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 March 31, 1998
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.)
230 Half Mile Road
Red Bank, New Jersey 07701
(Address of principal executive offices)
732-933-5000
(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: 77,580,438 shares of Common
Stock, par value $.01 per share, as of May 8, 1998.
<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 ..................................... 18
Part II
Item 6 Exhibits and Reports on Form 8-K................................ 21
Signature............................................................... 22
Exhibit Index........................................................... 23
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:
material changes in the relationship between industry production capacity and
operating rates on the one hand, and demand for the products of Millennium
Chemicals Inc. (the "Company") and Equistar Chemicals, LP ("Equistar), including
ethylene, polyethylene and titanium dioxide, on the other hand; the economic
trends in the United States and other countries which serve as the Company's and
Equistar's marketplaces; customer inventory levels; competitive pricing
pressures; the cost and availability of the Company's and Equistar's feedstocks
and other raw materials, including natural gas and ethylene; operating
interruptions (including leaks, explosions, fires, mechanical failures,
unscheduled downtime, transportation interruptions, spills, releases and other
environmental risks); competitive technology positions; and failure to achieve
the Company's and Equistar'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.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31, December 31,
1998 1997
---------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 58 $ 64
Trade receivables, net 308 369
Inventories 270 273
Other current assets 100 106
--------- ---------
Total current assets 736 812
Property, plant and equipment, net 837 851
Investment in Equistar 1,810 1,934
Other assets 264 261
Goodwill 464 468
-------- ---------
Total assets $4,111 $4,326
======== =========
Liabilities and shareholders' equity
Current liabilities:
Notes payable $ 56 $ -
Current maturities of long-term debt 20 20
Trade accounts payable 82 86
Income taxes payable 19 12
Accrued expenses and other liabilities 293 323
-------- --------
Total current liabilities 470 441
Long-term debt 1,034 1,327
Deferred income taxes 299 280
Other liabilities 805 814
--------- --------
Total liabilities 2,608 2,862
--------- --------
Commitments and contingencies (Note 8)
Shareholders' 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 77,291,371 shares in 1998 and
77,276,942 shares in 1997) 1 1
Paid in capital 1,348 1,334
Retained earnings 216 177
Unearned restricted shares (53) (42)
Cumulative translation adjustment (9) (6)
--------- ---------
Total shareholders' equity 1,503 1,464
-------- ---------
Total liabilities and shareholders' equity $4,111 $4,326
======== =========
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS EXCEPT SHARE DATA)
Three Months Ended
March 31,
1998 1997
------- ------
(Unaudited)
Net sales $ 399 $ 794
Operating costs and expenses
Cost of products sold 285 624
Depreciation and amortization 23 53
Selling, development and administrative expense 33 51
---- ----
Operating income 58 66
Interest expense (20) (38)
Interest income 1 5
Equity in earnings of Equistar 45 --
Other income (expense), net 5 4
---- ----
Income before provision for income taxes 89 37
Provision for income taxes (39) (17)
---- ----
Net income $ 50 $ 20
===== =====
Net income per share - basic $ 0.67 $ 0.27
===== =====
Net income per share - diluted $ 0.66 $ 0.27
===== =====
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
Three Months Ended
March 31,
1998 1997
------ ------
(Unaudited)
Cash flows from operating activities
Net income $ 50 $ 20
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 23 53
Provision for deferred income taxes 21 13
Restricted stock amortization 3 --
Equity earnings (49) (5)
Changes in assets and liabilities
Increase in trade receivables (15) (24)
Decrease in inventories 3 53
Decrease in other current assets -- 7
(Increase) decrease in investments and other assets (3) 13
(Decrease) in trade accounts payable (1) (39)
