SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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
MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3436215
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 Wood Avenue South
Iselin, New Jersey 08830
(Address of principal executive offices)
908-603-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 77,156,585 shares of Common
Stock, par value $.01 per share, as of August 5, 1997.
<PAGE>
MILLENNIUM CHEMICALS INC.
Table of Contents
Page
Part I
Item 1 Financial Statements . . . . . . . . . . . . . . . . . . . . 2
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 15
Part II
Item 4 Submission of Matters to a Vote of Security Holders . . . . 18
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Disclosure Concerning Forward-Looking Statements
All statements, other than statements of historical fact, included in this
Quarterly Report are, or may be deemed to be, forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934. Important
factors that could cause actual results to differ materially from those
discussed in such forward-looking statements ("Cautionary Statements") include:
the balance between industry production capacity and operating rates on the one
hand, and demand for the Company's products, including polyethylene and titanium
dioxide, on the other hand; the economic trends in the United States and other
countries which serve as the Company's marketplaces; customer inventory levels;
competitive pricing pressures; the cost and availability of the Company's
feedstocks and other raw materials, including natural gas and ethylene;
competitive technology positions; and failure to achieve the Company's
productivity improvement and cost reduction targets or to complete construction
projects on schedule. 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 such Cautionary Statements. It should
also be noted that the formation of the Company's proposed olefins and polymers
joint venture discussed in Note 9 is subject to certain conditions and that, if
formed, the results of the joint venture will be subject to many of the factors
included in such Cautionary Statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(In Millions)
June 30, December 31,
1997 1996*
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 26 $ 408
Trade receivables, net 500 464
Inventories 444 515
Other current assets 57 83
------- -------
Total current assets 1,027 1,470
Property, plant and equipment, net 2,015 2,031
Investments and other assets 281 334
Goodwill 1,742 1,766
------- -------
Total assets $ 5,065 $ 5,601
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 82 $ 98
Current maturities of long-term debt 6 6
Trade accounts payable 153 160
Income taxes payable 113 33
Accrued expenses and other liabilities 367 470
------- -------
Total current liabilities 721 767
Long-term debt 1,787 2,360
Deferred income taxes 131 78
Other liabilities 1,030 1,078
------- -------
Total liabilities 3,669 4,283
------- -------
Commitments and contingencies (Note 6)
Stockholders' Equity
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 and
outstanding 77,324,605 shares) 1 1
Paid in capital 1,334 1,319
Retained earnings 117 38
Unearned restricted stock (59) (50)
Cumulative translation adjustment 3 10
------- -------
Total stockholders' equity 1,396 1,318
------- -------
Total liabilities and stockholders' equity $ 5,065 $ 5,601
======= =======
See Notes to Consolidated (Combined) Financial Statements
- ---------------------
* Reclassified for comparative purposes.
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(In Millions, except share data)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
(Unaudited) (Unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 813 $ 780 $ 1,607 $ 1,510
Operating costs and expenses:
Cost of products sold 571 589 1,195 1,140
Depreciation and amortization 53 51 106 102
Selling, development and administrative expenses 57 51 108 93
Asset impairment and related closure costs - 60 - 60
----- ----- ------ -----
Operating income 132 29 198 115
Interest expense (primarily to a related party in 1996) 32 54 70 108
Interest income (1) (2) (6) (12)
Gain on sale of Suburban Propane - - - (212)
Other (income) expense (40) 11 (44) (16)
----- ----- ------ -----
Income (loss) from continuing operations before provision
for income taxes 141 (34) 178 247
(Provision) benefit for income taxes (59) 15 (76) (154)
----- ----- ------ -----
Income (loss) from continuing operations 82 (19) 102 93
Loss from discontinued operations (net of income tax
of $1 and benefit of $1,286, respectively) - (14) - (3,204)
----- ----- ------ ------
Net income (loss) $ 82 $ (33) $ 102 $ 3,111
===== ===== ====== ======
Per share information assuming 76,477,055 shares
outstanding during entire period:
Income per share from continuing operations $ 1.07 $(0.25) $ 1.33 $ 1.22
----- ----- ------ ------
Net income per share $ 1.07 $(0.43) $ 1.33 $(40.69)
===== ===== ====== ======
</TABLE>
See Notes to Consolidated (Combined) Financial Statements.
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(In Millions)
Six Months Ended
June 30,
1997 1996
---- ----
(Unaudited)
Cash flows from operating activities:
Income from continuing operations $ 102 $ 53
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 106 102
Asset impairment and related closure costs - 60
Provision for deferred income taxes 53 62
Restricted stock amortization - 6
Gain on sale of business - (212)
Changes in assets and liabilities:
(Increase) in trade receivables (36) (11)
Decrease in inventories 71 78
Decrease in other current assets 26 27
Decrease (increase) in investments and other assets 53 (25)
(Decrease) increase in trade accounts payable (7) 8
(Decrease) increase in accrued expenses and
other liabilities and income taxes payable (23) 59
(Decrease) in other liabilities
(33) (65)
----- -----
Net cash provided by operating activities 318 176
Cash flows from investing activities:
Capital expenditures (74) (153)
Proceeds from sale of business - 733
Proceeds from sale of fixed assets - 7
----- -----
Net cash (used in) provided by investing
activities (74) 587
Cash flows from financing activities:
Dividend to stockholders - (23)
Net transactions with affiliates - (1,084)
Proceeds from long-term debt - 6
Repayment of long-term debt - (580)
(Decrease) increase in notes payable (16) 316
----- -----
Net cash (used in) financing activities (619) (762)
----- -----
Effect of exchange rate changes on cash (7) 21
----- -----
(Decrease) increase in cash and cash equivalents (382) 22
Cash and cash equivalents at beginning of period 408 412
----- -----
Cash and cash equivalents at end of period $ 26 $ 434
===== =====
See Notes to Consolidated (Combined) Financial Statements.
