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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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: 66,338,056 shares of Common
Stock, par value $.01 per share, as of May 1, 2000, excluding 10,911,096 shares
held by the registrant, its subsidiaries and certain Company trusts, which are
not entitled to vote.
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<PAGE>
MILLENNIUM CHEMICALS INC.
Table of Contents
Part 1
Item 1 Financial Statements.......................................... 3
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 16
Part II
Item 3 Quantitative and Qualitative Disclosures About Market Risk... 20
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:
the balance 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 titanium dioxide, ethylene
and polyethylene, on the other hand; the economic trends in the United States
and other countries that 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; failure to achieve the Company's or Equistar's
productivity improvement and cost reduction targets or to complete construction
projects on schedule; and, other unforseen circumstances. 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)
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 88 $ 110
Trade receivables, net 294 268
Inventories 341 361
Other current assets 96 118
------------- -------------
Total current assets 819 857
Property, plant and equipment, net 983 995
Investment in Equistar 817 800
Other assets 190 194
Goodwill 400 404
------------- -------------
Total assets $ 3,209 $ 3,250
============= =============
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 62 $ 56
Current maturities of long-term debt 5 23
Trade accounts payable 117 153
Income taxes payable 105 97
Accrued expenses and other liabilities 182 166
------------- -------------
Total current liabilities 471 495
Long-term debt 1,024 1,023
Deferred income taxes 3 -
Other liabilities 694 701
------------- -------------
Total liablities 2,192 2,219
------------- -------------
Commitments and contingencies (Note 6)
Minority interest 20 16
Shareholders' equity
Preferred stock (par value $0.01 per
share, authorized 25,000,000 shares;
none issued and outstanding) - -
Common stock (par value $0.01 per share,
authorized 225,000,000 shares; issued
77,891,586 shares each in 2000 and 1999) 1 1
Paid in capital 1,335 1,335
Retained deficit (16) (32)
Unearned restricted shares (28) (28)
Cumulative other comprehensive loss (72) (61)
Treasury stock (at cost, 11,279,377 and
9,567,263 shares in 2000 and 1999,
respectively) (233) (210)
Deferred compensation 10 10
------------- -------------
Total shareholders' equity 997 1,015
------------- -------------
Total liabilities and shareholders' equity $ 3,209 $ 3,250
============= =============
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Income
(Dollars In Millions, Except Share Data)
Three Months Ended March 31,
2000 1999
------------------------------
(Unaudited)
Net sales $ 423 $ 383
Operating costs and expenses
Cost of products sold 300 274
Depreciation and amortization 27 24
Selling, development and administrative
expense 50 45
------------- -------------
Operating income 46 40
Interest expense (19) (18)
Interest income 1 1
Equity in earnings (loss) of Equistar 14 (4)
Other income, net 3 (4)
------------- -------------
Income before provision for income taxes
and minority interest 45 15
Provision for income taxes (17) (6)
------------- -------------
Income before minority interest 28 9
Minority interest 3 -
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Net income $ 25 $ 9
============= =============
Net income per share - basic $ 0.38 $ 0.12
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Net income per share - diluted $ 0.37 $ 0.12
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See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Cash Flows
(Dollars In Millions)
Three Months Ended March 31,
2000 1999
----------------------------
(Unaudited)
Cash flows from operating activities
Net income $ 25 $ 9
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27 24
Deferred income tax provision 3 5
Restricted stock amortization - 3
Equity in (earnings) loss of Equistar (14) 4
Minority interest 3 -
Changes in assets and liabilities
Increase in trade receivables (29) (16)
Decrease in inventories 15 31
Decrease (increase) in other current
assets 21 (14)
Decrease (increase) in investments
and other assets 2 (5)
Decrease in trade accounts payable (33) (2)
Increase (decrease) in accrued expenses
and other liabilities and income taxes
payable 23 (12)
Decrease in other liabilities (9) (13)
----------- ----------
Cash provided by operating activities 34 14
Cash flows from investing activities
Capital expenditures (21) (29)
Distributions from Equistar - 15
Proceeds from syngas transaction - 123
Proceeds from sale of fixed assets 2 8
----------- ----------
Cash (used in) provided by investing
activities (19) 117
Cash flows from financing activities
Dividends to shareholders (9) -
Repurchase of common stock (23) (51)
