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, 2000
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: 64,178,252 shares of Common
Stock, par value $.01 per share, as of October 25, 2000, excluding 13,221,923
shares held by the registrant, its subsidiaries and certain Company trusts,
which are not entitled to vote.
--------------------------------------------------------------------------------
<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
Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 22
Part II
Item 6 Exhibits and Reports on Form 8-K.............................. 23
Signature ........................................................... 24
Exhibit Index......................................................... 25
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. The information provided in this Quarterly Report is
intended to be accurate as of the date hereof; forward-looking information is
intended to reflect opinion as of such date; and, such information is not
necessarily updated.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
MILLENNIUM CHEMICALS INC.
Consolidated Balance Sheets
(Dollars In Millions, Except Share Data)
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 97 $ 110
Trade receivables, net 310 268
Inventories 341 361
Other current assets 96 118
------------- -------------
Total current assets 844 857
Property, plant and equipment, net 943 995
Investment in Equistar 795 800
Other assets 199 194
Goodwill 394 404
------------- -------------
Total assets $ 3,175 $ 3,250
============= =============
Liabilities and shareholders' equity
Current liabilities
Notes payable $ 44 $ 56
Current maturities of long-term debt 381 23
Trade accounts payable 122 153
Income taxes payable - 97
Accrued expenses and other liabilities 171 166
------------- -------------
Total current liabilities 718 495
Long-term debt 762 1,023
Deferred income taxes 35 -
Other liabilities 659 701
------------- -------------
Total liabilities 2,174 2,219
------------- -------------
Commitments and contingencies (Note 6)
Minority interest 21 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
77,896,586 shares in 2000 and 77,891,586
in 1999) 1 1
Paid in capital 1,318 1,335
Retained earnings (deficit) 49 (32)
Unearned restricted shares (15) (28)
Cumulative other comprehensive (106) (61)
Treasury stock (at cost, 13,687,692 and
9,567,263 shares in 2000 and 1999,
respectively) (281) (210)
Deferred compensation 14 10
------------- -------------
Total shareholders' equity 980 1,015
------------- -------------
Total liabilities and shareholders' equity $ 3,175 $ 3,250
============= =============
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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------ -------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 473 $ 396 $ 1,359 $ 1,185
Operating costs and expenses
Cost of products sold 335 278 970 833
Depreciation and amortization 27 25 83 74
Selling, development and
administrative expense 57 55 153 155
------------- ------------- ------------- -------------
Operating income 54 38 153 123
Interest expense (20) (18) (58) (54)
Interest income 1 - 2 2
Equity in earnings of Equistar 16 3 73 4
Other income, net 8 25 13 22
------------- ------------- ------------- -------------
Income from continuing operations
before provision for income taxes
and minority interest 59 48 183 97
Provision for income taxes (23) (9) (70) (31)
------------- ------------- ------------- -------------
Income from continuing operations
before minority interest 36 39 113 66
Minority interest (1) (1) (5) (2)
------------- ------------- ------------- -------------
Income from continuing operations 35 38 108 64
Income from discontinued operations
(net of income taxes of $7 and $(9)) - 7 - 38
------------- ------------- ------------- -------------
Net income $ 35 $ 45 $ 108 $ 102
============= ============= ============= =============
Income per share from continuing
operations $ 0.56 $ 0.57 $ 1.68 $ 0.91
Income per share from discontinued
operations - 0.11 - 0.55
------------- ------------- ------------- -------------
Net income per share - basic $ 0.56 $ 0.68 $ 1.68 $ 1.46
------------- ------------- ------------- -------------
Net income per share - diluted $ 0.55 $ 0.67 $ 1.66 $ 1.44
------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Cash Flows
(Dollars In Millions)
Nine Months Ended
September 30,
2000 1999
-----------------------------
(Unaudited)
Cash flows from operating activities
Income from continuing operations $ 108 $ 64
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 83 74
Deferred income tax provision 37 1
Restricted stock amortization (4) 5
Equity in earnings of Equistar (73) (4)
Minority interest 5 2
Changes in assets and liabilities
Increase in trade receivables (57) (28)
Increase in inventories (1) (22)
Decrease in other current assets 18 1
Increase in investments and other
assets (8) (23)
(Decrease) increase in trade accounts
payable (22) 7
Increase (decrease) in accrued expense
and other liabilities and income
taxes payable (99) (16)
Decrease in other liabilities (24) (42)
------------ ------------
Cash (used in) provided by operating
activities (37) 19
Cash flows from investing activities
Capital expenditures (72) (79)
Distributions from Equistar 83 51
Proceeds from syngas transaction - 123
Proceeds from sale of Suburban Propane - 75
Proceeds from sale of fixed assets 2 14
------------ ------------
Cash provided by investing activities 13 184
Cash flows from financing activities
Dividends to shareholders (27) (29)
Repurchase of common stock (69) (200)
Proceeds from long-term debt 255 54
Repayment of long-term debt (137) (63)
(Increase) decrease in notes payable (11) 13
------------ ------------
Cash provided by (used in) financing
activities 11 (225)
Effect of exchange rate changes on cash - (3)
------------ ------------
Decrease in cash and cash equivalents (13) (25)
Cash and cash equivalents at beginning of year 110 103
------------ ------------
Cash and cash equivalents at end of period $ 97 $ 78
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
MILLENNIUM CHEMICALS INC.