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Changes in Stockholders' Equity
(In Millions)
<TABLE>
Unearned Cumulative
Common Stock Paid In Retained Restricted Translation
Shares Amount Capital Earnings Stock Adjustment Total
------ ------ ------- -------- ----- ---------- -----
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 77 1 $ 1,319 $ 38 $ (50) $ 10 $ 1,318
Net income 102 102
Dividend (23) (23)
Amortization and adjustment of
unearned restricted stock 15 (9) 6
Translation adjustment (7) (7)
----- ----- ------ ------ ----- -------- ------
Balance at June 30, 1997 (unaudited) 77 1 $ 1,334 $ 117 $ (59) $ 3 $ 1,396
===== ===== ====== ====== ===== ======== ======
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated (Combined) Financial Statements
(In Millions, except for share data)
NOTE 1--BASIS OF PRESENTATION AND DESCRIPTION OF COMPANY
Millennium Chemicals Inc. (the "Company") was incorporated on April 18,
1996, and has been publicly-owned since October 1, 1996, when Hanson PLC
("Hanson") paid a dividend to its stockholders consisting of all of the then
outstanding shares of the Company's common stock (the "Demerger"). The Company's
businesses were owned by Hanson prior to October 1, 1996. The Company is a
leading producer of commodity, industrial, performance and specialty chemicals
operating through its subsidiaries: Millennium Petrochemicals Inc. (formerly
Quantum Chemical Corporation), Millennium Inorganic Chemicals Inc. (formerly SCM
Chemicals Inc., SCM Chemicals Limited and SCM Chemicals Ltd., collectively), and
Millennium Specialty Chemicals Inc. (formerly Glidco Inc.). For periods prior to
the Demerger, the financial statements present, on a combined basis, the
historical net assets and results of operations of their chemical operations.
Consequently, the results of operations and cash flows prior to October 1, 1996
may not be indicative of what would have been reported if the Company had been a
separate entity. For periods subsequent to the Demerger, the financial
statements are presented on a consolidated basis. All significant intercompany
accounts and transactions have been eliminated.
The accompanying consolidated (combined) financials are unaudited and have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. They include all adjustments which the Company considers
necessary for a fair statement of the results of operations and financial
position for the interim periods presented. Such adjustments consist only of
normal recurring items, except as otherwise disclosed in Notes 3 and 4.
The combined statements of operations and cash flows for the periods ended
June 30, 1996 also include the combined operations of certain non-chemicals
businesses ("Discontinued Businesses") which were owned by subsidiaries of
Hanson that became subsidiaries of the Company upon the Demerger (see Note 4).
The Company sold the Discontinued Businesses to Hanson on October 6, 1996. Since
these operations were not a part of the Company upon completion of the Demerger
transactions, their historical results of operations have been presented as
discontinued operations.
In March 1996, Millennium Petrochemicals sold a 73.6% interest in Suburban
Propane, a division of Millennium Petrochemicals, through an initial public
offering of 21,562,500 common units in a new master limited partnership ("MLP"),
Suburban Propane Partners, L.P., and received aggregate proceeds from the sale
of the common units and the issuance of notes of the Suburban Propane operating
partnership, Suburban Propane, L.P., of approximately $831 resulting in a
pre-tax gain of $212. The Company retains a combined subordinated and general
partnership interest of 26.4% in Suburban Propane Partners L.P. and Suburban
Propane L.P. (collectively "Suburban Propane Partners"), which is accounted for
on an equity basis effective January 1, 1996.
Prior to the Demerger, the Company provided certain corporate, general and
administrative services to certain other indirect wholly-owned subsidiaries of
Hanson ("Prior Affiliates"), including legal, finance, tax, risk management and
employee benefit services. Charges for these services, which were allocated to
the Prior Affiliates based on the respective revenues of the Company and the
Prior Affiliates, reduced the Company's selling and administrative expenses by
$6 and $12 for the three months and six months ended June 30, 1996,
respectively. The Company's management believes such method of allocation is
reasonable. In addition, prior to the Demerger, a subsidiary of the Company
controlled, on a centralized basis, all cash receipts and disbursements received
or made by such Prior Affiliates.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
<PAGE>
Inventories: Inventories are stated at the lower of cost or market value. For
certain United States ("U.S.") operations, cost is determined under the last-in,
first-out (LIFO) method. The first-in, first-out (FIFO) method is used by all
other subsidiaries. Inventories valued at a LIFO basis were approximately $39
and $45 less than the amount of such inventories valued at current cost at June
30, 1997 and December 31, 1996, respectively.