Proceeds from long-term debt 26 7
Repayment of long-term debt (34) (64)
Increase (decrease) in notes payable 5 (2)
----------- ----------
Cash used in financing activities (35) (110)
Effect of exchange rate changes on cash (2) (3)
----------- ----------
(Decrease) increase in cash and cash equivalents (22) 18
Cash and cash equivalents at beginning of period 110 103
----------- ----------
Cash and cash equivalents at end of period $ 88 $ 121
=========== ==========
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 Paid In Retained Restricted Comprehensive Treasury Deferred
Shares Amount Capital Earnings Shares Loss Stock Compensation Total
------- ------- -------- -------- ---------- ------------- ---------- ------------ ---------
<S> <C><C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 68 $ 1 $ 1,335 $ (32) $ (28) $ (61) $ (210) $ 10 $ 1,015
Comprehensive income
Net income 25 25
Other comprehensive income -
Currency translation
adjustment (11) (11)
------- ------- -------- -------- ---------- ------------- ---------- ------------ ---------
Total comprehensive income - - - 25 - (11) - - 14
Amortization and adjustment of
unearned restricted shares -
Shares repurchased (1) (23) (23)
Dividend to shareholders (9) (9)
------- ------- -------- -------- ---------- ------------- ---------- ------------ ---------
Balance at March 31, 2000
67 $ 1 $ 1,335 $ (16) $ (28) $ (72) $ (233) $ 10 $ 997
======= ======= ======== ======== ========== ============= ========== ============ =========
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 1--Description of Company
Millennium Chemicals Inc. (the "Company") is a major international chemical
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 limited
partnership jointly owned by the Company, Lyondell Chemical Company ("Lyondell")
and Occidental Petroleum Corporation ("Occidental").
The Company and Occidental each have a 29.5% interest in Equistar and Lyondell
has a 41% interest. Equistar owns and operates the petrochemical, polymer and
derivative businesses contributed to it by its partners. Equistar is managed by
a Partnership Governance Committee consisting of representatives of each
partner. Approval of Equistar's strategic plans and other major decisions
require 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 Company accounts for its interest in Equistar using the equity method. Prior
to December 31, 1999, the difference between the carrying value of the Company's
interest and its underlying equity in the net assets of Equistar ("goodwill")
was amortized over 25 years. In furthering the Company's business strategy to
de-emphasize commodity chemicals, the Board of Directors of the Company in
December 1999 approved actions to advance the Company's efforts to dispose of
its Equistar interest. As a result of the Board's adopting the strategy to
dispose of the Equistar interest in the short-term, the Company reduced the
carrying amount of the interest at December 31, 1999 (including all of the
underlying goodwill) to an estimated fair value of $800. The estimated fair
value was determined by evaluating, among other things, the estimated discounted
future cash flows of Equistar, current market interest and estimated disposal
costs, including income taxes.
Note 2--Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. Minority interest
represents the minority ownership of Titanio do Brazil S.A. ("Tibras") at cost.
All significant intercompany accounts and transactions have been eliminated. The
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 are normal recurring items.
Estimates and Assumptions: 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, the disclosure of
contingent 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.
Revenue Recognition: Revenue is recognized upon shipment of product to the
customer or upon usage of the product by the customer in the case of consignment
inventories.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 2--Significant Accounting Policies--Continued
Inventories: Inventories are stated at the lower of cost or market value. For
certain United States operations representing 50% and 47% of consolidated
inventories at March 31, 2000 and December 31, 1999, respectively, 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.
March 31, December 31,
2000 1999
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(Unaudited)
Inventories
Finished products $ 182 $ 167
In-process products 26 29
Raw materials 82 116
Other inventories 51 49
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$ 341 $ 361
============= =============
Inventories valued on a LIFO basis were approximately $31 less than the amount
of such inventories valued at current cost at March 31, 2000 and December 31,
1999.
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. Major repairs and improvements
incurred in connection with substantial plant overhauls or maintenance
turnarounds are capitalized and amortized on a straight-line basis until the
next planned turnaround (generally 18 months), other less substantial
maintenance and repair costs are expensed as incurred.