(Decrease) increase in accrued expenses and
other liabilities and income taxes payable (23) 57
(Decrease) in other liabilities (8) (33)
---- ----
Cash provided by operating activities 1 115
Cash flows from investing activities
Capital expenditures (27) (36)
Distribution from Equistar 44 --
Proceeds from sale of fixed assets 4 --
---- ----
Cash provided by (used in) investing activities 21 (36)
Cash flows from financing activities
Dividend to shareholders (11) (11)
Repayment of long-term debt (288) (356)
Accounts receivable collection through Equistar 205 --
Increase (decrease) in notes payable 56 (50)
---- ----
Cash (used in) financing activities (38) (417)
Effect of exchange rate changes on cash 10 (5)
---- ----
(Decrease) in cash and cash equivalents (6) (343)
Cash and cash equivalents at beginning of period 64 408
---- ----
Cash and cash equivalents at end of period $ 58 $ 65
==== ====
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
Unearned Cumulative
Common Stock Paid In Retained Restricted Translation
Shares Amount Capital Earnings Shares Adjustment Total
---------- ---------- ---------- -------- ---------- ------------ ----------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 76 $ 1 $ 1,334 $ 177 $ (42) $ (6) $ 1,464
Comprehensive Income -
Net income 50 50
Other comprehensive income
Currency translation adjustment (3) (3)
Amortization and adjustments
of unearned restricted shares 14 (11) 3
---------- --------- --------- ------------ ----------
Total comprehensive income 14 50 (11) (3) 50
Dividends (11) (11)
----------- ---------- ---------- ----------- ---------- ------------ ----------
Balance at March 31, 1998 (Unaudited) 76 $ 1 $ 1,348 $ 216 $ (53) $ (9) $ 1,503
=========== ========== ========== =========== ========== ============ ==========
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 1--Basis of Presentation and Description of Company
Millennium Chemicals Inc. (the "Company") is a major international chemicals
company, with leading market positions in a broad range of commodity,
industrial, performance and specialty chemicals operating through its
wholly-owned subsidiaries: Millennium Inorganic Chemicals Inc. (and its
non-United States affiliates), Millennium Petrochemicals Inc. and Millennium
Specialty Chemicals Inc. and, beginning December 1, 1997, through its 43%
interest in Equistar Chemicals, LP ("Equistar"), a joint venture formed by the
Company and Lyondell Petrochemical Company ("Lyondell") to jointly own and
operate the olefins and polymers businesses of the Company and Lyondell (see
Note 2).
The Company was incorporated on April 18, 1996 and has been publicly owned since
October 1, 1996, when Hanson PLC ("Hanson") transferred its chemical operations
to the Company and, in consideration, all of the then outstanding shares of the
Company's common stock were distributed pro rata to Hanson's shareholders (the
"Demerger").
The accompanying consolidated financial statements 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
periods presented. Such adjustments consist only of normal recurring items. All
significant intercompany accounts and transactions have been eliminated.
Note 2--Acquisition and Dispositions
On December 31, 1997 the Company completed the purchase of the shares of
Rhone-Poulenc Chimie S.A.'s Thann et Mulhouse titanium dioxide ("TiO2") and
specialty and intermediate chemicals subsidiary for $185, including assumed
debt. The purchase price was allocated to the net assets acquired, principally
property, plant and equipment and working capital based on their fair value.
On December 1, 1997, the Company and Lyondell completed the formation of
Equistar, a joint venture partnership to own and operate the olefins and
polymers and ethyl alcohol businesses of the Company and Lyondell. The
partnership is the largest producer of ethylene and polyethylene in North
America. Equistar, 57% owned by Lyondell and 43% by the Company, is managed by a
Partnership Governance Committee consisting of three representatives of each of
Lyondell and the Company. Approval of Equistar's strategic plans and other major
decisions requires the consent of representatives of both partners. All
decisions of Equistar's Governance Committee that do not require unanimity
between Lyondell and the Company may be made by Lyondell's representatives
alone.