<PAGE>
June 30, December 31,
-------- ------------
1997 1996
---- ----
(Unaudited)
Inventories consisted of the following:
Finished products $ 227 $ 270
In-process products 14 12
Raw materials 125 165
Other inventories 78 68
------- -------
$ 444 $ 515
======== =======
Environmental Liabilities and Expenditures: Accruals for environmental matters
are recorded in operating expenses when it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated. Accrued
liabilities are exclusive of claims against third parties (except where payment
has been received or the amount of the liability or contribution by such other
parties, including insurance companies, has been agreed) and are not discounted.
In general, costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs increase the value of the
property and/or mitigate or prevent contamination from future operations.
Foreign Currency Translation and Forward Contracts: Assets and liabilities of
the Company's foreign operating subsidiaries are translated at the exchange rate
in effect at the balance sheet dates, while revenue, expenses, and cash flows
are translated at average exchange rates for the reporting period.
Prior to October 1, 1996, certain of the Company's subsidiaries, whose holdings
principally consisted of sterling denominated cash deposits, were considered to
hedge a portion of Hanson's investments in the U.S. The functional currency of
these subsidiaries was the local currency. After the Demerger, such deposits no
longer acted as a hedge; instead, the entities were primarily holding companies,
the assets of which were remittable to the Company. As such, the functional
currency of these subsidiaries was changed to the U.S. dollar.
During 1996, the Company entered into forward contracts to hedge the impact of
exchange rate fluctuations on approximately 200 pounds sterling of the
sterling deposits held by these subsidiaries. The contracts, which expired on
December 12, 1996, were renewed until February 12, 1997, at which time they
expired in connection with the conversion of sterling proceeds received on the
sale of certain offshore companies for approximately 190 pounds sterling ($305).
The proceeds of such sales were used to reduce long-term debt.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated (Combined) Financial Statements-Continued
(In Millions, except for share data)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES--Continued
Dual Residence: The Company is organized under the laws of Delaware and is
subject to U.S. federal income taxation of corporations. However, in order to
obtain clearance from the United Kingdom ("U.K.") Inland Revenue as to the
tax-free treatment of the stock dividend for U.K. tax purposes for Hanson and
Hanson shareholders, Hanson agreed with the U.K. Inland Revenue that the Company
will continue to be centrally managed and controlled in the U.K. at least until
September 30, 2001. Hanson also agreed that the Company's Board of Directors
will be the only medium through which strategic control and policy making powers
are exercised, and that board meetings almost invariably will be held in the
U.K. during this period. The Company has agreed not to take, or fail to take,
during such five-year period, any action that would result in a breach of, or
constitute non-compliance with, any of the representations and undertakings made
by Hanson in its agreement with the U.K. Inland Revenue and to indemnify Hanson
against any liability and penalties arising out of a breach of such agreement.
The Company's By-Laws provide for similar constraints. The Company and Hanson
estimate that such indemnification obligation would amount to approximately $421
if it were to arise during the twelve months ending September 30, 1997, and it
will decrease by approximately $84 on each October 1 prior to October 1, 2001,
when it will expire.
If the Company ceases to be a U.K. tax resident at any time, the Company will be
deemed for purposes of U.K. corporation tax on chargeable gains to have disposed
of all of its assets at such time. In such a case, the Company would be liable
for U.K. corporation tax on chargeable gains on the amount by which the fair
market value of those assets at the time of such deemed disposition exceeds the
Company's tax basis in those assets. The tax basis of the assets would be
calculated in pounds sterling, based on the fair market value of the assets (in
pounds sterling) at the time of acquisition of the assets by the Company
adjusted for U.K. inflation. Accordingly, in such circumstances, the Company
could incur a tax liability even though it has not actually sold the assets and
even though the underlying value of the assets may not actually have appreciated
(due to currency movements). Since it is impossible to predict the future value
of the Company's assets, currency movements and inflation rates, it is
impossible to predict the magnitude of such liability, should it arise.
Fair Value of Financial Instruments: The fair value of all short-term financial
instruments approximated their carrying value due to their short maturity. The
fair value of long-term financial instruments, excluding interest rate
protection agreements and the Exchangeable Notes, the Senior Notes and the
Senior Debentures discussed below, approximated carrying value as they were
based on terms that continue to be available to the Company from its lenders.
The Company enters into interest rate protection agreements to manage interest
costs and risks associated with changing interest rates; these agreements
effectively convert underlying variable rate debt into fixed rate debt. The
notional amount of these agreements was $750 at June 30, 1997. The fixed rates
payable to the Company under these agreements average 5.7875% per annum with
terms expiring at various dates through October 1998. At June 30, 1997 the fair
value of the Exchangeable Notes and, collectively, the Senior Notes and the
Senior Debentures is approximately $36 and $729, respectively, based on
estimates obtained from independent financial advisors.
Earnings Per Share: Per share information is computed assuming that the common
stock issued as a result of the Demerger had been issued at the beginning of
1996. The weighted average number of common and common equivalent shares
outstanding at June 30, 1997 was 76,477,055. Such shares include 2,038,619 of
the 2,912,322 restricted shares issued on October 8, 1996, which anticipates the
achievement of certain performance based goals through the restricted period.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," effective for periods ending after December 31, 1997.
SFAS 128 specifies new standards designed to improve the earnings per share
("EPS") information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and increasing
the comparability of EPS data on an international basis. Had the Company adopted
the provisions of SFAS 128 as of January 1, 1997, basic and fully diluted EPS
for the three months and six months ended June 30, 1997 would have been $1.10
and $1.37, respectively.