Capitalized Software Costs: The Company capitalizes costs incurred in the
acquisition and modification of computer software used internally, including
consulting fees and costs of employees dedicated solely to a specific project.
Such costs are amortized over periods not exceeding 7 years and are subject to
impairment evaluation under SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of ".
Goodwill: Goodwill represents the excess of the purchase price over the fair
value of net 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 existed at March 31, 2000.
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 companies, has been agreed, and are not discounted.
In general, costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs increase the value of the
property and/or mitigate or prevent contamination from future operations.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 2--Significant Accounting Policies--Continued
Foreign Currency: Assets and liabilities of the Company's foreign 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 in the
currency translation account in Shareholders' equity. Gains and losses resulting
from changes in foreign currency on transactions denominated in currencies other
than the functional currency of the respective subsidiary are generally
recognized in income as they occur. Forward exchange contracts are used to
manage the exposure to foreign currency fluctuations on certain of these
transactions. Unrealized gains and losses related to these contracts are
deferred and reported as part of the underlying transaction when settled. The
cash flows from such contracts are classified consistent with cash flows from
the transactions or events being hedged.
Federal Income Taxes: Deferred income taxes result from temporary differences
between the financial statement basis and income tax basis of assets and
liabilities and are computed using enacted marginal tax rates of the respective
tax jurisdictions. Valuation allowances are provided against deferred tax assets
which are not likely to be realized in full. The Company and certain of its
subsidiaries have entered into tax-sharing and indemnification agreements with
Hanson PLC ("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 prior to the Company's demerger from
Hanson.
Earnings Per Share: The weighted-average number of equivalent shares of Common
Stock outstanding used in computing earnings per share is as follows:
For Three Months Ended
March 31,
2000 1999
------------------------------
(Unaudited)
Basic 66,203,843 73,777,860
Options - 140
Restricted shares 547,458 350,603
------------- -------------
Diluted 66,751,301 74,128,603
============= =============
Note 3--Long-Term Debt and Credit Arrangements
March 31, December 31,
2000 1999
------------- -------------
(Unaudited)
Revolving Credit Agreement 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 $ 263 $ 261
7% Senior Notes due 2006 500 500
7.625% Senior Debentures due 2026 249 249
Debt payable through 2007 at interest rates
ranging from 3% to 9% 17 36
Less current maturities of long-term
debt (5) (23)
------------- -------------
$ 1,024 $ 1,023
============= =============
Under the Revolving Credit Agreement, as most recently amended on January 12,
2000, 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"). The Company guarantees borrowings under 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.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 3--Long-Term Debt and Credit Arrangements--Continued
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. On January 12, 2000, one of the financial covenants in the
Credit Agreement was amended to permit the Company to remain compliant after the
1999 charge for loss in value of the Equistar investment.
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 4--Financial Instruments
SFAS 137: In June 1999, the Financial Accounting Standards Board issued SFAS
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS 133," which defers the effective date of SFAS 133 for
one year. The Company plans to adopt SFAS 133 in the first quarter of 2001. SFAS
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in Net income or as Comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is currently evaluating the implications of
this new pronouncement but, due to the Company's limited use of derivative
instruments, the adoption of SFAS 133 is not expected to have a significant
effect on the financial position, results of operations or cash flows of the
Company.
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.
One of the Company's subsidiaries sells vinyl acetate monomer ("VAM") to
Equistar at formula-based prices pursuant to an agreement entered into in
connection with the formation of Equistar. Under this agreement, Equistar is
required to purchase 100% of its VAM feedstock requirements for its La Porte,
Texas, Clinton and Morris, Illinois plants, estimated to be 48 to 55 million
pounds per year, up to a maximum of 60 million pounds per year ("Annual
Maximum") for the production of ethylene vinyl acetate products at those
locations. If Equistar fails to purchase at least 42 million pounds of VAM in
any calendar year, the Annual Maximum quantity may be reduced by as much as the
total purchase deficiency for one or more successive years. In order to reduce
the Annual Maximum quantity, Equistar must be notified within at least 30 days
prior to restricting the VAM purchases provided that the notice is not later
than 45 days after the year of the purchase deficiency. The initial term of the
contract expires December 31, 2000, and, thereafter, renews annually. Either
party may terminate on one year's notice.