The Company contributed to Equistar substantially of all the net assets of its
polyethylene, performance polymers and ethyl alcohol businesses. The Company
retained $250 from the proceeds of accounts receivable collections and
substantially all the accounts payable and accrued expenses of its contributed
businesses existing on December 1, 1997, and received proceeds of $750 from
borrowings under a new credit facility entered into by Equistar. The Company
used the $750 which it received to repay debt. The Company guaranteed $750 of
Equistar's credit facility.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 2--Acquisition and Dispositions--Continued
Lyondell contributed to Equistar substantially all of the net assets of its
petrochemicals and polymers businesses, except for substantially all the
accounts payable and accrued expenses which it retained. In addition, Equistar
assumed senior debt obligations of Lyondell aggregating $745 and received a note
payable by Lyondell to the partnership for $345.
As of December 1, 1997, the Company accounted for its interest in Equistar using
the equity method. The investment in Equistar at December 1, 1997 represented
the carrying value of the Company's net assets which it contributed to the
venture and approximated the fair market value of a 43% interest in Equistar
based upon independent valuation. The difference between the carrying value of
the Company's investment and its underlying equity in the net assets of Equistar
is $617, which is being amortized over 25 years and included in equity earnings.
In addition, the Company incurs certain general and administrative expenses
associated with the governance of Equistar which are also included in equity
earnings. Equistar incurred $6 of non-recurring transition costs in the three
months ended March 31, 1998. The Company's share of those costs are recorded as
other expense.
On May 15, 1998, the Company, Lyondell and Occidental Petroleum Corporation
("Occidental"), announced the completion of the transaction to expand Equistar
with the addition of the ethylene, propylene, ethylene oxide and derivatives
businesses of Occidental's chemical subsidiary. In connection with this
transaction, Occidental contributed $205 million of debt to Equistar. Occidental
will receive $420 and the Company will receive $75 million. As a result,
Equistar is now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the
Company.
Note 3--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 amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents: Cash equivalents represent investments in short-term deposits
and commercial paper with banks which have original maturities of ninety days or
less. In addition, investments and other assets include approximately $83 in
restricted cash at each of March 31, 1998 and December 31, 1997 which is on
deposit primarily to satisfy insurance claims.
Inventories: Inventories are stated at the lower of cost or market value. For
certain United States 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.
Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, generally 20 to 40 years for buildings and
5 to 25 years for machinery and equipment.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 3--Significant Accounting Policies--Continued
Goodwill: Goodwill represents the excess of the purchase price over the fair
value of assets allocated to acquired companies. Goodwill is being amortized
using the straight-line method over 40 years. Management periodically evaluates
goodwill for impairment based on the anticipated future cash flows attributable
to its operations. Such expected cash flows, on an undiscounted basis, are
compared to the carrying value of the tangible and intangible assets, and if
impairment is indicated, the carrying value of goodwill is adjusted. In the
opinion of management, no impairment of goodwill exists at March 31, 1998.
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 liability or contribution by such other
parties, including insurance company, 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: Assets and liabilities of the Company's foreign
operating subsidiaries are translated at the exchange rates in effect at the
balance sheet dates, while revenue, expenses and cash flows are translated at
average exchange rates for the reporting period.
Federal Income Taxes: Deferred tax assets and liabilities are computed based on
the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset and liability from
period to period.
The Company and certain of its subsidiaries have entered into tax sharing and
indemnification agreements with Hanson or its subsidiaries in which the Company
and/or its subsidiaries generally agreed to indemnify Hanson or its subsidiaries
for income tax liabilities attributable to periods when such other operations
were included in the consolidated tax returns of the Consolidated Group.
Earnings Per Share: In February 1997, the Financial Accounting Standards Board
issued SFAS No 128, "Earnings Per Share," which 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. The Company adopted these provisions for the year ended
December 31, 1997. The weighted average number of common and common equivalent
shares outstanding used in computing EPS was as follows:
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 3--Significant Accounting Policies -Continued
March 31,
1998 1997
------------ -------------
(Unaudited)
Basic 75,099,648 74,484,588
Options 112,665 -
Restricted shares 114,685 -
------------ ------------
Diluted 75,326,998 74,484,588
============ ============
Comprehensive Income: In June 1997 the Financial Accounting Standard Board
issued SFAS No. 130, "Reporting Comprehensive Income", which includes net income
and other changes in equity. The Company has adopted this provision for the year
ended December 31, 1998 and elected to report such income within the
consolidated statement of changes in shareholders' equity.