NOTE 3--IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company recorded a $60 non-cash charge ($39 after tax) to
reduce the carrying value of certain property, plant and equipment employed in
sulfate-process manufacturing of TiO2 caused by changes in market conditions.
During the first half of 1996, intense price competition was experienced, as
customers of the anatase products associated with the sulfate-process operations
sought more cost efficient manufacturing inputs to their applications. As a
result of the deterioration of market conditions in the TiO2 industry, the
Company decided to implement a program which included a reduction of its
sulfate-process manufacturing capacity both in the U.K. and U.S., rephasing
chloride-process expansion programs in the U.K. and Australia. The 10,000 tonnes
per annum sulfate-process plant in Stallingborough, England has been closed, and
production at the 66,000 tonnes per annum sulfate-process facility in Baltimore,
Maryland has been reduced by approximately one third. The carrying value of
plant and equipment associated with sulfate-process manufacturing was reduced by
$60 as a result of evaluating the recoverability of such assets under the
unfavorable market conditions existing at that time. The amount of the
write-down was determined by comparison to the fair value of the related assets,
as determined based on the projected discounted cash flows identified to such
assets.
NOTE 4--DISCONTINUED BUSINESSES SOLD TO HANSON
The following represents the results of operations of the Discontinued
Businesses sold to Hanson:
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
------------- -------------
Sales $ 374 $ 889
Pre-tax loss (13) (4,490)
Tax (expense) benefit (1) 1,286
--------- -------
Net loss $ (14) $ (3,204)
======== =======
The pre-tax loss for the period includes the initial non-cash charge
resulting from adopting the evaluation methodology provided by SFAS 121 of
$4,497 ($3,206 after income taxes), related to the Discontinued Businesses.
SFAS 121 requires the impairment review to be performed at the lowest level of
asset grouping for which there are identifiable cash flows, which represents a
change from the level at which the previous accounting policy measured
impairment. In this case, economic grouping of assets was made based on local
marketplaces. Evaluation of assets at this lower grouping level indicated an
impairment of certain of those assets. The impairment loss was measured based on
the difference between estimated discounted cash flows and the carrying value of
such assets.
NOTE 5--LONG-TERM DEBT AND CREDIT ARRANGEMENTS
<TABLE>
Long-term debt consists of the following:
June 30, December 31,
1997 1996
---- ----
---- ----
(unaudited)
<CAPTION>
<S> <C> <C>
Revolving Credit Facility bearing interest at either the
bank's prime lending rate, LIBOR or NIBOR plus
.275% at the option of the Company plus Facility
Fee of .15% to be paid quarterly $ 971 $ 1,540
7% Senior Notes due 2006 (net of unamortized discount
of $.5 and $.5) 500 500
7.625% Senior Debentures due 2026 (net of unamortized
discount of $1.1 and $1.1) 249 249
2.39% Senior Exchangeable Discount Notes, due 2001
(net of unamortized discount of $5 and $6) 38 37
Debt payable through 2007 at interest rates ranging
from 4% to 11% 35 40
Less current maturities (6) (6)
------- ------
$ 1,787 $ 2,360
======= ======
</TABLE>
Under the Revolving Credit Agreement, as amended on December 18, 1996, certain
of the Company's subsidiaries may borrow up to $1,500 under the five-year
unsecured revolving credit facility, which matures in July 2001 (the "Credit
Agreement"). The Company is guarantor of this facility. Borrowings under the
Credit Agreement may consist of standby loans or uncommitted competitive loans
offered by syndicated banks through an auction bid procedure. Loans may be
borrowed in U.S. dollars and/or other currencies. The proceeds from the
borrowings may be used to provide working capital and for general corporate
purposes.
The Credit Agreement contains covenants and provisions that restrict, among
other things, the ability of the Company and its material subsidiaries to: (i)
create liens on any of its property or assets, or assign any rights to or
security interests in future revenues; (ii) engage in sale and leaseback
transactions; (iii) engage in mergers, consolidations and sales of all or
substantially all of their assets on a consolidated basis; (iv) enter into
agreements restricting dividends and advances by their subsidiaries; and (v)
engage in transactions with affiliates other than those based on arm's length
negotiations. The Credit Agreement also limits the ability of certain
subsidiaries of the Company to incur indebtedness or issue preferred stock. In
addition, the Credit Agreement requires the Company to satisfy certain financial
performance criteria.
The indenture under which the Senior Notes and Senior Debentures of
Millennium America Inc. ("MAI") are issued contain certain covenants that limit,
among other things, (i) the ability of MAI and its Restricted Subsidiaries (as
defined) to grant liens or enter into sale and lease-back transactions, (ii) the
ability of the Restricted Subsidiaries to incur additional indebtedness, and
(iii) the ability of MAI and the Company to merge, consolidate or transfer
substantially all of their respective assets. The Company is guarantor of the
Senior Notes and Senior Debentures.
The Exchangeable Notes have a stated interest rate of 2.39% per annum
which, when combined with the implicit interest yield attributable to the
original issue discount to par ("OID"), represents a yield to maturity of 6.0%.
