- --------------------------------------------------------------------------------
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 September 30, 1999
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: 68,231,254 shares of Common Stock, par value $.01 per share,
as of November 11, 1999, excluding 9,651,332 treasury shares held by the
registrant, its subsidiaries and rabbi trusts.
________________________________________________________________________________
<PAGE>
MILLENNIUM CHEMICALS INC.
Table of Contents
Part
Item 1 Financial Statements............................................... 3
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 17
Part II
Item 3 Quantitative and Qualitative Disclosures About Market Risk......... 23
Item 6 Exhibits and Reports on Form 8-K................................... 24
Signature ................................................................ 25
Exhibit Index.............................................................. 26
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
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 78 $ 103
Trade receivables, net 261 242
Inventories 336 334
Assets of discontinued interests - 148
Other current assets 106 109
------- -------
Total current assets 781 936
Property, plant and equipment, net 995 1,044
Investment in Equistar 1,480 1,519
Other assets 189 189
Goodwill 405 412
------- -------
Total assets $ 3,850 $ 4,100
======= =======
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 42 $ 29
Current maturities of long-term debt 24 14
Trade accounts payable 117 113
Income taxes payable 4 23
Accrued expenses and other liabilities 193 200
------- -------
Total current liabilities 380 379
Long-term debt 993 1,039
Deferred income taxes 187 334
Other liabilities 869 755
------- -------
Total liabilities 2,429 2,507
------- -------
Commitments and contingencies (Note 6)
Minority interest 13 15
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 225,000,00 shares; issued 77,882,586
shares in 99 and 77,873,586 in 1998) 1 1
Paid in capital 1,332 1,333
Retained earnings 367 294
Treasury stock (at cost, 9,651,332 shares and 502,572
shares in 1999 and 1998, respectively) (209) (7)
Unearned restricted shares (29) (35)
Cumulative other comprehensive income (63) (15)
Deferred compensation 9 7
------- -------
Total shareholders' equity
1,408 1,578
------- -------
Total liabilities and shareholders' equity $ 3,850 $ 4,100
======= =======
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
--------------------------------- --------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 396 $ 408 $ 1,185 $ 1,215
Operating costs and expenses
Cost of products sold 278 283 833 847
Depreciation and amortization 25 27 74 74
Selling, development and administrative
expense 55 40 155 112
--------------- -------------- -------------- --------------
Operating income 38 58 123 182
Interest expense (18) (19) (54) (57)
Interest income - 1 2 3
Equity in earnings of Equistar 3 3 4 58
Other income, net 25 7 22 18
--------------- -------------- -------------- --------------
Income from continuing operations before
provision for income taxes and minority
interest 48 50 97 204
Provision for income taxes (9) (17) (31) (79)
--------------- -------------- -------------- --------------
Income from continuing operations before
minority interest 39 33 66 125
Minority interest (1) (1) (2) (1)
--------------- -------------- -------------- --------------
Income from continuing operations 38 32 64 124
Income from discontinued operations (net of
income taxes of $7, $0, $(9), and $(1)) 7 - 38 1
--------------- -------------- -------------- --------------
Net income $ 45 $ 32 $ 102 $ 125
=============== ============== ============== ==============
Income per share from continuing operations $ 0.57 $ 0.43 $ 0.91 $ 1.65
Income per share from discontinued
operations 0.11 0.00 0.55 0.01
--------------- -------------- -------------- --------------
Net income per share - basic $ 0.68 $ 0.43 $ 1.46 $ 1.66
=============== ============== ============== ==============
Net income per share - diluted $ 0.67 $ 0.42 $ 1.44 $ 1.65
=============== ============== ============== ==============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
Nine Months Ended Sept. 30,
1999 1998
---------------------------
(Unaudited)
Cash flows from operating activities
Income from continuing operations $ 64 $ 124
Adjustments to reconcile income to net cash
provided by operating activities
Depreciation and amortization 74 74
Provision for deferred income taxes 1 52
Restricted stock amortization 5 3
Equity earnings - including non-recurring items (3) (50)
Minority interest 2 2
Changes in assets and liabilities (net of
acquisitions and dispositions)
(Increase) decrease in trade receivables (28) 12
Increase in inventories (22) (34)
Decrease in other current assets 1 1
(Increase) decrease in investments and
other assets (23) 2
Increase in trade accounts payable 7 13
Decrease in accrued expenses and other
liabilities and income taxes payable (16) (19)
Decrease in other liabilities (43) (33)
------- -------
Cash provided by operating activities 19 147
Cash flows from investing activities
Capital expenditures (79) (150)
Accounts receivable collection through Equistar - 225
Distributions from Equistar, net of liabilities
paid in 1998 51 317
Proceeds from syngas and methanol transactions 123 -
Tibras acquisition - net of cash - (85)
Proceeds from sale of Suburban Propane 75 -
Proceeds from sale of fixed assets 14 10
------- -------
Cash provided by investing activities 184 317
Cash flows from financing activities
Repurchases of common stock (200) -
Dividends to shareholders (29) (35)
New borrowings 54 97
Repayment of long-term debt (63) (472)
Increase in notes payable 13 -
------- -------
Cash used in financing activities (225) (410)
Effect of exchange rate changes on cash (3) -
------- -------
(Decrease) increase in cash and cash equivalents (25) 54
Cash and cash equivalents at beginning of year 103 64
------- -------
Cash and cash equivalents at end of period $ 78 $ 118
======= =======
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN MILLIONS) (Unaudited)
<TABLE>
<CAPTION>
Cumulative
Unearned Other
Common Stock Treasury Deferred Paid In Retained Restricted Comprehensive
Shares Amount Stock Compensation Capital Earnings Shares Income Total
------- ------- --------- ------------ ------- -------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 77 $ 1 $ (7) $ 7 $ 1,333 $ 294 $ (35) $ (15) $ 1,578
Comprehensive income
Net income 102 102
Other comprehensive income -
Currency translation
adjustment (48) (48)
------- ------- --------- ------------ ------- -------- ---------- ------------- -------
Total comprehensive income - - - - - 102 - (48) 54
Amortization and adjustment of
unearned restricted shares (1) 6 5
Shares held by rabbi trusts (2) 2 -
Repurchase of common stock (8) (200) (200)
Dividends to shareholders (29) (29)
------- ------- --------- ------------ ------- -------- ---------- ------------- --------
Balance at September 30, 1999 69 $ 1 $ (209) $ 9 $ 1,332 $ 367 $ (29) $ (63) $ 1,408
======= ======= ========= ============ ======= ======== ========== ============= ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
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
subsidiaries: Millennium Inorganic Chemicals Inc. (and its non-United States
affiliates), Millennium Petrochemicals Inc., and Millennium Specialty Chemicals
Inc.; and through its interest in Equistar Chemicals, LP ("Equistar"), a joint
venture between the Company, Lyondell Chemical Company ("Lyondell") and
Occidental Petroleum Corporation's ("Occidental") chemical subsidiary.
