for income taxes (82) (471) (618) (1,171)
--------------------------------------------------------------------------------
Net (loss) income $ (3,849) $ (1,499) $ (946) $ 2,445 $ (3,849)
================================================================================
18
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Nine Months Ended March 31, 2001
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 25,483 $ 152,344 $ 114,376 $ (32,262) $ 259,941
Cost of goods sold 20,603 108,471 92,100 (32,262) 188,912
--------------------------------------------------------------------------------
Gross profit 4,880 43,873 22,276 -- 71,029
Selling, general, and
administrative expenses 11,209 41,383 18,103 70,695
--------------------------------------------------------------------------------
Operating (loss) income (6,329) 2,490 4,173 -- 334
Interest expense 8,882 (10) 4,330 13,202
Interest income (49) (10) (328) (387)
Other expense 150 336 748 1,234
Intercompany allocation (11,594) 9,500 2,094 --
Loss relating to subsidiaries 6,062 -- -- (6,062) --
--------------------------------------------------------------------------------
(Loss) income before income taxes (9,780) (7,326) (2,671) 6,062 (13,715)
Benefit for income taxes (194) (2,490) (1,445) (4,129)
--------------------------------------------------------------------------------
Net (loss) income $ (9,586) $ (4,836) $ (1,226) $ 6,062 $ (9,586)
================================================================================
19
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2001
(In Thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (9,586) $ (4,836) $ (1,226) $ 6,062 $ (9,586)
Adjustments to reconcile net (loss)
income to cash (used in) provided by
operating activities:
Depreciation and amortization 528 3,805 5,923 10,256
Other (878) 320 (1,480) (2,038)
Changes in operating assets and liabilities
net of effect of business acquired:
Accounts receivable 920 8,255 (8,037) 1,138
Inventory 280 (9,834) 8,352 (1,202)
Prepaid expenses and other (434) 2,910 (1,622) 854
Other assets (918) (2,286) 39 (3,165)
Intercompany (3,517) 4,116 5,463 (6,062) --
Accounts payable 1,532 573 3,578 5,683
Accrued expenses and other (2,476) 1,491 625 (360)
-------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (14,549) 4,514 11,615 -- 1,580
-------------------------------------------------------------------------------
Investing activities:
Capital expenditures (236) (6,845) (3,245) (10,326)
Acquisition of a business (51,700) -- -- (51,700)
Other investing -- -- (457) (457)
-------------------------------------------------------------------------------
Net cash used in
investing activities (51,936) (6,845) (3,702) -- (62,483)
-------------------------------------------------------------------------------
Financing activities:
Cash overdraft (145) 3,489 -- 3,344
Net decrease in short term debt 24,592 -- 893 25,485
Proceeds from long term debt -- 26 1,552 1,578
Proceeds from issuance of
redeemable preferred stock 45,000 -- -- 45,000
Payments of long term debt (24) (806) (6) (836)
Other financing (942) -- -- (942)
-------------------------------------------------------------------------------
Net cash provided by
financing activities 68,481 2,709 2,439 -- 73,629
-------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- (4) (41) (45)
-------------------------------------------------------------------------------
Net increase in cash and
cash equivalents 1,996 374 10,311 -- 12,681
Cash and cash equivalents
at beginning of period 11 99 2,293 2,403
-------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 2,007 $ 473 $ 12,604 $ -- $ 15,084
===============================================================================
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of specialty agricultural and industrial chemicals, which are sold
world-wide for use in numerous markets, including animal health and nutrition,
agriculture, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company also provides recycling and hazardous waste services
primarily to the electronics and metal treatment industries.
The Company has four operating segments--Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. The Company previously
reported two operating segments--Agchem and Industrial Chemicals. Due to
organizational changes during fiscal 2001, including those associated with the
acquisition of the animal health business from Pfizer and the sale of the Agtrol
crop protection business, segment reporting was revised as of June 30, 2001.
Prior period segment information has been revised to conform to the fiscal 2002
segment presentation.
On November 30, 2000, the Company purchased the animal health business of
Pfizer, Inc. ("Pfizer"). The operating results of this business, now called
Phibro Animal Health, ("PAH"), are included in the Company's consolidated
statements of operations from the date of acquisition and are included in the
Animal Health and Nutrition segment.
On May 4, 2001, the Company sold its Agtrol U.S. business, a division of
the Company's Phibro-Tech, Inc. subsidiary, to Nufarm, Inc. ("Nufarm"), a U.S.
subsidiary of Nufarm Limited, a publicly listed Australian based company. On
June 14, 2001, the Company sold its Agtrol international business to Nufarm.