The notes are not callable until March 1, 1999. Each holder of a note has a
benefit of a right (an "ADS Right"), not separately tradable, which is
exercisable at the holder's option until March 1, 2001 to cause the holder's
notes to be exchanged for Hanson ADSs, with each ADS representing five ordinary
shares of 2 pounds sterling in the capital of Hanson. The exchange ratio is
currently set at 12.182 ADSs per $1,000 principal amount of maturity of the
notes. At June 30, 1997, the closing price of Hanson ADSs on the New York Stock
Exchange was $25.75 per ADS.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated (Combined) Financial Statements-Continued
(In Millions, except for share data)
NOTE 6--COMMITMENTS AND CONTINGENCIES
The Company is subject, among other things, to several proceedings under the
Federal Comprehensive Environmental Response Compensation and Liability Act and
other federal and state statutes or agreements with third parties. These
proceedings are in various stages ranging from initial investigation to active
settlement negotiations to implementation of the clean-up or remediation of
sites.
Additionally, certain of the Company's subsidiaries are defendants or plaintiffs
in lawsuits that have arisen in the normal course of business, including those
relating to commercial transactions and product liability. While certain of the
lawsuits involve allegedly significant amounts, it is management's opinion,
based on the advice of counsel, that the ultimate resolution of such litigation
will not have a material adverse effect on the Company's financial position or
results of operations.
The Company believes that the range of potential liability for the above
matters, collectively, which primarily relate to environmental remediation
activities, is between $150 and $195 and has accrued $195 as of June 30, 1997.
The Company has various contractual obligations to purchase raw materials
used in its production of polyethylene, titanium dioxide, and fragrance and
flavor chemicals. Commitments to purchase ethylene used in the production of
polyethylene are based on market prices and expire from 1997 through 2000.
Commitments to purchase ore used in the production of titanium dioxide are
generally 3- to 8-year contracts with competitive prices generally determined at
a fixed amount subject to escalation for inflation. Total commitments to
purchase ore aggregate approximately $1,100 for titanium dioxide and expire
between 1997 and 2002. Commitments to acquire crude sulfate turpentine ("CST"),
used in the production of fragrance and flavor chemicals, are generally pursuant
to 1- to 5-year contracts expiring from 1997 through 2000 with prices based on
the market price.
NOTE 7--OPERATIONS BY INDUSTRY SEGMENTS
The Company's principal operations (excluding its interest in Suburban Propane
Partners) are grouped into five business segments: polyethylene and related
products, acetyls and ethyl alcohol, performance polymers, titanium dioxide and
related products, and fragrance and flavor chemicals.
The following is a summary of the Company's operations by industry segment:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
Net Sales:
Polyethylene and related products $ 354 $ 315 $ 713 $ 600
Acetyls and ethyl alcohol 107 107 203 203
Performance polymers 99 91 193 186
Titanium dioxide and related products 218 237 429 461
Fragrance and flavor chemicals 35 30 69 60
------ ----- ----- -----
Total $ 813 $ 780 $1,607 $1,510
====== ===== ===== =====
Depreciation and Amortization:
Polyethylene and related products $ 30 $ 25 $ 58 $ 51
Acetyls and ethyl alcohol 7 6 14 13
Performance polymers 4 5 10 10
Titanium dioxide and related products 11 14 22 26
Fragrance and flavor chemicals 1 1 2 2
------ ----- ----- -----
Total $ 53 $ 51 $ 106 $ 102
====== ===== ===== =====
Operating income:
Polyethylene and related products $ 78 $ 31 $ 117 $ 44
Acetyls and ethyl alcohol 24 13 30 28
Performance polymers 7 11 12 23
Titanium dioxide and related products 11 (36) 16 -
Fragrance and flavor chemicals 12 10 23 20
------ ----- ----- ----
Total $ 132 $ 29 $ 198 $ 115
====== ===== ===== ====
</TABLE>
<PAGE>
NOTE 8--INFORMATION ON MILLENNIUM AMERICA
MAI is a wholly-owned subsidiary of the Company and a holding company for all of
the Company's operating subsidiaries other than its operations in the U.K.
and Australia.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated (Combined) Financial Statements-Continued
(In Millions except share data)
NOTE 8--INFORMATION ON MILLENNIUM AMERICA--Continued
MAI is also the issuer of the Senior Notes, the Senior Debentures and
Exchangeable Notes and a borrower under the Credit Agreement, all of which are
fully and unconditionally guaranteed by the Company. Summarized financial
information for MAI is as follows:
June 30, December 31,
1997 1996
---- ----
Unaudited)
Current assets $ 850 $ 1,258
Noncurrent assets 3,790 3,973
-------- -------
Total assets $ 4,640 $ 5,231
======== =======
Current liabilities $ 638 $ 707
Noncurrent liabilities 3,140 3,418
Invested capital 862 1,106
-------- -------
Total liabilities and invested capital $ 4,640 $ 5,231
======== =======
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Net sales $ 729 $ 685 $ 1,442 $ 1,315
Operating income 110 15 194 78
Income from continuing operations 82 (25) 104 75
Net income (loss) 82 (39) 104 (3,129)
</TABLE>
Separate consolidated financial statements of MAI are not presented as
management has determined that they would not be material to investors.