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 ("Common Stock") were distributed pro rata to Hanson's
shareholders (the "Demerger").
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
adjustments necessary for a fair statement of the results of operations and
financial position for the periods presented in conformity with generally
accepted accounting principles. Such adjustments consist only of normal
recurring items. All significant intercompany accounts and transactions have
been eliminated.
Note 2-Acquisitions and Dispositions
On December 1, 1997, the Company and Lyondell completed the formation of
Equistar, a joint venture partnership created to own and operate the
petrochemical and polymer businesses of the Company and Lyondell. The Company
contributed to Equistar substantially all of the net assets of its polyethylene,
performance polymer and ethyl alcohol businesses in exchange for a 43%
partnership interest and 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. A subsidiary of the Company guarantees $750 of this Equistar
credit facility.
On May 15, 1998, the Company and Lyondell expanded Equistar with the addition of
the ethylene, propylene, ethylene oxide, ethylene glycol and other ethylene
oxide derivatives businesses of Occidental's chemical subsidiary. Occidental
contributed the net assets of those businesses (including approximately $205 of
related debt) to Equistar. In exchange, Equistar borrowed an additional $500,
$420 of which was distributed to Occidental and $75 to the Company. Equistar is
now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. No gain
or loss resulted from this transaction.
Equistar is managed by a Partnership Governance Committee consisting of
representatives of each partner. Approval of Equistar's strategic plans and
other major decisions requires the consent of the representatives of the three
partners. All decisions of Equistar's Governance Committee that do not require
unanimity among the partners may be made by Lyondell's representatives alone.
The investment in Equistar at the date of contribution represented the carrying
value of the Company's contributed net assets, less cash received, and
approximated the fair market value of its 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 has
been reduced from $617 to $404 as a result of adding Occidental as a partner and
is being amortized over 25 years. The Company accounts for its interest in
Equistar using the equity method.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 2-Acquisitions and Dispositions--Continued
On July 1, 1998, the Company completed the acquisition of 99% of the voting
shares and 72% of total shares of Titanio do Brazil S.A. ("Tibras"), Brazil's
only integrated TiO2 producer, for $129, including assumed debt. This
acquisition was accounted for using the purchase method of accounting with the
purchase price allocated to the net assets acquired, principally property, plant
and equipment and working capital based on their fair value. The two operations
comprising Tibras included a plant which has capacity to produce approximately
60 thousand metric tons per year of TiO2 and a mineral sands mine with over 2
million metric tons of recoverable reserves.
On January 18, 1999, the Company completed transactions with Linde AG ("Linde")
relating to the Company's synthesis gas ("syngas") unit in La Porte, Texas, and
a 15% interest in its methanol business, whereby the Company received $122.5 in
cash. Linde operates the syngas facility under a long-term lease with a purchase
option. In addition, Linde operates and holds a 15% interest in the methanol
facility. No gain or loss resulted from these transactions.
On May 26, 1999, the Company sold its 26.4% combined subordinated and general
partnership interest in Suburban Propane Partners, L.P. and Suburban Propane,
L.P. (collectively "Suburban Propane") to Suburban Propane's management for $75
in cash, resulting in an after-tax gain of $38. As such, Suburban Propane is
reflected as a discontinued operation for all periods presented.
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.
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, or methods which
approximate FIFO, are used by all other subsidiaries.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 3-Significant Accounting Policies--Continued
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
Inventories
Finished products $ 163 $ 139
In-process products 23 28
Raw materials 102 117
Other inventories 48 50
-------------- --------------
$ 336 $ 334
============== ==============
Inventories valued on a LIFO basis were approximately $36 and $41 less than the
amount of such inventories valued at current cost at September 30, 1999 and
December 31, 1998, respectively.
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.
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 September 30, 1999.
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 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. Resulting translation
adjustments are recorded as a currency translation adjustment in Shareholders'
equity. Gains and losses resulting from foreign exchange changes on transactions
denominated in currencies other than the functional currency are recognized in
income in the Consolidated Statements of Income except for gains and losses on
hedges of net investments which are included as a component of Shareholders'
equity.