One of the Company's subsidiaries and Equistar have entered into various
manufacturing and service agreements. These agreements provide the subsidiary
with research and development laboratory space, certain utilities and support
services, and provide Equistar with certain utilities and support services.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 6--Commitments and Contingencies
The Company and various of its subsidiaries are defendants in a number of
pending legal proceedings incidental to present and former operations. These
include several proceedings alleging injurious exposure of the plaintiffs to
various chemicals and other materials manufactured by the Company's current and
former subsidiaries. Typically, such proceedings involve large claims made by
many plaintiffs against many defendants in the chemical industry. The Company
does not expect that the outcome of these proceedings, either individually or in
the aggregate, will have a material adverse effect upon the consolidated
financial position, results of operations or cash flows of the Company.
Together with other alleged past manufacturers of lead pigments for use in paint
and lead-based paint, a former subsidiary of a discontinued operation has been
named as a defendant or third party defendant in various legal proceedings
alleging that it and other manufacturers are responsible for personal injury and
property damage allegedly associated with the use of lead pigments in paint. The
legal proceedings seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and nuisance. The plaintiffs in these
actions generally seek to impose on the defendants responsibility for alleged
damages and health concerns associated with the use of lead-based paints. These
cases are in various pre-trial stages. The Company is vigorously defending all
litigation related to the use of lead. Although liability, if any, that may
result is not reasonably capable of estimation, the Company believes that, based
on information currently available, the disposition of such claims in the
aggregate should not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties ("PRPs"), or both, in a number of environmental proceedings
associated with waste disposal sites and facilities currently or previously
owned, operated or used by the Company's subsidiaries or their predecessors,
some of which disposal sites or facilities are on the Superfund National
Priorities List of the United States Environmental Protection Agency ("EPA") or
similar state lists. These proceedings seek cleanup costs, damages for personal
injury or property damage, or both. Certain of these proceedings involve claims
for substantial amounts, individually ranging in estimates from less than $0.3
to $45. One potentially significant matter in which a Company subsidiary is a
PRP concerns alleged PCB contamination of a section of the Kalamazoo River from
Kalamazoo, Michigan, to Lake Michigan for which a remedial
investigation/feasibility study is currently being undertaken.
The Company believes that the range of potential liability for environmental and
other legal contingencies, collectively, but which primarily relates to
environmental remediation activities and other environmental proceedings, is
between $130 and $135 and has accrued $135 as of March 31, 2000. The Company's
ultimate liability in connection with these proceedings may depend on many
factors, including the volume of material contributed to the sites, the number
of other PRPs and their financial viability and the remediation methods and
technologies to be used.
The Company has various contractual obligations to purchase raw materials used
in its production of titanium dioxide ("TiO2") and fragrance and flavor
chemicals. Commitments to purchase ore used in the production of TiO2 are
generally 1- to 3-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 $682 and expire between 2000 and
2002. Commitments to acquire crude sulfate turpentine, used in the production of
fragrance chemicals, are generally pursuant to 1- to 5-year contracts with
prices based on the market price and which expire between 2000 and 2003.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 6--Commitments and Contingencies--Continued
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 1st 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
charge-able 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 Business Segment
The Company's principal operations are grouped into three business segments:
titanium dioxide and related products, acetyls and specialty chemicals.
The following is a summary of the Company's operations by business segment:
Three Months Ended March 31,
2000 1999
-------------------------------
(Unaudited)
Net sales
Titanium dioxide and related products $ 323 $ 300
Acetyls 69 49
Specialty chemicals 31 34
------------- -------------
$ 423 $ 383
============= =============
Operating income
Titanium dioxide and related products $ 32 $ 27
Acetyls 7 4
Specialty chemicals 7 9
------------- -------------
$ 46 $ 40
============= =============
Depreciation and amortization
Titanium dioxide and related products $ 21 $ 18
Acetyls 4 4
Specialty chemicals 2 2
------------- -------------
Total $ 27 $ 24
============= =============
Capital expenditures
Titanium dioxide and related products $ 16 $ 25
Acetyls 2 2
Specialty chemicals 3 2
------------- -------------
Total $ 21 $ 29
============= =============
<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 and is the principal borrower
under the Company's Revolving Credit Agreement. The Senior Notes and Senior
Debentures, as well as the borrowings under the Revolving Credit Agreement, are
guaranteed by the Company. Accordingly, the following summarized financial
information is provided for Millennium America Inc.