NOTE 9--SUBSEQUENT EVENT
On July 28, 1997 the Company and Lyondell Petrochemical Company
("Lyondell") announced an agreement to form a new joint venture partnership (the
"Venture") to own and operate the olefins and polymers businesses of the Company
and Lyondell. The Venture is expected to be the largest producer of ethylene and
polyethylene in North America with expected revenues of $5 billion and book
assets totaling $5 billion. The Venture will be 57% owned by Lyondell and 43% by
the Company. It will be managed by a Partnership Governance Committee consisting
of three representatives of each of Lyondell and the Company. Approval of the
Venture's strategic plan and other major decisions will require the consent of
both partners; day-to-day operations in implementation of the strategic plan
will require the approval of Lyondell's representatives Management of the
Venture will be drawn from both companies. Dan Smith, Lyondell's Chief Executive
Officer, will serve as the Venture's first Chief Executive Officer.
The Venture will have 13 manufacturing facilities on the U.S. Gulf Coast
and in the U.S. Midwest, producing ethylene, propylene, polyethylene
(high-density, low-density and linear-low-density), polypropylene, ethyl
alcohol, butadiene, aromatics, MTBE and other associated products. The Venture
initially will have $1.745 billion of debt including $745 million of existing
Lyondell debt. Although the Venture will assume primary responsibility for such
existing Lyondell debt, Lyondell will continue to be liable for such debt. In
addition, Lyondell will provide a $345 million note payable to the Venture. MAI
will guarantee $750 million of the Venture's debt. It is contemplated that the
Venture will distribute all available net operating cash (as defined) pro rata
to the partners on a monthly basis.
The Company will contribute to the Venture substantially all of the net
assets and businesses comprising its polyethylene and related products and
performance polymers segments and the ethyl alcohol portion of the acetyls and
ethyl alcohol segment. The Company will retain the accounts receivable and
substantially all the accounts payable and accrued expenses from its contributed
businesses and receive approximately $750 million cash upon formation of the
Venture. Not included in the Venture are Millennium Petrochemicals' acetic acid,
vinyl acetate and methanol businesses. Also excluded from the Venture are
Millennium Inorganic Chemicals, Millennium Specialty Chemicals, and Millennium's
equity interest in Suburban Propane Partners.
Lyondell will contribute substantially all of the net assets and businesses
comprising its petrochemicals segment, except for retained accounts payable and
accrued expenses. Not included in the Venture are Lyondell's 58% interest in
Lyondell-CITGO Refining Co. Ltd. and its 75% interest in Lyondell Methanol (a
joint venture with MCN Investment Corp.).
The transaction, which has been unanimously approved by the Boards of
Directors of both companies, is subject to approval by both companies'
stockholders and satisfaction of certain other conditions. The Venture is
expected to commence operations by year end.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended June 30, 1997 Compared To Three Months Ended June 30, 1996
The Company had operating income of $132 million for the three months ended
June 30, 1997, an increase of $103 million from the three months ended June 30,
1996. 1996's quarter included a non-recurring non-cash pre-tax charge of $60
million to reduce the carrying value of certain facilities employed in the
sulfate-process manufacturing of TiO2 products. Excluding such charge, 1997
operating income increased 48% over the comparable quarter of the prior year.
This increase in operating income is primarily due to higher selling prices and
lower feedstock costs in the polyethylene and related products segments compared
to the 1996 quarter. The results of the polyethylene and related products
segment more than offset titanium dioxide segment results which, while
improving, continued to lag results for the 1996 quarter. Net sales of $813
million for the 1997 quarter increased $33 million (4%) over the 1996 quarter.
Net income for the second quarter of 1997 was $82 million or $1.07 per
share, including a one-time pre-tax gain from an insurance settlement of $46
million ($28 million after tax) relating to a 1989 explosion and fire at the
Company's Morris, Illinois plant. Excluding this gain, earnings per share for
the 1997 quarter would have been 71 cents. Net loss from continuing operations
for the second quarter of 1996 would have been $27 million or 35 cents per
share, assuming post-Demerger debt levels and corporate expenses and excluding
the non-recurring loss charge. Net loss from continuing operations for the
second quarter of 1996 of ($19) million includes the non-recurring pre-tax
charge of $60 million ($39 million after tax) mentioned above.
Polyethylene and Related Products: Net sales of polyethylene and related
products were $354 million for the second quarter of 1997, an increase of $39
million (12%) from the prior year's quarter. Compared to the second quarter of
1996, operating income more than doubled to $78 million, with higher selling
prices more than offsetting slightly lower volumes and higher than expected
maintenance costs. Average selling prices peaked in June, and for the quarter
were 21% higher than the second quarter of last year and 3.4% higher than first
quarter of 1997. With industry outages keeping ethylene supplies tight until
expected additional capacity comes on later in the year, pricing is expected to
remain steady through the third quarter before a possible downturn later in 1997
and into 1998.
Acetyls and Ethyl Alcohol: Net sales of acetyls and ethyl alcohol were unchanged
from the 1996 quarter at $107 million, while operating income increased $11
million (85%) to $24 million. Higher selling prices in most product lines and
lower costs were partially offset by lower volumes. Average selling prices for
VAM and methanol were 15% and 39% higher, respectively, than the previous year's
quarter, while acetic acid prices were 3% lower. Cost efficiencies are being
realized from the natural gas conversion of the Syngas facility; however,
operational problems continue to be experienced, limiting production. Sufficient
amounts of methanol are being produced to feed acetic acid and VAM production as
planned; however, merchant market sales have been curtailed. Third party volumes
for methanol, while 49% higher than last year's quarter, were 26% below the
Company's expectations for the quarter.