Federal Income Taxes: Deferred tax assets and liabilities are computed based on
the difference between the financial statement basis and income tax basis of
assets and liabilities using enacted marginal tax rates of the respective tax
jurisdictions. Deferred income tax expense (credit) is based on the changes in
the assets and liabilities 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 Company's subsidiaries.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 3-Significant Accounting Policies--Continued
Earnings per share: The weighted-average number of common equivalent shares
outstanding used in computing earnings per share for 1999 and 1998 was as
follows:
For Three Months Ended For Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------- ------------------------
(Unaudited) (Unaudited)
Basic 66,715,598 75,141,248 70,097,482 75,115,348
Options 52,875 47,923 48,125 110,264
Restricted shares 682,180 256,452 679,442 326,549
----------- ----------- ----------- -----------
Diluted 67,450,653 75,445,623 70,825,049 75,552,161
=========== =========== =========== ===========
Note 4-Long-Term Debt and Credit Arrangements
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Revolving Credit Facility bearing interest
at the bank's prime lending rate, or
at LIBOR or NIBOR plus .275% at the
option of the Company plus a Facility
Fee of .15% to be paid quarterly $ 231 $ 235
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 $1.0 and $1.1) 249 249
Debt payable through 2007 at interest rates
ranging from 2.4% to 22% 37 69
Less current maturities of long-term debt (24) (14)
------------ ------------
$ 993 $ 1,039
============ ============
Under the Revolving Credit Agreement, as amended on October 20, 1997, certain of
the Company's subsidiaries may borrow up to $500 under an unsecured
multi-currency revolving credit facility, which matures in July 2001 (the
"Credit Agreement" or the "Revolving Credit Facility"). 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 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 or 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.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 4-Long-Term Debt and Credit Arrangements -- Continued
The Senior Notes and Senior Debentures were issued by Millennium America Inc., a
wholly owned subsidiary of the Company, and are guaranteed by the Company. The
indenture under which the Senior Notes and Senior Debentures were issued
contains certain covenants that limit, among other things: (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 5-Related Party Transactions
One of the Company's subsidiaries purchases ethylene from Equistar at
market-related prices pursuant to an agreement made in connection with the
formation of Equistar. Under the agreement, the subsidiary is required to
purchase 100% of its ethylene requirements for its La Porte, Texas, facility up
to a maximum of 330 million pounds per year. The initial term of the contract
expires December 1, 2000. Thereafter, the contract automatically renews
annually. Either party may terminate on one year's notice.
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 these matters, collectively, which
primarily relate to environmental remediation activities, is between $150 and
$156 and has accrued $156 as of September 30, 1999. During the third quarter of
1999 there were favorable legacy insurance and litigation settlements of
approximately $15.
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 1-to 8-year contracts
with competitive prices generally determined at a fixed amount subject to
escalation for inflation. Total commitments to purchase ore for TiO2 aggregate
approximately $1,100 and generally expire between 1999 and 2006.
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 Demerger stock dividend for United Kingdom tax purposes for Hanson and
Hanson's 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.
PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 6-Commitments and Contingencies -- Continued
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
(Dollars in millions, except share data)
Note 7-Operations by Industry Segment
The Company's principal operations are grouped into three business segments:
titanium dioxide, acetyls and specialty chemicals.
The following is a summary of the Company's operations by industry segment:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------- ---------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales
Titanium dioxide $ 307 $ 314 $ 928 $ 901
Acetyls 60 59 162 202
Specialty chemicals 29 35 95 112
--------------- -------------- -------------- --------------
$ 396 $ 408 $ 1,185 $ 1,215
=============== ============== ============== ==============
Depreciation and amortization
Titanium dioxide $ 18 $ 20 $ 54 $ 52
Acetyls 5 6 14 18
Specialty chemicals 2 1 6 4
--------------- -------------- -------------- --------------
$ 25 $ 27 $ 74 $ 74
=============== ============== ============== ==============
Operating income
Titanium dioxide $ 26 $ 47 $ 85 $ 128
Acetyls 7 1 16 20
Specialty chemicals 5 10 22 34
--------------- -------------- -------------- --------------
$ 38 $ 58 $ 123 $ 182
=============== ============== ============== ==============
Capital expenditures
Titanium dioxide $ 18 $ 64 $ 64 $ 106
Acetyls 3 6 9 24
Specialty chemicals 2 11 6 20
--------------- -------------- -------------- --------------
$ 23 $ 81 $ 79 $ 150
=============== ============== ============== ==============
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 8-Information on Millennium America Inc.
Millennium America Inc., a wholly owned indirect subsidiary of the Company, is a
holding company for all of the Company's operating subsidiaries other than its
operations in the United Kingdom, France, Brazil and Australia. Millennium
America Inc. is the issuer of the 7% Senior Notes due November 15, 2006 and the
7.625% Senior Debentures due November 15, 2026, is a borrower under the
Company's Credit Agreement and guarantees $750 borrowed by Equistar under an
Equistar credit facility. Accordingly, the following summarized financial
information is provided for Millennium America Inc.