March 31, December 31,
2000 1999
------------- -------------
(Unaudited)
Current assets $ 412 $ 430
Investment in Equistar 817 800
Noncurrent assets 1,105 1,122
Receivable from affiliates 508 519
------------- -------------
Total assets $ 2,842 $ 2,871
============= =============
Current liabilities $ 314 $ 325
Non-current liabilities 1,670 1,672
Invested capital 535 551
Payable to parent and affiliates 323 323
------------- -------------
Total liabilities and invested
capital $ 2,842 $ 2,871
============= =============
Three Months Ended
March 31,
2000 1999
-------------------------------
(Unaudited)
Net sales $ 253 $ 224
Operating income 29 25
Net income 14 8
<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:
March 31, December 31,
2000 1999
------------- ------------
(Unaudited)
Current assets $ 1,390 $ 1,360
Noncurrent assets 5,314 5,376
------------- -----------
Total assets $ 6,704 $ 6,736
============= ===========
Current liabilities $ 677 $ 784
Non-current liabilities 2,305 2,290
Partners' capital 3,722 3,662
------------- -----------
Total liabilities and partners' capital $ 6,704 $ 6,736
============= ===========
Three Months Ended
March 31,
2000 1999
-------------------------------
(Unaudited)
Net sales $ 1,807 $ 1,104
Operating income 99 47
Net income 56 7
<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") and related products,
acetyls and specialty chemicals. The Company also holds a 29.5% interest in
Equistar Chemicals, LP ("Equistar"). The Company's interest in Equistar is
accounted for using the equity method. (See Note 1 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 CONSOLIDATED OPERATIONS
Three Months Ended March 31,
2000 1999
-------------------------------
(In millions, except share data)
(Unaudited)
Net sales $ 423 $ 383
Operating income 46 40
Equity in earnings (loss) of Equistar 14 (4)
Net income 25 9
Basic earnings per share 0.38 0.12
Diluted earnings per share 0.37 0.12
During the first quarter of 2000, market conditions improved for all of the
Company's businesses except specialty chemicals. Net sales for the quarter
increased 10% over the first quarter of 1999 to $423 million. Operating income
increased 15% from $40 million in the first quarter of 1999 to $46 million in
the first quarter of 2000.
The TiO2 segment accounted for most of the increase in operating income, with
higher sales volumes in all regions. The acetyls segment experienced stronger
demand and higher pricing in the vinyl acetate monomer ("VAM") and acetic acid
marketplaces. Specialty chemicals profits were lower than the first quarter of
1999 due mainly to lower selling prices quarter-on-quarter. Equity earnings from
Equistar improved dramatically, contributing $14 million of income to the first
quarter of 2000 compared to a loss of $4 million in the first quarter of 1999.
The factors affecting these performances are detailed below.
The resulting net income of $25 million or $0.38 per share was almost three
times 1999's first quarter net income of $9 million or $0.12 per share. The
first quarter of 1999 included several unusual items which netted to $3 million
in expense or $0.04 per share. Such items included after-tax charges for an
early retirement program of $4 million or $0.05 per share and currency losses on
dollar-denominated debt in Brazil of $2 million or $0.03 per share, offset by
after-tax income of $3 million or $0.04 per share from insurance recoveries.
Excluding such items, first quarter 1999 net income would have been $12 million
or $0.16 per share.
<PAGE>
SEGMENT ANALYSIS
Titanium Dioxide and Related Products
Three Months Ended March 31,
2000 1999
------------- -------------
(In Millions)
(Unaudited)
Net sales $ 323 $ 300
Operating income 32 27
First quarter 2000 operating income of $32 million increased $5 million (19%)
from the first quarter of 1999. Net sales of $323 million for the first quarter
of 2000 increased $23 million (8%) from the same quarter of 1999.