Performance Polymers: Net sales of performance polymers for the second quarter
increased $8 million (9%) over the 1996 quarter to $99 million. Operating
income, however, decreased $4 million (36%) to $7 million as a result of
continued higher raw material costs, mainly ethylene, propylene and base resins.
These costs, combined with the effects of lower demand and new competitive plant
capacities on polypropylene volumes and prices, offset growth in the wire and
cable business where volumes were 10% higher and prices 5% higher than 1996's
quarter. These trends are expected to continue for the balance of 1997.
Titanium Dioxide and Related Products: Operating income for the second
quarter of 1997 was $11 million, a decrease of $13 million (54%) from the
comparable quarter of 1996, excluding the $60 million charge for the writedown
of certain sulfate-process manufacturing facilities in 1996. Net sales decreased
$19 million (9%) to $218 million compared to last year's quarter, with volumes
relatively flat with last year. 1996 volumes were strong due to the prolonged
U.S. coatings season, and 1997 was also hampered by chlorinator outages that
were corrected by quarter end.
Worldwide average TiO2 selling prices were 9.5% lower than the second
quarter of 1996, reflecting the steep decline in prices beginning in the second
quarter of last year. Price increases, which have been implemented in the first
and second quarters, reversed the downward trend with June prices 1.5% higher
than the previous month.
A second price increase in the U.S., effective June 1, 1997, is being
implemented with price protection for larger customers into the third quarter.
The strong British pound continues to hinder the success of price increases in
Europe, with exchange rate fluctuations absorbing the impact of any increases.
In Asia/Pacific markets, prices are generally rising, with a third price
increase announced for the third quarter of 1997. Profits overall are expected
to continue improving in the third quarter of 1997 as price increases take
effect and the significant focus on cost reduction programs continues.
Fragrance and Flavor Chemicals: Fragrance and flavor chemicals continued
its record performance with operating income increasing 20% to $12 million for
the second quarter of 1997. Net sales for the quarter increased $5 million (17%)
to $35 million, primarily due to an 18% increase in sales volume. Partially
offsetting this improvement were higher CST costs, which increased 27% over the
1996 quarter and 7% over the first quarter of 1997 to $1.66 per gallon.
With current demand levels continuing to hold steady, particularly in
certain product offerings where capacity limitations have production sold-out,
this segment is expected to report higher year-on-year profits in the third
quarter despite the seasonal slowdown typical for the second half of the year.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
The Company had operating income of $198 million for the six months ended June
30, 1997, an increase of $83 million (72%) from the six months ended June 30,
1996, and net sales of $1,607 million, an increase of $97 million (6%) from 1996
period. The six months ended June 30, 1996 included a $60 million non-recurring
charge to reduce the carrying value of certain facilities employed in the
sulfate-process manufacturing of TiO2 products. Excluding such charge, operating
income for 1997 increased 13% over 1996. This increase is primarily due to
higher selling prices in the polyethylene and related products segment
offsetting the impact of higher feedstock costs, period on period, in the
segment and lower selling prices in the titanium dioxide segment compared to
the first six months of 1996.
Net income for the first six months of 1997 was $102 million or $1.33 per share,
including a one time gain from an insurance settlement of $46 million ($26 after
tax) relating to a 1989 explosion and fire at the Morris, Illinois plant.
Excluding this gain, earnings per share would have been 99 cents. Net income
from continuing operations for the six months 1996 would have been $57 million
or 74 cents per share, assuming post-Demerger debt levels and corporate
expenses, and excluding the $60 million ($39 after tax) non-recurring charge and
an $88 million after-tax gain related to the disposal of 73.6% of the Company's
interest in Suburban Propane in the first quarter of 1996.
Polyethylene and Related Products: Net sales of polyethylene and related
products were $713 million for the first six months 1997, an increase of $113
million (19%) from the 1996 period. Compared to the first six months of 1996,
operating income more than doubled to $117 million. Average selling prices were
25% higher during the 1997 period, offsetting higher ethylene costs (which
peaked in January 1997). These higher costs allowed for price increases to be
implemented, and with ethylene supplies tight as a result of industry outages,
prices are expected to remain steady through the third quarter.
Acetyl and Ethyl Alcohol: Net sales of acetyl and ethyl alcohol for the first
six months of 1997 were unchanged from the 1996 period at $203 million, while
operating income increased $2 million (7%) to $30 million. Despite continued
mechanical difficulties of the Syngas facility, the conversion of the unit to
natural gas had a $5 million favorable impact on costs for the first six months
of 1997. This, along with higher selling prices, more than offset lower volume
and higher feedstock prices. Volumes for acetic acid and VAM were 30% and 9%,
respectively, lower during the 1997 period than the 1996 period, as a result of
production limitations arising from the mechanical difficulties.
Performance Polymers: Net sales of performance polymers for the six months
increased 4% compared to the first six months of 1996, while operating income
decreased $9 million (39%) to $12 million. Higher raw material costs, mainly
ethylene, propylene and base resins, primarily account for the decrease in
operating income. While demand and pricing were strong in the wire and cable
market, demand for polypropylene was depressed.