Agtrol developed, manufactured and marketed crop protection products, including
copper fungicides. The sale included inventory and intangible assets to Nufarm
but did not include plant, equipment, or other manufacturing assets. Phibro-Tech
also entered into agreements to supply copper fungicide products to Nufarm from
its Sumter, South Carolina plant for five years, and from its Bordeaux, France
plant for three years. On December 24, 2001, the Company transferred certain
receivables and rebate liabilities, at net carrying value, from Agtrol U.S.
sales prior to May 1, 2001, to Nufarm, with no recourse. The operating results
of Agtrol are included in the Company's consolidated statements of operations up
to the date of disposition and are included in the All Other segment.
The Company's Odda, Norway operation has suffered operating losses during
fiscal 2001 and for the nine months ended March 31, 2002. Odda is included in
the Industrial Chemicals segment and had third party revenues of $18.2 and $15.9
million, and operating losses (before the effect of the $4.8 million incremental
depreciation discussed below) of $4.4 and $3.2 million for the nine month
periods ended March 31, 2002 and 2001, respectively. The Company has initiated
and completed a number of cost cutting and efficiency initiatives. However,
continued competitive pricing pressures on Odda's primary products and
increasing raw material and production costs have more than offset the favorable
impact of initiatives undertaken to date. The Company has evaluated the future
operation of Odda under a number of scenarios, ranging from ceasing production
of certain products to a complete shutdown of the operation. During the third
quarter of fiscal 2002 the Company decided to cease production of two of Odda's
three primary products as of June 30, 2002, and focus its resources on the
remaining product line. Third party revenues of the remaining product line were
$9.6 million for the nine months ended March 31, 2002. The decision to cease
production of these two products requires the Company to accelerate the
depreciation of the directly related property, plant, and equipment so these
assets will be fully depreciated by June 30, 2002. This change in expected
remaining useful life has increased depreciation and amortization by $4.8
million for the three months and nine months ended March 31, 2002, with an
additional charge to depreciation and amortization of $9.3 million planned for
the fourth quarter. The Company is also in negotiations with the government of
Norway for certain financial assistance.
The Company has evaluated this decision to cease production of two
products and the related estimated undiscounted future cash flows from the
remaining product line under Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-lived Assets and For Long-lived Assets To
Be Disposed Of" and believes no impairment of long-lived assets of Odda (with a
carrying value of $18,946) exists at March 31, 2002.
21
Results of Operations
Sales
($000's)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ---------------------------
2002 2001 2002 2001
------- ------- -------- --------
Operating Segments
Animal Health and Nutrition .......................... $ 60,252 $ 60,167 $ 183,618 $ 139,651
Industrial Chemicals ................................. 22,839 25,776 65,718 72,281
Distribution ......................................... 8,984 11,641 27,798 33,928
All Other ............................................ 9,444 14,115 28,464 35,035
Elimination of intersegment sales .................... (5,209) (7,897) (16,642) (20,954)
--------- --------- --------- ---------
$ 96,310 $ 103,802 $ 288,956 $ 259,941
========= ========= ========= =========
Operating Income (Loss)
($000's)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ---------------------------
2002 2001 2002 2001
------- ------- -------- --------
Operating Segments
Animal Health and Nutrition .......................... $ 6,246 $ 4,614 $ 23,870 $ 11,107
Industrial Chemicals ................................. (6,067) (397) (12,809) (797)
Distribution ......................................... 635 1,119 2,224 2,964
All Other ............................................ (750) (1,744) (860) (5,383)
Corporate expenses and eliminations .................. (3,793) (2,276) (10,131) (7,557)
--------- --------- --------- ---------
$ (3,729) $ 1,316 $ 2,294 $ 334
========= ========= ========= =========
Comparison of Three Months Ended March 31, 2002 and 2001
Net Sales. Net sales decreased by $7.5 million, or 7%, to $96.3 million in
the three months ended March, 2002, as compared to the same period of the prior
year. The decrease was primarily due to the sale of the Company's Agtrol
operations and lower average selling prices.
The Animal Health and Nutrition segment's net sales were $60.3 million for
the three months ended March 31, 2002, approximately the same as the prior
period. Higher unit volumes and product mix changes increased sales
approximately 7% during the period and were offset by lower average selling
prices and inter segment sales of approximately the same percent.