Note 4 - Supplemental Information
March 31, December 31,
1998 1997
-------------- -------------
(Unaudited)
Trade receivables
Trade receivables $ 312 $ 371
Allowance for doubtful accounts (4) (2)
------------ --------------
$ 308 $ 369
============ ==============
Inventories
Finished products $ 152 $ 121
In-Process products 12 21
Raw materials 66 89
Other inventories 40 42
------------- --------------
$ 270 $ 273
============= ==============
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 4 - Supplemental Information - Continued
Inventories valued on a LIFO basis were approximately $37 and $32 less than the
amount of such inventories valued at current cost at March 31, 1998 and December
31, 1997, respectively.
March 31, December 31,
1998 1997
--------------- ----------------
(Unaudited)
Property, Plant and Equipment
Land and buildings $ 184 $ 247
Machinery and equipment 1,211 1,429
------------- ---------------
1,395 1,676
Allowance for depreciation and amortization (558) (825)
------------- ---------------
$ 837 $ 851
============= ===============
Goodwill $ 528 $ 528
Accumulated amortization (64) (60)
------------- ---------------
$ 464 $ 468
============= ===============
Note 5 - Long-Term Debt and Credit Arrangements
March 31, December 31,
1998 1997
------- -------
(Unaudited)
Revolving Credit Agreement 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 $ 255 $ 546
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
Debt payable through 2007 at interest rates ranging
from 2.4% to 11% 50 52
Less current maturities of long-term debt (20) (20)
--------- --------
$ 1,034 $ 1,327
========= ========
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 5 - Long-Term Debt and Credit Arrangements - Continued
Under the Revolving Credit Agreement, as amended as of October 20, 1997, certain
of the Company's subsidiaries may borrow up to $500 under the unsecured
revolving credit facility, which matures in July 2001 (the "Credit Agreement").
The Company is the 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
United States 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, and with certain exceptions, 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 are issued
contains certain covenants that limit, among other things, and with certain
exceptions: (i) the ability of Millennium America Inc. and its Restricted
Subsidiaries (as defined) to grant liens or enter into sale and leaseback
transactions; (ii) the ability of the Restricted Subsidiaries to incur
additional indebtedness; and, (iii) the ability of Millennium America Inc. and
the Company to merge, consolidate or transfer substantially all of their
respective assets.
Note 6--Financial Instruments
Fair Value of Financial Instruments: The fair value of all short-term financial
instruments approximate their carrying value due to their short maturity. The
fair value of long-term financial instruments (excluding forward exchange
contracts, interest rate protection agreements and the Senior Notes and Senior
Debentures) approximates carrying value as they were based on terms that
continue to be available to the Company from its lenders.
Off Balance Sheet Risk: The Company has certain receivables, payables and
short-term borrowings denominated in currencies other than the functional
currencies of the Company and/or its subsidiaries. During the quarter, the
Company has hedged certain of these exposures by entering into forward exchange
contracts. Gains and losses related to these hedges are recognized in income as
part of, and concurrent with the hedged transactions. The Company does not use
derivative financial instruments for trading or speculative purposes.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 7--Long-Term Incentive Plan
The Company adopted a Long-Term Stock Incentive Plan ("Stock Incentive Plan")
for the purpose of enhancing the profitability and value of the Company for the
benefit of its shareholders. A maximum of 3,909,000 shares of Common Stock may
be issued or used for reference purposes pursuant to the Stock Incentive Plan.