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
Current assets $ 401 $ 538
Investment in Equistar 1,480 1,519
Noncurrent assets 1,083 1,060
Receivable from affiliates 475 491
-------------- --------------
Total assets $ 3,439 $ 3,608
============== ==============
Current liabilities $ 226 $ 211
Noncurrent liabilities 1,961 2,000
Invested capital 932 1,052
Payable to parent and affiliates 320 345
-------------- --------------
Total liabilities and invested capital $ 3,439 $ 3,608
============== ==============
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------- --------------------------
(Unaudited) (Unaudited)
Net sales $ 237 $ 247 $ 694 $ 771
Operating income 20 15 68 88
Net income 31 16 78 72
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 9-Information on Equistar
The following is summarized financial information for Equistar:
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
Current assets $ 1,211 $ 1,127
Noncurrent assets 5,458 5,538
-------------- --------------
Total assets $ 6,669 $ 6,665
============== ==============
Current liabilities $ 620 $ 635
Noncurrent liabilities 2,256 2,145
Partners' capital 3,793 3,885
-------------- --------------
Total liabilities and partners' capital $ 6,669 $ 6,665
============== ==============
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------- ----------------------------
(Unaudited) (Unaudited)
Net sales $ 1,471 $ 1,149 $ 3,783 $ 3,263
Operating income 76 69 163 292
Net income 35 29 83 194
<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 three business segments: titanium dioxide ("TiO2"), acetyls and specialty
chemicals. The Company also holds a 29.5% interest in Equistar Chemicals, LP
("Equistar"). From December 1, 1997 to May 15, 1998, the Company had a 43%
interest in Equistar. The Company's interest in Equistar is accounted for using
the equity method. (See Note 2 to the Consolidated Financial Statements.) A
discussion of Equistar's financial results for the relevant period is included
below since the Company's interest in Equistar is a significant component of its
business.
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" on page 2 of this Quarterly Report on Form 10-Q should be reviewed
carefully.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
The Company had operating income of $38 million for the three months ended
September 30, 1999, a decrease of $20 million (34%) from the same period of
1998. Of the three business segments, only the acetyl segment had higher
earnings than the third quarter of last year. The acetyl segment's improved
performance was mainly due to lower production and administrative costs offset
by slightly lower prices. Higher functional costs, unfavorable foreign exchange
and lower prices negatively impacted TiO2 profits for the quarter compared to
last year's quarter. Lower pricing and volumes in the specialty chemical
segment's main fragrance business resulted in lower profits year-on-year.
Net income for the three months ended September 30, 1999 was $45 million, a 41%
increase from the quarter ended September 30, 1998 of $32 million. Net income in
1999 included favorable legacy insurance and litigation settlements and prior
year tax adjustments totaling $23 million post-tax. In addition, a $7 million
tax adjustment relating to 1998 discontinued operations was included in net
income. Excluding these items, net income for the third quarter of 1999 would
have been $15 million compared to $32 million for the third quarter of 1998. The
Company's third quarter 1999 equity earnings in Equistar remained flat with the
third quarter of 1998.
Titanium dioxide: Third quarter 1999 operating income was $26 million compared
to $47 million for the third quarter 1998, down $21 million (45%). Higher costs
from the implementation of new SAP-based systems and the opening of new sales
offices in Brussels and Singapore combined with lower average selling prices to
more than offset slightly higher sales volume compared to last year.
Overall, sales volume for the third quarter was up 1% from the prior year's
third quarter. Slow demand in Europe and loss of volume to more competitive
pricing resulted in lower sales volume in Europe and North America in the third
quarter of 1999 compared to 1998. Offsetting this was improved sales elsewhere
with volumes increasing 31% in the Asia/Pacific markets and 10% in the Latin
American markets over the third quarter of 1998.
Third quarter 1999 average selling prices were down 3% from the comparable
period last year. Strong competition in Europe put severe pressure on pricing.
Pricing in North America has been stable while prices were higher in the
Asia/Pacific Region, where economies are strengthening. Several price increases
have been announced in the global markets. Driven by steady demand and limited
supply, such increases are expected to begin to be realized during the fourth
quarter.
The overall plants' operating rate for the third quarter of 1999 was 93%
compared to 96% for the same period last year. This rate was based on an annual
effective capacity of 712,000 metric tons in 1999 compared with 671,000 metric
tons in 1998. At Stallingborough, work continues to improve its operating rate
which was 85% in September, 1999, up from the 70% to 80% monthly rate in the
second quarter.
<PAGE>
The near-term outlook for the titanium dioxide business is positive, with steady
demand and announced price increases beginning to be implemented during the
fourth quarter.
Acetyls: Operating income was $7 million, up $6 million from the third quarter
of 1998. Lower production and administrative costs more than offset the impact
of higher natural gas and ethylene prices on the cost of products in this chain.
Methanol prices were up 25% from the second quarter of 1999 and up 17% from the
third quarter of 1998, spurred by limited supply. Rising natural gas prices,
however, increased methanol production costs. Acetic acid prices were down 10%
from the prior year's third quarter but demand for acetic acid was strong during
the quarter. Vinyl acetate monomer ("VAM") prices were flat with the third
quarter of 1998 but are on an increasing trend due to strong demand. A $0.03/lb
price increase was implemented on July 1,,1999. A second price increase in VAM
of $0.03/lb. was announced with an effective date of October 1, 1999.
The U.S., European and Asian VAM markets have strengthened in recent months with
the short-term outlook positive.
Specialty chemicals: Operating income for the quarter ended September 30, 1999
was $5 million compared to $10 million for the third quarter of 1998. Weakness
in global fragrance demand and the addition of new competitors into the
marketplace have resulted in a highly competitive marketplace. Third quarter
sales volume was down 26% compared to the third quarter of last year. Overall
average selling prices increased 13% compared to the third quarter of 1998, due
solely to product mix; competitive price reductions have taken place in most
individual products.