Overall sales volumes for the first quarter of 2000 were up 10% from the first
quarter of 1999. All regions experienced strong demand, with the Asian and
European markets showing the strongest gains. The Asia/Pacific marketplace has
shown continued economic recovery and growth in new business with volumes 22%
higher for the quarter versus the first quarter of 1999. Recovery in the
European markets from growing demand and strengthening economies resulted in a
10% increase in sales volumes versus the first quarter of 1999. In North
America, a strong coatings market helped boost volumes.
First quarter 2000 prices were 3% lower than the comparable 1999 period,
partially offsetting the impact of higher sales volumes. Weakened European
pricing in U.S. dollar terms is due mainly to the continued strength of the
dollar and pound sterling against the Euro. Price increases in continental
Europe of 7 to 9% were announced in March to take effect April 1, 2000. Price
increases have also been announced for the North American paper market effective
April 15th.
The overall plant operating rate for the first quarter of 2000 was 96% of
nameplate capacity compared to 81% for the first quarter of 1999. Plant
operating rates are expected to remain high as long as strong demand continues.
Acetyls
Three Months Ended March 31,
2000 1999
------------- --------------
(In Millions)
(Unaudited)
Net sales $ 69 $ 49
Operating income 7 4
Operating income was $7 million for the first quarter of 2000, an increase of $3
million (75%) from the first quarter of 1999. Net sales of $69 million in the
first quarter of 2000 were 41% higher than the first quarter of 1999 due to
improved overall market conditions.
Price increases realized during the first quarter of 2000, supported by strong
underlying demand, accounted for a 7% increase in average acetic acid prices
over the same quarter last year. Another $0.03 per pound increase has been
announced for April 1, 2000. Sales volumes were 28% above the first quarter of
the prior year, with export markets particularly strong.
VAM prices increased 15% in the first quarter of 2000 compared to the first
quarter of 1999. Volumes were well above (30%) the first quarter of 1999 as the
marketplace has been strong. Higher feedstock costs and continued firm demand
have led to another $0.03 per pound increase announced for April 1, 2000.
Mechanical problems at offshore producers kept supplies tight in the methanol
market with prices rising during the quarter. Average prices were 25% higher
than the first quarter of 1999. Rising natural gas costs negatively impacted
margins, however, offsetting the favorable pricing impact.
Specialty Chemicals
Three Months Ended March 31,
2000 1999
------------- --------------
(In Millions)
(Audited)
Net sales $ 31 $ 34
Operating income 7 9
First quarter 2000 operating income of $7 million was $2 million (22%) lower
than the first quarter of 1999. Net sales were $3 million lower
quarter-on-quarter at $31 million.
The decline in profit was driven by lower selling prices as a result of a change
in the competitive landscape that occurred during 1999. Sales volumes, however,
were 15% higher than the first quarter of 1999 and 22% higher than the previous
quarter, reflecting strengthening demand for fragrance and flavor chemicals. The
vitamin market remains flat.
Crude sulfate turpentine costs remain low at $0.85 per gallon for the first
quarter of 2000 compared to $1.69 per gallon for the first quarter of 1999.
Equistar
Three Months Ended March 31,
2000 1999
------------- --------------
(In Millions)
(Unaudited)
Equity earnings (loss) $ 14 $ (4)
The Company's 29.5% interest in Equistar generated equity earnings of $14
million (after interest) for the first quarter of 2000 compared to an equity
loss of $4 million for the first quarter of 1999. On an operating basis,
Equistar's income (in total) doubled from $50 million in the first quarter of
1999 to $99 million in the first quarter of 2000.
Early 2000 ethylene demand was strong and industry inventories were low,
providing support for price increases realized during the first quarter. The
average selling price for ethylene increased $0.02 per pound during the first
quarter. Sales volumes were at record levels in March. However, higher feedstock
costs partially offset the ethylene price increases.
Unfortunately, the polymers segment was negatively impacted by the increased
cost of ethylene as feedstock costs rose. With strong fundamental demand
supported by high ethylene prices, polymer pricing is expected to rise in the
near term. Three price increases were announced during the first quarter ranging
from $0.03 per pound to $0.05 per pound.