The Stock Incentive Plan provides for the following types of awards: (i) stock
options, including incentive stock options and non-qualified stock options; (ii)
stock appreciation rights; (iii) restricted stock; (iv) performance units; and
(v) performance shares. The vesting schedule for the restricted stock awards is
as follows: (i) three equal tranches aggregating 25% of the total award will
vest in each of October 1999, 2000 and 2001; and (ii) three equal tranches
aggregating 75% of the total award will be subject to the achievement of "value
creation" performance criteria established by the Compensation Committee for
each of the three performance cycles commencing January 1, 1997 and ending
December 31, 1999, 2000 and 2001, respectively. If and to the extent such
criteria are achieved, half of the earned portion of the 25% tranche relating to
a particular performance based cycle of the award will vest immediately and the
remainder will vest in five equal annual installments commencing on the first
anniversary of the end of the cycle.
Options granted under the Stock Incentive Plan vest three years from the date of
grant and expire ten years from the date of grant. All grants under the Stock
Incentive Plan fully vest in the event of a change-in-control (as defined by the
plan) of the Company, or in the case of employees of a subsidiary of the
Company, a change-in-control of the relevant subsidiary.
The Company has authorization under the Stock Incentive Plan to grant awards for
up to an additional 621,886 shares at March 31, 1998.
Unearned restricted stock, based on the market value of the shares at each
balance sheet date, is included as a separate component of shareholders' equity
and amortized over the restriction period. Compensation expense recognized in
accordance with Accounting Principles Board Opinion No. 25 was $3 and $2 for the
three months ended March 31, 1998 and 1997, respectively.
Note 8--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
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 8--Commitments and Contingencies - Continued
the range of potential liability for these matters, collectively, which
primarily relate to environmental remediation activities, is between $150 and
$184 and has accrued $184 as of March 31, 1998.
The Company has various contractual obligations to purchase raw materials used
in its production of TiO2 and fragrance and flavor chemicals. Commitments to
purchase ore used in the production of TiO2 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 TiO2 and expire between 1998 and 2002. Commitments to
acquire crude sulfate turpentine, used in the production of fragrance and flavor
chemicals, are generally pursuant to 1 to 5 year contracts with prices based on
the market price and which expire between 1998 through 2000.
The Company is organized under the laws of Delaware and is subject to United
States federal income taxation of corporations. However, in order to obtain
clearance from the United Kingdom Inland Revenue as to the tax-free treatment of
the stock dividend for United Kingdom tax purposes for Hanson and Hanson
shareholders, Hanson agreed with the United Kingdom Inland Revenue that the
Company will continue to be centrally managed and controlled in the United
Kingdom 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 United Kingdom 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 United
Kingdom 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 have amounted to approximately $421 if it had
arisen during the twelve months ended September 30, 1997, and that such
obligation 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 United Kingdom tax resident at any time, the
Company will be deemed for purposes of United Kingdom 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 United Kingdom 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 United Kingdom 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.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 9--Operations by Industry Segment
The Company's principal operations are grouped into four business segments:
titanium dioxide and related products, acetyls, specialty chemicals and
polyethylene, alcohol and related products.