Offsetting some of this weakness is the declining price of crude sulfate
turpentine ("CST"), a key raw material used in the manufacture of fragrance
chemicals. The third quarter average cost of CST was 42% lower than in the same
period last year. Effective October 1, 1999, the price of CST decreased another
$0.25 per gallon. CST prices have declined approximately $0.80 per gallon since
the third quarter of 1998.
Competitive conditions are expected to continue for the remainder of the year
with a more positive outlook for 2000.
Equistar: The Company's 29.5% interest in Equistar resulted in $3 million (after
interest) equity income for both the 1999 and 1998 quarters. The Company's share
of Equistar's reported operating income was $15 million for the third quarter of
1999 and 1998 before interest but after allocated expenses. Such amounts exclude
any one-time transition costs to form the venture.
Compared with the third quarter of last year, ethylene and polyethylene prices
were higher in 1999, reflecting the upward trend in the current year as opposed
to the downturn in the petrochemicals cycle in 1998. Volumes in the
petrochemicals and polymers segment were relatively stable in the third quarter
of 1999 compared to 1998's third quarter. Polyethylene demand was strong during
the third quarter, driven by end-use demand growth and customer attempts to
restock low inventories ahead of announced price increases both in the quarter
and as compared to 1998. Total price increases for polyethylene of $0.21 per
pound on average have been announced since the beginning of the year, with
$0.13/lb. realized to date. Higher feedstock costs have substantially offset
price increases both in the quarter and as compared to 1998.
Equistar expects the current difficult business environment to continue due to
the rapid rise in raw materials costs and significant consolidation in the
commodity chemical industry. Raw materials cost increases have outpaced price
increases, putting pressure on margins. Industry mergers and joint ventures by
major competitors are expected to increase competition. Industry forecasts show
a continuing difficult business environment through 2001 due to industry
consolidation and capacity additions.
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The Company had operating income of $123 million for the nine months ended
September 30, 1999, a decrease of $59 million (32%) from the same period of
1998. Year to date, the acetyl segment had higher earnings in 1999 as compared
to 1998, while earnings in the TiO2 and specialty chemicals segments were lower.
In the TiO2 segment, higher production costs negatively impacted profits. The
acetyl segment experienced increasingly difficult business conditions in
oversupplied markets. Specialty chemicals was also impacted by lower volume due
in part to increased industry capacity and competition.
Net income for the nine months ended September 30, 1999 was $102 million, an 18%
decrease from income for the same period last year of $125 million. In addition
to the lower results from the Company's wholly owned operations, Equistar's
earnings were also lower. The Company's equity earnings in Equistar fell from
$58 million for the first nine months of 1998 to $4 million for the first nine
months of 1999. Higher feedstock costs was the major contributing factor.
Partially offsetting the negative items above were a $38 million after-tax gain
from the sale of Suburban Propane and a $6 million after-tax gain from the
Company's share of Equistar's gain on the sale of its colors and compounds
business during the second quarter of 1999.
Titanium dioxide: Operating income for the first nine months of 1999 of $85
million compared to $128 million for the comparable period in 1998. Costs were
higher as a result of lower production levels at all facilities and difficulties
earlier in the year with the ramp-up of the Stallingborough facility expansion.
In addition, functional costs were higher year-on-year from the implementation
of SAP and related systems and a reorganization of the sales and marketing
organization. This more than offset the impact of higher sales prices and
volumes.
Overall sales volume for the first nine months of 1999 was up only 1% from the
prior year's first nine months. Year-to-date European sales volumes were down
15% from the first nine months of 1998 due to economic weakness and down 5% in
North America due to competitive pricing. On the other hand, volumes increased
19% in the Asia/Pacific markets due to strengthening economies, and more than
doubled in the Latin American markets from strong demand and the acquisition of
capacity in Brazil in mid 1998.
Year-to-date 1999 average selling prices were up 1% over the comparable period
last year due to increases implemented during 1998. As discussed above, prices
in early 1999 have come under pressure primarily from slowing demand and strong
competition in Europe. However, prices have increased in the Asia/Pacific and
Brazilian markets.
The overall plants' operating rate for the first nine months of 1999 fell
compared to the same period last year from 98% to 88%. This rate was based on an
annual effective capacity of 712,000 metric tons in 1999 compared with 671,000
metric tons in 1998. The decline in the operating rate was due primarily to
planned and unplanned production slowdowns at certain facilities, driving costs
higher. During the first quarter of 1999, production was restricted to help
balance supply and demand.
Acetyls: This segment has suffered from difficult business conditions in all
product lines during 1999. Operating profit was down 20% from the first nine
months of 1998 to $16 million for the nine months ended September 30, 1999.
Lower sales prices and volume more than offset lower production costs within the
business.
Selling prices for methanol, acetic acid and VAM were down 12%, 14% and 9%,
respectively, for the nine months ended September 30, 1999 compared to the same
period in 1998. Overcapacity and slowness in world markets have depressed prices
since 1998. In addition, rising natural gas and ethylene prices increased
production costs. VAM markets have strengthened in all regions in recent months
as supply and demand came into balance and prices increased $0.03/lb. in July. A
price increase of $0.03/lb. in VAM has been announced to take effect October
1,1999.
Specialty chemicals: Operating income for the first nine months ended September
30, 1999 was $22 million compared to $34 million for the first nine months of
1998. Weakness in global fragrance demand and the entry of new competitors into
the marketplace have created a highly competitive business climate. Sales volume
was down 20% compared to the same period of last year. While overall average
selling prices increased 6% compared to the same period of 1998, due solely to
product mix, competitive price reductions were evident in most individual
products.