The Industrial Chemicals segment's net sales decreased by $2.9 million, or
11%, to $22.8 million in the three months ended March 31, 2002 as compared to
the prior period. Sales by the Company's Phibro-Tech subsidiary were down by
$2.1 million due to volume declines related to the printed circuit board
industry. The Company's Odda subsidiary reduced revenues by $1.1 million due to
lower shipments of Carbide and Dicyandiamide offset by increased shipments of
CY-50 product. Higher shipments of mineral oxide products partially offset the
decrease. Included in the sales decreases were lower inter segment sales of
approximately $2.2 million.
Net sales for the Distribution segment decreased by $2.7 million, or 23%,
to $9.0 million in 2002, as compared to the prior period. The net sales decrease
was due to lower unit volumes and product mix changes of $2.5 million and also
lower average selling prices of $.2 million. Declines in the segment's cyanide,
carbide, dicyandiamide and DL panthenol products occurred during the quarter of
this fiscal year as compared to the prior year period.
Net sales for the All Other segment decreased by $4.7 million, or 33%, to
$9.4 million in 2002, as compared to the prior period. Approximately $4.9
million of this decrease related to lower sales of crop protection chemicals.
The Company's Agtrol crop protection business was sold during the fourth quarter
of fiscal 2001 and sales of certain crop protection chemicals are currently
being made under supply agreements to Nufarm. Excluding Agtrol, sales for the
segment in 2002 were $.2 million above the prior year, primarily due to improved
average selling prices in the Company's fly ash business.
22
Gross Profit. Gross profit decreased by $5.5 million, or 19%, to $23.0
million in the three months ended March 31, 2002, as compared to the prior
period. A charge of $4.8 million was recorded in the third quarter for the
acceleration of depreciation related to the Company's decision to cease
production of two products at the Company's Odda facility. Purchase accounting
adjustments relating to inventory acquired in the PAH acquisition resulted in an
increase to cost of goods sold of $.4 million and $4.6 million for the three
months ended March 31, 2002 and, respectively. Excluding the purchase
accounting adjustments, gross profit declined by approximately $.8 million in
the Animal Health segment primarily due to lower average selling prices. The
Industrial Chemicals segment declined primarily due to lower production volumes
and ERS revenues at the Company's Phibro-Tech facilities ($.9 million) and lower
profits at the Company's Odda facility ($.8 million) offset in part by higher
sales of mineral products ($.3 million). The Distribution segment declined $.6
million primarily as a result of lower unit volume. Gross profit declined in the
All Other segment due to sales of crop protection products sold to Nufarm under
a supply agreement in the current period as opposed to higher margin sales to
third parties in the prior period of $1.9 million offset by improved performance
at the Company's fly ash operations ($.5 million). Elimination of inter-company
profit in inventory accounted for the balance of the decrease.
Selling, General and Administrative Expenses. Costs decreased by $.5
million to $26.7 million in 2002, as compared to the prior period. Excluding
Agtrol, costs were up approximately $2.7 million. Costs increased by $.9 million
over the prior period at PAH due to increased staffing levels, advertising and
research and development costs associated with the transition of operations from
Pfizer. In addition, costs increased due to higher warehousing, and distribution
costs primarily relating to sales growth in the Company's fly ash business ($.7
million). The prior period included a $1.1 million non-cash gain to reflect the
decrease in repurchase value of redeemable common stock of a minority
shareholder; no amount was recorded in the current period.
Operating Income (Loss). Operating income decreased by $5.0 million to a
loss of $3.7 million in 2002, as compared to the prior period. The Animal Health
and Nutrition segment, after the exclusion of purchase accounting adjustments,
decreased due to lower margins and increased overhead spending. Operating
income, excluding the accelerated depreciation at Odda, declined in the
Industrial Chemicals segment primarily due to lower sales and production
volumes. The Company is implementing cost reduction programs and other
initiatives with respect to Phibro-Tech's copper related businesses in reaction
to current market conditions in the printed circuit board industry. The
improvement in operating income of the All Other segment is primarily the result
of the sale of Agtrol as the Company is no longer materially impacted by the
seasonal nature of the crop protection business. The Distribution segment
decreased compared to the prior year primarily due to sales volume declines.
Interest Expense, Net. Costs decreased by $.6 million or 12% to $4.6
million for the three months ended March 31, 2002 as compared to the prior
period primarily due to lower interest rates and lower average borrowing levels
associated with the Company's revolving credit agreement.