The following is a summary of the Company's operations by industry segment:
March 31,
1998 1997
-------- -------
(Unaudited)
Net Sales:
Titanium dioxide and related products $ 282 $ 207
Acetyls 78 59
Specialty chemicals 39 38
Polyethylene, alcohol and related products (1) - 490
------ ------
Total $ 399 $ 794
====== ======
Depreciation and amortization:
Titanium dioxide and related products $ 16 $ 11
Acetyls 6 7
Specialty chemicals 1 1
Polyethylene, alcohol related products (1) - 34
------ ------
Total $ 23 $ 53
======= =======
Operating Income:
Titanium dioxide and related products $ 35 $ 5
Acetyls 11 2
Specialty chemicals 12 11
Polyethylene, alcohol and related products (1) - 48
------ -------
Total $ 58 $ 66
====== =======
1) Segment information for 1997 has been restated to combine the information for
polyethylene, alcohol and related products businesses which have been
contributed to Equistar as one segment. The Company's 43% interest in Equistar
is excluded from this segment beginning December 1, 1997, at which time the
equity method is used to account for this investment.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 10--Information on Millennium America
Millennium America is a wholly-owned subsidiary of the Company and is a holding
company for all of the Company's operating subsidiaries other than its
operations in the United Kingdom and Australia. Millennium America is the issuer
of the Senior Notes, and the Senior Debentures and a borrower under the Credit
Agreement. Accordingly, the following summarized financial information is
provided for Millennium America:
March 31, December 31,
1998 1997
--------- ---------
(Unaudited)
Current assets $ 453 $ 528
Investment in Equistar 1,810 1,934
Noncurrent assets 1,582 1,428
-------- --------
Total assets $ 3,845 $ 3,890
======== ========
Current liabilities $ 343 $ 296
Noncurrent liabilities 2,516 2,647
Invested capital 986 947
-------- --------
Total liabilities and invested capital $ 3,845 $ 3,890
======== ========
Three Months Ended
March 31,
1998 1997
--------- ---------
(Unaudited)
Net sales $ 258 $ 713
Operating income 36 64
Net income 34 22
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(In Millions Unless Otherwise Indicated)
Note 11 - Information on Equistar
The following is summarized financial information for Equistar:
March 31, December 31,
1998 1997
-------- ----------
(Unaudited)
Current assets $ 1,158 $ 1,209
Noncurrent assets 3,394 3,408
-------- ---------
Total assets $ 4,552 $ 4,617
======== =========
Current liabilities $ 369 $ 353
Noncurrent liabilities 1,755 1,546
Partners' capital 2,428 2,718
-------- --------
Total liabilities and partners' capital $ 4,552 $ 4,617
======== ========
Three Months
Ended
March 31,
1998
------------
(Unaudited)
Net sales $ 1,021
Operating income 146
Net income 121
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Millennium Chemicals Inc.'s (the "Company") principal operations are grouped
into four business segments: titanium dioxide and related products ("TiO2"),
acetyls, specialty chemicals and polyethylene, alcohol and related products. The
Company's businesses comprising the polyethylene, alcohol and related products
segment were contributed to Equistar Chemicals, LP ("Equistar"), a joint venture
partnership formed by the Company and Lyondell Petrochemical Company
("Lyondell") on December 1, 1997, to own and operate the olefins and polymers
businesses of the partners. Results of these businesses for the first eleven
months of 1997, before the formation of Equistar, are consolidated. Since
December 1, 1997, the Company's 43% share in the results of Equistar is
accounted for using the equity method.
On March 20, 1998, the Company, Lyondell and Occidental Petroleum Corporation
("Occidental") announced the signing of a definitive agreement to expand
Equistar with the addition of the ethylene, propylene, ethylene oxide and
derivatives businesses of Occidental's chemical subsidiary. See Note 1 to the
Consolidated Financial Statements.
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto. In connection with the
forward-looking statements that appear in the following information, the
Cautionary Statements referred to in "Disclosure Concerning Forward-Looking
Statements" should be reviewed carefully.
RESULTS OF OPERATIONS
The Company had income before provision for income tax for the first quarter of
1998 of $89 million, an increase of $52 million (141%) compared to the first
quarter of 1997. In addition to improved operating results and the Equistar
equity earnings discussed in the following paragraph, lower interest expense
also contributed to this increase. Lower debt levels and interest rates during
the quarter resulted in reduced interest costs.
Net income for the first quarter of 1998 was $50 million or 67 cents per share
(Basic EPS), while net income for the same quarter of 1997 was $20 million or 27
cents per share.
Operating income was $58 million for the three months ended March 31, 1998, a
decrease of $8 million (12%) from the three months ended March 31, 1997. The
first quarter of 1997 included $48 million related to the polyethylene, alcohol
and related products businesses contributed to Equistar on December 1, 1997. The
Company's 43% share of Equistar's post-interest earnings for the first quarter
of 1998 was $45 million, which is reported as equity earnings. Excluding the
earnings mentioned above, 1998 operating income from the Company's wholly-owned
subsidiaries increased $40 million (222%) over 1997. Operating profits from each
of the business units was higher than 1997, with TiO2 profits leading the trend,
$30 million ahead of last year. TiO2 price trends, which started to improve at
the end of 1997's first quarter, continued that improvement in 1998. Average
TiO2 prices for the first quarter of 1998 were 8% higher than in the first
quarter of 1997, and 1% above the previous quarter. In addition, the acquisition
of the TiO2 operations in France at the end of 1997 contributed $6 million to
first quarter profits.