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 is included as a
component of comprehensive income in the consolidated statement of changes in
shareholder's equity. In addition, the Company buys materials and sells 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. Future events, which may significantly increase or decrease
the risk of future movement in any of the currencies in which it conducts
business, cannot be predicted.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of $34 million compared to $14 million
provided for the three months ended March 31, 1999. The increase was due
primarily to a difference in working capital changes.
Cash used in investing activities was $19 million compared to $117 million
provided in the first quarter of 1999. The first quarter of 2000 reflects $21
million used for capital expenditures, while the 1999 period reflects proceeds
of $123 million from the syngas transaction and distributions from Equistar of
$15 million, partially offset by capital expenditures of $29 million.
Cash used in financing activities was $35 million in the first quarter of 2000
compared to $110 million in the first quarter of 1999. The 2000 period reflects
debt repayment of $3 million and $23 million for the repurchase of shares, while
1999 reflects debt repayment of $59 million and $51 million for the repurchase
of shares.
The Company expects to spend approximately $115 million in 2000 for capital
expenditures.
The Company's Board of Directors has authorized the Company to repurchase up to
3,500,000 shares of its Common Stock. As of May 1, 2000, the Company had
repurchased 1,489,300 shares pursuant to this authorization, representing 2% of
the shares outstanding at the beginning of the year.
<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
March 31, 2000 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, 2000 ___________________________
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
MILLENNIUM CHEMICALS INC.
COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1
<TABLE>
<CAPTION>
Weighted
Shares Average Earnings
BASIC Outstanding # of Shares Per Share
----------- ----------- ---------
<S> <C> <C> <C>
Shares of Common Stock outstanding at December 31, 1998 5,170,692 75,170,692
January, 1999 -82,800 -82,800
February, 1999 -1,240,300 -826,866
March, 1999 -1,449,500 -483,166
------------ ------------
Shares of Common Stock outstanding at March 31, 1999 72,398,092 73,777,860
============ ============
Net income $ 9,000,000
-----------
Weighted average shares outstanding 73,777,860
Basic earnings per share $0.12
Shares of Common Stock outstanding at December 31, 1999 66,508,567 66,508,567
Shares issued
January 10,594 10,594
February 220,378 145,449
Shares repurchased
March -1,382,300 -460,767
------------ ------------
Shares of Common Stock outstanding at March 31, 2000 65,357,239 66,203,843
============ ============
Net income $25,000,000
Weighted average shares outstanding 66,203,843
Basic earnings per share $0.38
DILUTED
Shares of Common Stock outstanding at December 31, 1998 75,170,692 75,170,692
January, 1999 -82,800 -82,800
February, 1999 -1,240,300 -826,866
March, 1999 -1,449,500 -483,166
Options 502,000 140
Time-vested restricted stock 614,327 290,828
Performance-based restricted stock 1,842,982 59,775
------------ ------------
Shares of Common Stock outstanding at March 31, 1999 75,357,401 74,128,603
============ ============
Net income $ 9,000,000
-----------
Weighted average shares outstanding 74,128,603
Diluted earnings per share $0.12
<PAGE>
Weighted
Shares Average Earnings
DILUTED (continued) Outstanding # of Shares Per Share
----------- ----------- -----------
Shares of Common Stock outstanding at December 31, 1999 66,508,567 66,508,567
Shares issued
January 10,594 10,594
February 220,378 145,449
Shares repurchased
March -1,382,300 -460,767
Options 538,000 -
Time-vested retricted stock 608,624 405,363
Performance-based restricted stock 228,224 142,095
----------- -----------
Shares of Common Stock outstanding at March 31, 2000 66,732,087 66,751,301
=========== ===========
Net income $25,000,000
-----------
Weighted average shares outstanding 66,751,301
Diluted earnings per share $0.37
</TABLE>
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 88
<SECURITIES> 0
<RECEIVABLES> 294
<ALLOWANCES> 2
<INVENTORY> 341
<CURRENT-ASSETS> 819
<PP&E> 983
<DEPRECIATION> 686
<TOTAL-ASSETS> 3209
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<BONDS> 1024
0
0
<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 3209
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<TOTAL-REVENUES> 423
<CGS> 300
<TOTAL-COSTS> 377
<OTHER-EXPENSES> (3)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 45
<INCOME-TAX> 17
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</TABLE>