Other Expense, Net. Other expense, net principally reflects foreign
currency transaction/translation gains and losses of the Company's foreign
subsidiaries (principally Norwegian Kroner and the Israeli Shekel).
Income Taxes. The Company provides a benefit on interim period losses as
it is anticipated that future earnings can be utilized to offset the tax benefit
recorded in the current year. The effective tax rate differs from the U.S.
statutory rate due to the relationship of each domestic and international
subsidiary's individual income or loss position to the statutory tax rates in
each country.
Comparison of Nine Months Ended March 31, 2002 and 2001
Net Sales. Net sales increased by $29.0 million, or 11%, to $289.0 million
in the nine months ended March 31, 2002, as compared to same period of the prior
year. The increase was primarily due to the purchase of the PAH business offset
in part by the sale of the Company's Agtrol operations.
The Animal Health and Nutrition segment's net sales increased by $44.0
million, or 31%, to $183.6 million in the nine months ended March 31, 2002, as
compared to the prior period. The net sales increase was due to increased unit
volume primarily as a result of the PAH purchase. Excluding PAH, sales for the
segment in 2001 were $2.2 million above the prior year primarily due to higher
unit volume sales of vitamin, mineral and other pre-mix products at the
Company's domestic facilities. This was offset in part by the adverse business
climate in Israel and the discontinuation of sales of vitamin exports by the
Company's Koffolk Israel operations.
23
The Industrial Chemicals segment's net sales decreased by $6.6 million, or
9%, to $65.7 million in the nine months ended March 31, 2002, as compared to the
prior period. Sales by the Company's Phibro-Tech subsidiary were down by $7.1
million due to volume declines related to the printed circuit board industry.
Higher unit volume sales, offset in part by lower average selling prices, at the
Company's Odda subsidiary increased revenues by $1.1 million and partially
offset the decrease. Lower sales of iron and manganese oxides accounted for the
balance of the change.
Net sales for the Distribution segment decreased by $6.1 million, or 18%,
to $27.8 million in 2002, as compared to the prior period. The net sales
decrease was primarily due to lower unit volumes and product mix changes of
approximately $3.3 million and lower average selling prices, primarily carbide
products, of $2.8 million. Declines in the segment's cyanide, carbide,
dicyandiamide and DL panthenol products also occurred during nine month period
of this fiscal year as compared to the prior year period.
Net sales for the All Other segment decreased by $6.6 million, or 19%, to
$28.5 million in 2002, as compared to the prior period. Approximately $9.4
million of this decrease related to lower sales of crop protection chemicals.
The Company's Agtrol crop protection business was sold during the fourth quarter
of fiscal 2001 and sales of certain crop protection chemicals are currently
being made under supply agreements to Nufarm. Excluding Agtrol, sales for the
segment in 2001 were $2.8 million above the prior year. The Company's fly ash
business increased by $1.8 million primarily due to increased volume as a result
of additional contracts with utilities in Missouri and Michigan and improved
average selling prices. Revenues of the Company's Wychem, U.K. operations
improved by $1.0 million due to an increase in specialized lab projects and
formulations.
Gross Profit. Gross profit increased by $10.3 million, or 14%, to $81.3
million in the nine months ended March 31, 2002, as compared to the prior
period. The increase was primarily due to the purchase of the PAH business
offset in part by lower production volumes at the Company's Phibro-Tech
facilities and the sale of the Company's Agtrol operations. A charge of $4.8
million was recorded in the third quarter for the acceleration of depreciation
related to the Company's decision to cease production of two products at the
Company's Odda facility. Purchase accounting adjustments relating to inventory
acquired in the PAH acquisition resulted in an increase to cost of goods sold of
$3.3 and $5.7 million for the nine months ended March 31, 2002 and 2001,
respectively. Gross profit declined in the All Other segment due to sales of
crop protection products sold to Nufarm under a supply agreement in the current
period as opposed to higher margin sales to third parties in the prior period of
$4.1 million offset by improved performance at the Company's fly ash operations
of $1.6 million. Elimination of inter-company profit in inventory accounted for
the balance of the decrease.
Selling, General and Administrative Expenses. Costs increased by $8.3
million to $79.0 million in 2002, as compared to the prior period. Excluding PAH
and Agtrol, costs were up approximately $5.3 million principally due to
management advisory fees to Palladium Equity Partners, LLC ($.9 million), higher
warehousing and distribution primarily relating to sales growth in the Company's
fly ash business ($1.5 million), higher depreciation and amortization ($.6
million) and environmental remediation ($.7 million). The prior period included
an accrual for severance costs ($1.3 million) associated with the termination of
employment of an executive of the Company. In addition, the prior period
included a $2.3 million non-cash gain to reflect the decrease in repurchase
value of redeemable common stock of a minority shareholder, as compared to the
gain in the current period of $.4 million. Other general spending accounted for
the balance of the increase.