The declining price of CST has offset some of this weakness. The average cost of
$1.40 per gallon was 30% lower than the same period last year. Effective October
1, 1999, the price of CST decreased another $0.25 per gallon. CST prices have
declined approximately $0.80 per gallon since the third quarter of 1998.
<PAGE>
Equistar: The Company's 29.5% interest in Equistar generated an equity profit of
$4 million (after interest) for the first nine months as compared to earnings of
$58 million (after interest) for the same period of 1998. The Company's share of
Equistar's reported operating income was $31 million for the first nine months
of 1999, before interest but after allocated expenses. This compares to $90
million for the same period of 1998. Both periods exclude any one-time
transition costs to form the venture.
Ethylene and polyethylene prices increased during the first nine months of 1999
after their fall during the second half of 1998. Plant outages during the first
nine months of 1999 kept industry ethylene supply tight, with demand steady.
Polyethylene demand was strong, driven by end-use demand growth and customer
attempts to restock very low inventories ahead of announced price increases.
Average polyethylene pricing increased with total price increase announcements
of $0.21 per pound on average during the first nine months of 1999, with
$0.13/lb. realized to date. However, higher feedstock costs and production costs
eroded most margin improvement from increased pricing. In addition, planned and
unplanned outages during the first and second quarters increased production
costs as compared to the prior year.
FOREIGN CURRENCY MATTERS
The functional currency of each of the Company's non-United States operations is
the local currency. The impact of currency translation in consolidating the
results of operations and financial position of such operations has historically
not been material to the consolidated financial position of the Company. The
Company buys materials and sell products in a variety of currencies in various
parts of the world. Its results are therefore impacted by changes in the
relative value of currencies in which it deals. The Company's primary market
risk relates to exposure to foreign currency exchange rate fluctuations on
transactions made by the Company's foreign operations. The Company currently
uses forward exchange contracts to mitigate the effect of short-term foreign
exchange rate movements on the Company's operating results. The devaluation of
Brazil's currency, the real, in January 1999 and the volatility of this currency
during 1999 had a negative effect of approximately $7 on net income. Future
events, which may significantly increase or decrease the risk of future movement
in the real or any other currency, cannot be predicted.
EURO CONVERSION
On January 1, 1999, eleven of fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
("legacy currencies") and the European Union's common currency, the euro. As of
that date, the euro began trading on currency exchanges and may be used in
business transactions. The legacy currencies will remain legal tender in the
participating countries for a transition period between January 1, 1999 and at
least January 1, 2002 (but not later than July 1, 2002).
The Company has begun to identify issues associated with the conversion to the
euro, including, among others, the need to adapt computer and financial systems
to accommodate euro-denominated transactions and the impact of one common
currency on pricing. Since financial systems and processes currently accommodate
multiple currencies, the Company does not anticipate system-conversion costs to
be material. Since the euro conversion may affect cross-border competition by
creating cross-border price transparency, the Company will be assessing its
pricing strategies to ensure it remains competitive in a broader European
market.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $19 million compared to $147 million
provided for the nine months ended September 30, 1999 and 1998, respectively.
Lower income from continuing operations and increased working capital were the
primary reasons for the decrease.
Cash provided by investing activities was $184 million and $317 million for the
first nine months of 1999 and 1998, respectively. Cash provided in the 1999
period reflects proceeds of $123 million from the syngas and methanol
transactions with Linde AG, as discussed in Note 2 to the Consolidated Financial
Statements, distributions of $51 million from Equistar and proceeds of $75
million from the sale of Suburban Propane, more than offsetting capital
expenditures of $79 million. Cash provided in 1998 reflects $225 million of
accounts receivable collections related to the businesses contributed to
Equistar and $317 million in distributions from Equistar, partially offset by
capital expenditures of $150 million. 1999 capital expenditure levels are
significantly below last year due primarily to the completion early in the year
of the Stallingborough UK plant expansion.
Cash used in financing activities was $225 million and $410 million for the nine
months ended September 30, 1999 and 1998, respectively. Included in the first
nine months of 1999 financing activities was $200 million used to repurchase
company stock. There was a net $375 million debt reduction during the first nine
months of 1998.
<PAGE>
The Company expects to spend approximately $115 million in 1999 for capital
expenditures, which include a new TiO2 research and development center in the
United States and the completion of the SAP business systems implementation.
During the third quarter of 1999, the Company completed a $200 million share
repurchase program, approved by its Board of Directors in January 1999. The
Company repurchased 8,893,600 shares, representing 11.4% of the shares
outstanding at the beginning of the year.
YEAR 2000
Each of the Company's three business units and its corporate headquarters has
established a team to address Year 2000 compliance issues. Plans have been
established by each team and are being implemented. Actions taken toward the
goal of Year 2000 compliance are reported, on a regular basis, to the Company's
Operations Committee and its Board of Directors. The most recent briefing was on
October 29, 1999 to the Board of Directors.
The Company has focused its Year 2000 efforts on three major exposure areas:
information systems (which includes application software and technical
infrastructure), manufacturing process controls (non-IT systems) and supply
chain (which includes the Company's significant suppliers and customers). The
project phases common to all exposure areas are: 1) inventory/assessment; 2)
remediation; 3) testing; 4) implementation; and, 5) designing contingency plans.
Key components of each of these phases follows:
The inventory/assessment phase involves identifying significant hardware
and software that exist throughout the Company. The Company then assigns a
business risk to each system and prioritizes each system to determine
optimal allocation of resources and funds for Year 2000 remediation work.
The remediation phase involves determining whether individual systems will
be repaired, replaced or retired and develops plans, schedules and costs
for correction. This phase also includes an allocation of resources and
execution of a remedial plan.