Titanium Dioxide and Related Products: Operating income for the first half of
1997 decreased $44 million (73%) to $16 million compared to the 1996 first half,
excluding the $60 million non-recurring charge to reduce the carrying value of
certain sulfate-process manufacturing facilities taken during the second quarter
of 1996. During the 1997 period, worldwide average TiO2 prices were 12% lower
than during the 1996 period, reflecting the decline in prices over the past
twelve months. The second quarter of 1997 saw a reversal of this downward
trend with June prices 1.5% higher than the previous month.
Sales volumes during the first six months of 1997 were 5% higher than the first
six months of 1996 with strong demand in Europe and the Asia/Pacific markets.
Fragrance and Flavor Chemicals: Fragrance and flavor chemicals continued its
record performance with operating income increasing 15% over 1996 to $23
million. Net sales for the first half of 1997 increased $9 million (15%) to $69
million. An 8% increase in both sales volume and average selling prices has more
than offset the continuing rise in CST prices, up 27% compared to 1996. Further
increases in CST prices are expected as demand continues to grow.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash provided by operations and
borrowings under the Company's revolving credit facility. Net cash provided by
operating activities was $318 million for the first six months of 1997 compared
with net cash provided by operating activities of $176 million in the same
period of 1996 due mainly to a 13% increase in operating income, proceeds of $49
million received from an insurance settlement and favorable interest and
corporate expense levels in 1997 compared to pre-Demerger levels.
Net cash used in investing activities was $74 million in the first six
months of 1997, compared with net cash provided of $587 million in the first six
months of 1996. The 1996 period primarily benefittted from the March 1996 sale
of a 73.6% interest in Suburban Propane. Capital expenditures of $74 million for
the 1997 period represented less than half of the level for the 1996 period.
Capital expenditures for the full year 1997 are now expected to be at or
slightly above depreciation of approximately $165 million.
Net cash used in financing activities was $619 million in the six months of
1997, compared with net cash used of $762 million in the first six months of
1996. The 1997 period principally reflected the repayment of long-term debt. The
1996 period primarily reflected pre-Demerger transactions with Prior Affiliates.
During the first six months of 1997, gross debt declined $596 million,
including $358 million as a result of the Company's application of the net
proceeds of selling several offshore subsidiaries whose principal holdings were
sterling and dollar deposits. Net debt (i.e., gross debt less available cash)
decreased $207 million during this period, primarily from operational cash flow.
As a result, the ratio of net debt to total capital at June 30, 1997 was 57%, a
four percentage-point improvement from the 1996 year end. The Company expects
debt levels at year end to remain close to current levels.
Recent Announcement
See Note 9 (Subsequent Event) in the Financial Statements included in this
filing.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held May 16, 1997. The
stockholders elected all three directors nominated for election, approved the
Millennium Chemicals Inc. Long-Term Stock Incentive Plan and ratified the
appointment of Price Waterhouse LLP as the Company's independent auditors for
1997. The names of the Company's other directors and detailed descriptions of
the proposals considered at the meeting are contained in the Company's Proxy
Statement, dated April 4, 1997, which is incorporated herein by reference.
For Withheld
1. Election of Directors
The Rt. Hon. Kenneth Baker CH MP 52,108,076 710,596
Martin G. Taylor 52,129,582 689,090
David J. P. Meachin 52,118,413 700,259
2. Annual Performance Incentive Plan
For: 51,248,455
Against: 1,319,950
Abstain: 250,307
3. Long-Term Stock Incentive Plan
For: 32,792,563
Against: 8,591,831
Abstain: 267,210
4. Appointment of Price Waterhouse LLP
For: 52,517,740
Against: 183,274
Abstain: 117,658
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule
(b) The following Current Report on Form 8-K was filed during the
quarter ended June 30, 1997 and through the date hereof.
Date of Report Item No.Financial Statements
July 25, 1997 5 None
(regarding the Venture)
<PAGE>
SIGNATURE
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.
MILLENNIUM CHEMICALS INC.
Date: August 14, 1997 /s/ John E. Lushefski
---------------------
John E. Lushefski
Senior Vice President and Chief
Financial Officer (as duly
authorized officer and
principal financial officer)
<PAGE>
EXHIBIT INDEX
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule
EXHIBIT 11.1
Computation of per share earnings from continuing operations:
Shares of Common Stock outstanding based on actual
Hanson ordinary shares and ADSs outstanding and
stock dividend ratio of one for every 70 74,408,257
Time-vested restricted shares issued to executive
officers and key employees 728,066
Expected vesting of performance-based restricted
shares issued to executive officers and key employees 1,310,556
Shares issued to the Company's non employee directors 4,026
Stock options weighted average 26,150
Weighted average Shares outstanding 76,477,055
SIX MONTHS ENDED JUNE 30, 1997
Net income 102,024,000 = 1.33
-----------
Shares Outstanding 76,477,055
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 500
<ALLOWANCES> 7
<INVENTORY> 444
<CURRENT-ASSETS> 1027
<PP&E> 2015
<DEPRECIATION> 905
<TOTAL-ASSETS> 5065
<CURRENT-LIABILITIES> 721
<BONDS> 1787
0
0
<COMMON> 1
<OTHER-SE> 1395
<TOTAL-LIABILITY-AND-EQUITY> 5065
<SALES> 0
<TOTAL-REVENUES> 1607
<CGS> 1195
<TOTAL-COSTS> 1409
<OTHER-EXPENSES> (44)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> 178
<INCOME-TAX> 76
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