<PAGE>
Titanium dioxide and related products: Operating income for the first three
months of 1998 was $35 million compared to $5 million for the first three months
of 1997. The French operations acquired on December 31, 1997 contributed $6
million of operating income. Net sales were $75 million (36%) higher than the
same period of last year. Higher selling prices accounted for the majority of
the increase, with pricing increasing in all regions. Average pricing is
expected to increase in North America as contract protection for major customers
expire. Sales volumes were up 21% from the first quarter of 1997 due to added
volume from the French operations. Excluding the operations in France, sales
volumes were 5% below the first quarter of last year due to weakness in the
Asia/Pacific and Australia regions. This weakness is expected to continue
through the balance of the year. It is also expected that markets in Europe and
North America will remain strong, helping to offset the weaker markets in the
other regions.
Cost reduction initiatives continue to be identified with quarterly savings of
$7 million compared to the previous quarter and cumulative savings of $55
million.
Capacity utilization is relatively in line with the first quarter of 1997 at
approximately 97%, including the French plants. Excluding French production, the
quarterly operating rate was 99%, reflecting strong demand in Europe and North
America.
The expansion project at the Stallingborough, United Kingdom, plant is on
schedule to be completed in late 1998 for start-up in 1999, which will add an
additional 41,000 metric tons of capacity per annum.
Acetyls: Net sales for the first quarter of 1998 increased $19 million (32%) to
$78 million. Operating profits of $11 million for the first three months of 1998
more than quadrupled compared to the first quarter of 1997.
Higher sales volumes in acetic acid, methanol and vinyl acetate monomer ("VAM")
accounted for most of the increase in operating income. Delays and difficulties
with the conversion of the Syngas unit to natural gas feed in early 1997
negatively impacted profits in the first quarter of 1997. Since the conversion,
methanol production costs have decreased and production has increased.
Methanol prices were down 22% from the first quarter of 1997 due to over supply
from new global capacity, strong U.S. production and weaker demand from the MTBE
sector of the market. Prices bottomed out in March 1998 from its previous high
in December 1997, with spot pricing dropping to below $.25 per gallon. Despite
these lower prices, profits for methanol were only slightly less than 1997, as
natural gas prices were lower than anticipated during most of the quarter.
Recent market conditions appear to be stabilizing and, with firming gas costs,
methanol prices are expected to remain steady.
During the first three months of 1998, demand was strong in the acetic acid
market, with sales volume 73% higher than the first quarter of 1997. Prices were
down 10% from the comparable quarter of 1997 due to falling natural gas prices.
Continued strong demand and stable prices are expected for the remainder of the
year. First quarter 1998 VAM prices were equal to the same quarter of 1997.
However, prices have fallen from year-end due to lower ethylene costs and excess
supply in Asia. While VAM volumes for the quarter were 28% above 1997, the Asian
market crisis is adversely affecting demand and pricing in these markets.
Although the North American market is stable, excess supply in Europe is putting
pressure on price. Such conditions are expected to continue in the short term.
Specialty chemicals: First quarter operating profits of $12 million were 9% over
the first quarter of 1997. Net sales for the 1998 quarter were in line with the
1997 quarter at $39 million. Favorable product mix and demand for higher margin
products are the principal factors for the increase in profits. Partially
offsetting this increase were lower volumes from other products and crude
sulfate turpentine ("CST") costs, which continue to increase. CST costs for the
<PAGE>
quarter were 32% higher than in the first quarter of 1997. Both of the Company's
fragrance and flavor chemical plants have operated at high capacity utilization
rates due to the strong demand for most products.