Consolidated Statements of Changes in Shareholders' Equity
(In Millions)
<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 108 108
Other comprehensive income -
Currency translation
adjustment (45) (45)
------- ------- -------- -------- ---------- ------------- ---------- ------------ ---------
Total comprehensive income - - - 108 - (45) - - 63
Amortization and adjustment of
unearned restricted shares (17) 13 (4)
Shares repurchased (3) (71) 4 (67)
Dividends to shareholders (27) (27)
------- ------- -------- -------- ---------- ------------- ---------- ------------ ---------
Balance at September 30, 2000
(unaudited) 65 $ 1 $ 1,318 $ 49 $ (15) $ (106) $ (281) $ 14 $ 980
======= ======= ======== ======== ========== ============= ========== ============ =========
</TABLE>
See Notes to Consolidated Financial Statements
<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 its 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.
On September 14, 2000 the Company announced that it had not received an
acceptable offer for its investment in Equistar and has terminated active
marketing of its stake.
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.
Reclassifications: Certain prior year balances have been reclassified to conform
with the present year presentation.
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
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No.101 (SAB 101), which provides guidance on the
recognition, presentation, and disclosure of revenue. In June 2000, the SEC
released SAB 101B, which postponed the effective date of SAB 101 to the fourth
quarter of fiscal years beginning after December 15, 1999. The Company will be
required to be in conformity with the provisions of SAB 101 in the fourth
quarter of 2000. The Company is currently evaluating the implication of SAB 101
and feels the adoption of SAB 101 will not have a significant effect on its
financial position, results of operations and cash flows of the Company.
Inventories: Inventories are stated at the lower of cost or market value. For
certain United States operations representing 30% and 37% of consolidated
inventories at September 30, 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.
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
Inventories
Finished products $ 168 $ 167
In-process products 23 29
Raw materials 103 116
Other inventories 47 49
------------- -------------
$ 341 $ 361
============= =============
Inventories valued on a LIFO basis were approximately $35 and $31 less than the
amount of such inventories valued at current cost at September 30, 2000 and
December 31, 1999, 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. 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 September 30, 2000.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 2--Significant Accounting Policies--Continued
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.
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:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------- --------------------------
(Unaudited) (Unaudited)
Basic 63,244,539 66,715,598 64,584,509 70,097,482
Options - 52,875 - 48,125
Restricted shares 619,126 682,180 641,226 679,442
------------ ------------ ------------ ------------
Diluted 63,863,665 67,450,653 65,225,735 70,825,049
============ ============ ============ ============
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 3--Income Taxes
During the third quarter of 2000 the Company made a payment to the Internal
Revenue Service in the amount of $151. The payment represented settlement of
taxes and interest due for the tax years 1986 through 1988. The Company had
previously accrued for this settlement.
Note 4--Long-Term Debt and Credit Arrangements
September 30, 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 $ 378 $ 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% 16 36
Less current maturities of long-term debt (381) (23)
------------- -------------
$ 762 $ 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 on July 26,
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.
The Company is currently in discussions with representatives of the Credit
Agreement banks regarding the refinancing of the Credit Agreement. The Company
expects the Credit Agreement to be refinanced during the first quarter of 2001.
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.
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.
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 5 - 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 6--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.
Note 7--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
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 7--Commitments and Contingencies - Continued
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 $110 and $125 and has accrued $125 as of September 30, 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.
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 decreases by approximately $84 on each October 1st 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 7--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
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.
Note 8--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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------- ------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales
Titanium dioxide and related products $ 351 $ 307 $ 1,027 $ 928
Acetyls 95 60 244 162
Specialty chemicals 27 29 88 95
-------------- ------------- ------------- -------------
Total $ 473 $ 396 $ 1,359 $ 1,185
============== ============= ============= =============
Operating income
Titanium dioxide and related products $ 35 $ 26 $ 105 $ 85
Acetyls 14 7 30 16
Specialty chemicals 5 5 18 22
-------------- ------------- ------------- -------------
Total $ 54 $ 38 $ 153 $ 123
============== ============= ============= =============
Depreciation and amortization
Titanium dioxide and related products $ 20 $ 18 $ 63 $ 54
Acetyls 5 5 14 14
Specialty chemicals 2 2 6 6
-------------- ------------- ------------- -------------
Total $ 27 $ 25 $ 83 $ 74
============== ============= ============= =============
Capital expenditures
Titanium dioxide and related products $ 18 $ 18 $ 62 $ 64
Acetyls 1 3 4 9
Specialty chemicals 1 2 6 6
-------------- ------------- ------------- -------------
Total $ 20 $ 23 $ 72 $ 79
============== ============= ============= =============
</TABLE>
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 9-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.