Operating Income. Operating income increased by $2.0 million to $2.3
million in 2002, as compared to the prior period. The Animal Health and
Nutrition segment increased due to the inclusion of PAH for the period.
Operating income, excluding the accelerated depreciation at Odda, declined in
the Industrial Chemicals segment primarily due to lower sales and production
volumes. The Company is implementing cost reduction programs and other
initiatives with respect to Phibro-Tech's copper related businesses in reaction
to current market conditions in the printed circuit board industry. The
improvement in operating income of the All Other segment is primarily the result
of the sale of Agtrol as the Company is no longer materially impacted by the
seasonal nature of the crop protection business. The Distribution segment was
below the prior year primarily due to sales volume declines.
Interest Expense, Net. Costs increased by $.8 million or 6% to $13.6
million for the nine months ended March 31, 2002 as compared to the prior period
primarily due to debt incurred in connection with the PAH acquisition and higher
levels of average bank borrowings.
Other Expense, Net. Other expense, net principally reflects foreign
currency transaction/translation gains and losses of the Company's foreign
subsidiaries.
Income Taxes. The Company provides a benefit on interim period losses as
it is anticipated that future earnings can be utilized to offset the tax benefit
recorded in the current year. The effective tax rate differs from the U.S.
statutory rate due to the relationship of each domestic and international
subsidiary's individual income or loss position to the statutory tax rates in
each country.
24
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Cash provided by operations for
the nine months ended March 31, 2002 was $.4 million. The increase in cash from
the collection of receivables from the Company's crop protection business was
offset by a planned increase in higher inventories at the PAH business unit.
This build up of inventories is considered necessary to ensure an adequate
availability of product as the Company continues to refine its supply chain and
expand into new markets.
Net Cash Used by Investing Activities. Net cash used in investing
activities for the nine months ended March 31, 2002 was $15.3 million. Capital
expenditures of $8.7 million were mostly for maintaining the Company's existing
asset base and for environmental, health and safety projects. The remainder of
the net cash used by investing activities primarily relates to contingent
purchase price payments from the PAH acquisition.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities totaled $14.7 million. Borrowings under the domestic revolving credit
agreement were partially offset by paydowns of debt at several of the Company's
international subsidiaries and a $2.5 million payment on long-term debt related
to the PAH acquisition.
Liquidity. At March 31, 2002, working capital totaled $61.2 million
compared to $74.0 million at the fiscal year end. Due to the nature and terms of
the revolving credit agreement, which includes both a subjective acceleration
clause and a requirement to maintain a lockbox arrangement, all borrowings
against this facility are classified as a current liability. At March 31, 2002,
the amount of credit extended under this agreement totaled $40.6 million and the
Company had $4.4 million available under the borrowing base formula in this
agreement. In addition, certain of the Company's foreign subsidiaries also had
availability under their respective credit facilities totaling $8.1 million.
The Company anticipates spending approximately $12 million for capital
expenditures in fiscal 2002, primarily to cover the Company's asset replacement
needs, improve processes, and for environmental and regulatory compliance,
subject to the availability of funds.
The Company's Odda subsidiary, with the concurrence of the Norwegian
banks, has deferred a scheduled principal payment of $.6 million pending
resolution of discussions with Odda's banks regarding the restructuring of these
loans as a result of the partial shutdown of Odda's operations, and is also
negotiating with the government of Norway for financial assistance. Philipp
Brothers Chemicals, Inc. is the guarantor of this debt.
Due to lower levels of economic activity and increased global competition,
the Company believes that cash flows from operations and available borrowing
arrangements may not provide sufficient working capital to operate the Company's
existing business, to make budgeted capital expenditures, and to service
interest and current principal coming due on outstanding debt over the ensuing
12 month period. Accordingly, the Company is considering the divestiture of
certain business operations and cost reduction programs to provide funds to meet
future obligations on a timely basis.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies". The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of
the June 30, 2001 Annual Report on Form 10-K. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, management of the Company is required to make
certain estimates and assumptions during the preparation of consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America. These estimates and assumptions impact the
reported amount of assets and liabilities and disclosures of contingent assets
and liabilities as of the date of the consolidated financial statements.