During the testing phase, the performance, functionality and integration of
converted or replaced systems are tested.
Thereafter, the implementation phase provides for the implementation of
fully tested systems into the production environment.
Contingency planning safeguards the Company in the event that risk
assessments and action plans do not result in Year 2000 compliance or the
timetable in which actions are scheduled to be taken is not adequate to
ensure compliance by the Year 2000.
During 1997, as a part of a separate project to improve the quality of and
access to business information, the Company began a company-wide implementation
of the SAP R/3 enterprise system software from SAP America, Inc. ("SAP
America"). This system integrates information, including financial, human
resources, customer and supply chain information, in a single database. The
Company has received representations from SAP America that the SAP R/3 system
has been designed to be Year 2000 compliant. All three of the Company's business
units have completed their SAP R/3 implementation with the exception of the U.S.
payroll portion of the SAP Human Resources Module. The Company plans to
implement this payroll portion in January 2000. The Company has completed the
remediation and testing of its current payroll system and the system has been
placed in production. The Company has outsourced the technical infrastructure
for the SAP R/3 system to an internationally recognized provider of these
services and has received assurances from the provider that all hardware and
related system software are Year 2000 compliant. The Company has not deferred
any of its currently planned projects as a result of Year 2000 efforts.
As of November 7, 1999 the Company's three business units have substantially
completed all phases of the Year 2000 project for non-IT systems. During the
phases of the Year 2000 project, the Company engaged independent consultants at
certain locations to monitor remediation programs for certain systems and to
provide additional expertise.
The Company has also requested and received Year 2000 compliance information
from its critical suppliers, customers and other third parties. The Company is
substantially complete in evaluating and assessing these responses. The more
significant third-party relationships include suppliers of ores, electrical
power, natural gas and industrial gases and providers of transportation such as
pipelines, rail and barges. Contingency plans have been developed for
significant third-party risks identified by the Company as a result of its
evaluations and assessments. Although the Company has planned these actions to
address third-party issues and potential impacts to the Company, it often has
little direct ability to influence the compliance actions of other parties.
<PAGE>
The Company estimates that it will spend $98 million related to the company-wide
implementation of SAP, consisting of $46 million for consulting costs, $4
million for hardware, $6 million for software, $24 million for internal human
resources, and $18 million for training and incidental costs. The Company
estimates that it will spend an additional $15 million for required
modifications and replacements of non-IT systems to become Year 2000 compliant,
excluding internal human resources costs, which the Company does not measure
separately. Such amounts exclude Year 2000 costs that may be incurred by
Equistar. The total amount spent on the SAP project, to date, was approximately
$93 million, of which $76 million was capitalized and $17 million was expensed.
The Company owns a 29.5% interest in Equistar. Equistar has formed a steering
committee to oversee all Year 2000 remediation efforts. The chairman of the
Equistar Year 2000 Steering Committee reports project progress regularly to the
Equistar Governance Committee, which includes representatives from the Company's
senior management. The Equistar Year 2000 Steering Committee has completed an
assessment of the state of readiness of the information technology and non-IT
systems of Equistar. These assessments cover manufacturing systems, including
laboratory information systems and field instrumentation, and significant
third-party vendor and supplier systems, including employee compensation and
benefit plan maintenance systems. The Steering Committee has also assessed the
readiness of significant customers and suppliers. The inventory, assessment and
remediation testing and final implementation phases for Equistar are
substantially complete. Equistar has also completed the system-wide replacement
of its business information systems with SAP-based systems, including the
systems for the operations contributed by Millennium and Occidental. The new
systems and software have been designed to be Year 2000 compliant. Equistar has
substantially completed contingency plan preparation with the assistance of an
outside consultant. These plans are intended to avoid material interruption of
core business operations through the year 2000 and beyond, while ensuring safe
operations and responsible financial performance. Final testing of these plans
is nearing completion. The operations of Millennium Petrochemicals are
integrally related to those of Equistar's La Porte, Texas, facility from which
materials and utilities are sourced. As a result, any Year 2000-related
interruption in Equistar's operations at this location could severely impact
Millennium Petrochemicals' ability to manufacture and ship products to
customers.
The Company has developed a process for creating Year 2000 contingency plans.
This process includes the evaluation of the Company's existing business and
disaster recovery plans and the identification of additional prudent steps that
may be necessary to prepare for certain contingencies. These contingency plans
are substantially complete and include identification of alternate suppliers,
allowing for sufficient inventory levels in the event of manufacturing or
transportation interruption and replacing electronic applications with manual
processes.
Due to the uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers, the Company
is unable to access the extent and resulting materiality of the impact of Year
2000 failures on its operations, liquidity or financial position. However, the
failure to correct a material Year 2000 problem could result in an interruption
in, or a failure of, certain normal business activities or operations. In
particular, if suppliers fail to provide the Company with raw materials
necessary to manufacture its products, sufficient electrical power and other
utilities to sustain its manufacturing processes, or adequate, reliable means of
transporting its products to its customers, then any such failure could result
in the temporary inability to manufacture and/or ship products to customers.
This risk may be mitigated to some extent at Millennium Inorganic Chemicals,
where manufacturing capacity is distributed among seven manufacturing locations.
The Company's Year 2000 project is designed to significantly reduce the
probability of any significant disruption of the Company's operations from
internal sources. The Company's contingency plans should mitigate the potential
impact of unanticipated failures by third party customers and suppliers.