Equistar: On December 1, 1997, the Company's polyethylene, alcohol and related
products businesses were contributed to Equistar. Since that time, the Company
has accounted for its 43% share of Equistar as equity earnings. Post-interest
equity earnings from Equistar for the first quarter of 1998 was $45 million, and
compares to operating income in the first quarter of 1997 of $48 million for the
businesses contributed to Equistar. The following relates to Equistar operations
in total, with comparisons to 1997 assuming combined historical results of the
contributed businesses. Olefin and polymer profits in this quarter exceeded last
year's first quarter. Higher volumes in both olefins and polymers accounted for
the increase. Demand for ethylene, however, is beginning to slow and production
has been reduced to adjust for the slowdown. Overall polyethylene prices have
fallen 12 % from the first quarter of 1997 but margins were not affected due to
lower raw material costs.
Synergies generated at Equistar in the first quarter of 1998 were $24 million
before one-time transition costs.
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 $1 million for the first three months ended March 31,
1998 compared to $115 million provided for the first three months ended March
31, 1997. The decrease of $114 million is due primarily to the polyethylene,
alcohol and related products businesses included in the first quarter of 1997
but not in the first quarter of 1998. Since December 1, 1997, such businesses
were part of Equistar and cash distributed by the partnership in the first
quarter of 1998 of $44 million is included as cash from investing activities.
The remaining difference is attributable to the timing of payments for accrued
expenses and other liabilities.
Net cash provided by investing activities was $21 million in the first quarter
of 1998, while $36 million was used in the first quarter of 1997. 1998
distributions from Equistar of $44 million and lower capital spending of $9
million compared to 1997 accounted for the variance. Capital spending for the
full year 1998 is expected to be approximately $200 million, including spending
on the Stallingborough, United Kingdom, plant expansion, SAP-based business
systems projects and capacity expansions at the specialties chemicals segment.
Net cash used in financing activities for the first three months of 1998 was $38
million compared to $417 million in the first three months of 1997. The 1998
quarter reflects gross debt repayment of $288 million, principally funded by
$205 million from the collection of accounts receivable related to the
businesses contributed to Equistar. At March 31, 1998, the Company had net debt
of $1.052 billion, or $231 million less than December 31, 1997.
<PAGE>
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) No Current Reports on Form 8-K were filed during the quarter ended
March 31, 1998 and through the date hereof.
<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: May 15, 1998 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
AT MARCH 31, 1998 SHARES WEIGHTED
BASIC O/S EPS AVERAGE
- ---------------- ----------- ------ ----------------
SHARES OF COMMON STOCK OUTSTANDING 75,099,648 75,099,648
----------- -----------
NET INCOME 50,000,000
-----------
WEIGHTED AVG SHARES OUTSTANDING 75,099,648 .067
DILUTED
- ----------------
SHARES OF COMMON STOCK OUTSTANDING 75,099,648 75,099,648
OPTIONS 112,665
RESTRICTED SHARES 114,685
----------- -----------
75,099,648 75,326,998
NET INCOME 50,000,000
-----------
WEIGHTED AVG SHARES OUTSTANDING 75,326,998 0.66
AT MARCH 31, 1997 SHARES WEIGHTED
BASIC O/S EPS AVERAGE
- ---------------- ------------ ------- -------------
SHARES OF COMMON STOCK OUTSTANDING 74,484,588 74,484,588
------------ -----------
NET INCOME 20,000,000
------------
WEIGHTED AVG SHARES OUTSTANDING 74,484,588 0.27
<PAGE>
Exhibit 11.1 (continued)
COMPUTATION OF PER SHARE EARNINGS
DILUTED
- ----------------
SHARES OF COMMON STOCK OUTSTANDING 74,484,588 74,484,588
------------ -----------
NET INCOME 20,000,000
------------
WEIGHTED AVG SHARES OUTSTANDING 74,484,588 0.27
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