Estimates and assumptions are reviewed periodically and the effects of revisions
are reflected in the period they are determined to be necessary. Actual results
could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include inventory valuation, allowance for doubtful accounts, useful
lives of tangible and intangible assets and various other operating allowances
and accruals.
25
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No.
141") and No. 142 "Goodwill and Other Intangibles" ("SFAS No. 142"). SFAS No.
141 and No. 142 are effective for the Company on July 1, 2002. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The statement requires that goodwill and
indefinite lived intangible assets no longer be amortized and be tested for
impairment at least annually. The amortization period of intangible assets with
finite lives will no longer be limited to forty years. The Company is currently
assessing the impact of these statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 is effective for the Company on July
1, 2002. The statement establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. The Company is currently assessing the impact of this
statement.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 is effective for the
Company on July 1, 2002. The statement addresses significant issues relating to
the implementation of FASB Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS No. 121"),
and the development of a single accounting model, based on the framework
established in FAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company is currently
assessing the impact of this statement.
Seasonality of Business
Prior to the divestiture of the crop protection business, the Company's
sales were typically highest in the fourth fiscal quarter due to the seasonal
nature of the agricultural industry. With the sale of this business, as well as
the acquisition of the non-seasonal PAH business, the Company's sales are
expected to be less seasonal. However, some seasonality in the Company's results
will remain as sales of certain industrial chemicals to the wood treatment
industry as well as sales of coal fly ash are typically highest during the peak
construction periods of the first and fourth fiscal quarters.
Quantitative and Qualitative Disclosure About Market Risk
For financial market risks related to changes in interest rates, foreign
currency exchange rates and commodity prices, reference is made to Part II, Item
7, Quantitative and Qualitative Disclosure About Market Risk, in the Company's
Annual Report on Form 10-K for the year ended June 30, 2001 and to Note 13 to
the Consolidated Financial Statements of the Company included therein.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among other factors
noted herein, the following: the Company's substantial leverage and potential
inability to service its debt; the Company's dependence on distributions from
its subsidiaries; risks associated with the Company's international operations;
the Company's ability to absorb and integrate into its existing operations the
PAH acquisition referred to above; the Company's dependence on its Israeli
operations; competition in each of the Company's markets; potential
environmental liability; extensive regulation by numerous government authorities
in the United States and other countries; significant cyclical price fluctuation
for the principal raw materials used by the Company in the manufacture of its
products; the Company's reliance on the continued operation and sufficiency of
its manufacturing facilities; the Company's dependence upon unpatented trade
secrets; the risks of legal proceedings and general litigation expenses;
potential operating hazards and uninsured risks; the risk of work stoppages; the
Company's dependence on key personnel; the uncertain impact of the Company's
acquisition plans; and the seasonality of the Company's business.
Additional factors that might cause such a difference include the effect
of current hostilities in Israel on the Company's Israeli operations, the
potential need to make cost reduction programs and divestiture of certain
business operations and the effect of such actions on consolidated results, and
uncertainties with respect to the restructuring of the Company's Odda
operations.
26
The Company has a domestic net deferred tax asset of approximately $12.2
million at March 31, 2002. The Company has incurred domestic losses in recent
fiscal years; however, with the acquisition of the Pfizer Animal Health business
and the sale of the Agtrol crop protection business in 2001, the Company had
anticipated a return to profitability in fiscal 2002 and, accordingly, the
Company had considered the deferred tax assets more likely than not of
realization. As indicated previously, the Company has experienced lower levels
of economic activity than anticipated across its global operations, including
the United States. As a result, the Company currently anticipates a small
domestic loss for fiscal 2002. As indicated above, significant cost reduction
activities have already been undertaken in several domestic businesses to adjust
the cost base to current levels of economic activity, and the Company
anticipates domestic profitability for fiscal 2003 and beyond. Consequently, the
Company continues to consider the deferred tax assets more likely than not of
recovery and no valuation allowance has been provided. The Company's position
will continue to be reassessed each reporting period in light of domestic
operating performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations Quantitative and Qualitative Disclosure
About Market Risk."
27
PART II -- OTHER INFORMATION
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
None.
(b) Reports on Form 8-K.
None.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
Date: May 14, 2002 By: /s/ DAVID C. STORBECK
-----------------------------------
David C. Storbeck
Chief Financial Officer
Date: May 14, 2002 By: /s/ JOSEPH KATZENSTEIN
-----------------------------------
Joseph Katzenstein, Treasurer
and Secretary
29