However, in the event that the Year 2000 issues of the Company and/or third
parties with whom the Company transacts business are not addressed on a timely
basis, it is possible that such issues could have an adverse impact on the
Company's operations and/or financial condition.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion under the caption "Foreign Currency Matters" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 2 of this Quarterly Report is incorporated by reference herein.
<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
September 30, 1999 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: November 15, 1999
[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
COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1
<TABLE>
<CAPTION>
BASIC 1998 WEIGHTED AVERAGE # SHARES
- --------------------------
YEAR
SHARES QUARTER TO DATE
<S> <C> <C> <C> <C> <C>
SHARES OF COMMON STOCK
OUTSTANDING
AT DECEMBER 31, 1997 75,099,648 75,099,648 75,099,648
ISSUED APRIL 5,600 5,600 3,700
JULY 36,000 36,000 12,000
--------------- ---------------- ----------------
SHARES OF COMMON STOCK
OUTSTANDING
AT SEPTEMBER 30, 1998 75,141,248 75,141,248 75,115,348
=============== ================ ================
EPS EPS
INCOME FROM CONTINUING
OPERATIONS 32,000,000 124,000,000
---------------- ----------------
WEIGHTED AVG SHARES 75,141,248 $0.43 75,115,348 $1.66
OUTSTANDING
NET INCOME 32,000,000 125,000,000
---------------- ----------------
WEIGHTED AVG SHARES 75,141,248 $0.43 75,115,348 $1.66
OUTSTANDING
1999
-------------
SHARES OF COMMON STOCK
OUTSTANDING
AT DECEMBER 31, 1998 75,170,692 75,170,692 75,170,692
SHARE REPURCHASES:
JANUARY (82,800) (82,800) (82,800)
FEBRUARY (1,240,300) (1,240,300) (1,102,489)
MARCH (1,449,500) (1,449,500) (1,127,389)
APRIL (639,000) (639,000) (426,000)
MAY (2,125,100) (2,125,100) (1,180,611)
JUNE (1,651,100) (1,651,100) (733,822)
JULY (435,200) (435,200) (145,067)
AUGUST (1,270,600) (847,067) (282,356)
APRIL ISSUE 6,000 6,000 4,000
JUNE ISSUE 3,000 3,000 1,333
AUG ISSUE 8,960 5,973 1,991
--------------- ---------------- ----------------
SHARES OF COMMON STOCK
OUTSTANDING
AT SEPTEMBER 30, 1999 66,295,052 66,715,598 70,097,482
=============== ================ ================
INCOME FROM CONTINUING
OPERATIONS 38,000,000 64,000,000
---------------- ----------------
WEIGHTED AVG SHARES 66,715,598 $0.57 70,097,482 $0.91
OUTSTANDING
NET INCOME 45,000,000 102,000,000
---------------- ----------------
WEIGHTED AVG SHARES 66,715,598 $0.68 70,097,482 $1.46
OUTSTANDING
<PAGE>
DILUTED 1998
- --------------------------
SHARES OF COMMON STOCK OUTSTANDING
OUTSTANDING
AT DECEMBER 31, 1997 75,099,648 75,099,648 75,099,648
ISSUED AAPRIL 5,600 5,600 3,700
JULY 36,000 36,000 12,000
OPTIONS 47,923 110,264
TIME VESTED RESTRICTED STOCK 256,452 326,549
--------------- ---------------- ----------------
SHARES OF COMMON STOCK
OUTSTANDING
AT SEPTEMBER 30, 1998 75,141,248 75,445,623 75,552,161
=============== ================ ================
INCOME FROM CONTINUING
OPERATIONS 32,000,000 124,000,000
---------------- ----------------
WEIGHTED AVG SHARES 75,445,623 $0.42 75,552,161 $1.64
OUTSTANDING
NET INCOME 32,000,000 125,000,000
---------------- ----------------
WEIGHTED AVG SHARES 75,445,623 $0.42 75,552,161 $1.65
OUTSTANDING
1999
-------------
SHARES OF COMMON STOCK
OUTSTANDING
AT DECEMBER 31, 1998 75,170,692 75,170,692 75,170,692
SHARE REPURCHASES:
JANUARY (82,800) (82,800) (82,800)
FEBRUARY (1,240,300) (1,240,300) (1,102,489)
MARCH (1,449,500) (1,449,500) (1,127,389)
APRIL (639,000) (639,0000) (426,000)
MAY (2,125,100) (2,125,100) (1,180,611)
JUNE (1,651,100) (1,651,100) (733,822)
JULY (435,200) (435,200) (145,067)
AUGUST (1,270,600) (847,067) (282,356)
APRIL ISSUE 6,000 6,000 4,000
JUNE ISSUE 3,000 3,000 1,333
AUG ISSUE 8,960 5,973 1,991
OPTIONS 547,000 52,875 48,125
TIME VESTED RESTRICTED STOCK 605,368 469,406 467,490
PERFORMANCE BASED RESTRICTED STOCK 1,816,104 212,774 211,952
--------------- ---------------- ----------------
SHARES OF COMMON STOCK
OUTSTANDING
AT SEPTEMBER 30, 1999 69,263,524 67,450,653 70,825,049
=============== ================ ================
INCOME FROM CONTINUING
OPERATIONS 38,000,000 64,000,000
---------------- ----------------
WEIGHTED AVG SHARES 67,450,653 $0.56 70,825,049 $0.90
OUTSTANDING
NET INCOME 45,000,000 102,000,000
---------------- ----------------
WEIGHTED AVG SHARES 67,450,653 $0.67 70,825,049 $1.44
OUTSTANDING
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0
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