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
Current assets $ 416 $ 430
Investment in Equistar 795 800
Noncurrent assets 1,089 1,122
Receivable from affiliates 486 519
------------- -------------
Total assets $ 2,786 $ 2,871
============= =============
Current liabilities $ 194 $ 325
Non-current liabilities 1,744 1,672
Invested capital 526 551
Payable to parent and affiliates 322 323
------------- -------------
Total liabilities and invested capital $ 2,786 $ 2,871
============= =============
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------- ---------------------------
(Unaudited) (Unaudited)
Net sales $ 282 $ 237 $ 813 $ 694
Operating income 20 20 76 68
Net income 10 31 60 78
<PAGE>
MILLENNIUM CHEMICALS INC.
Notes to Consolidated Financial Statements
(Dollars in millions, except share data)
Note 10-Information on Equistar
The following is summarized financial information for Equistar:
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
Current assets $ 1,408 $ 1,360
Noncurrent assets 5,259 5,376
------------- -------------
Total assets $ 6,667 $ 6,736
============= =============
Current liabilities $ 721 $ 784
Non-current liabilities 2,289 2,290
Partners' capital 3,657 3,662
------------- -------------
Total liabilities and partners' capital $ 6,667 $ 6,736
============= =============
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------- ----------------------------
(Unaudited) (Unaudited)
Net sales $ 1,914 $ 1,471 $ 5,580 $ 3,783
Operating income 110 76 407 163
Net income 63 35 271 83
<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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In millions, except share data)
(Unaudited)
Net sales $ 473 $ 396 $ 1,359 $ 1,185
Operating income 54 38 153 123
Equity in earnings of Equistar 16 3 73 4
Gain on sale of Suburban Propane
(net of income tax) - 7 - 38
Net income 35 45 108 102
Basic earnings per share 0.56 0.68 1.68 1.46
Diluted earnings per share 0.55 0.67 1.66 1.44
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
During the third quarter of 2000, market conditions improved for all of the
Company's businesses except specialty chemicals. Net sales for the quarter
increased 19% over the third quarter of 1999 to $473 million. Operating income
increased 42% from $38 million in the third quarter of 1999 to $54 million in
the third quarter of 2000.
The TiO2 segment accounted for most of the increase in operating income, with
higher sales volumes in all regions except Latin America. The acetyls segment
also experienced stronger demand and higher pricing in the vinyl acetate monomer
("VAM") and acetic acid marketplaces. Specialty chemicals profits were flat with
the third quarter of 1999 due mainly to lower selling prices quarter-on-quarter.
Equity earnings from Equistar improved due to higher ethylene and polyethylene
prices, contributing $16 million of income to the third quarter of 2000 compared
to $3 million in the third quarter of 1999. These and other factors affecting
these performances are detailed below.
The resulting net income of $35 million or $0.56 per share was lower than 1999's
third quarter net income of $45 million or $0.68 per share. However, the third
quarter of 1999 included favorable legacy insurance and litigation settlements
and prior year tax adjustments of $23 million or $0.35 per share and an
adjustment to the after-tax gain on the sale of the Company's remaining interest
in Suburban Propane Partners of $7 million or $0.10 per share. Excluding these
items, the third quarter of 1999 net income would have been $15 million or $0.23
per share.
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
The Company had operating income of $153 million for the first nine months of
2000, an increase of $30 million (24%) over the comparable period of 1999. Net
sales increased 15% over the first nine months of 1999 to $1,359 million.
Market conditions have improved in the TiO2 and acetyls businesses over the
prior year. The specialty chemicals business, however, has suffered from lower
selling prices due mainly to new industry capacity.
Equity earnings from Equistar contributed $73 million of income to the nine
months of 2000 compared to $4 million for the same period last year due
primarily to higher ethylene and polyethylene prices.
Net income of $108 million or $1.68 per share compares to $102 million or $1.46
per share for the first nine months of 1999. The 1999 period included an
after-tax gain on the sale of the Company's remaining interest in Suburban
Propane Partners of $38 million or $0.55 per share an after-tax gain on
Equistar's sale of its colors and concentrates assets of $5 million or $0.07 per
share and prior year tax adjustments of $21 million or $0.34 per share.
Excluding these items, net income for the 1999 period would have been $38
million or $0.54 per share.
SEGMENT ANALYSIS
Titanium Dioxide and Related Products
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(In Millions)
(Unaudited)
Net sales $ 351 $ 307 $ 1,027 $ 928
Operating income 35 26 105 85
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Third quarter 2000 operating income of $35 million increased $9 million (35%)
from the third quarter of 1999. Net sales of $351 million for the third quarter
of 2000 increased $44 million (14%) from the same quarter of 1999.
Overall sales volumes for the third quarter of 2000 were up 15% from the third
quarter of 1999 to slightly over 172,000 metric tons. All regions, except Latin
America, 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 44% higher for the quarter
versus the third quarter of 1999. Recovery in the European markets resulted in a
17% increase in sales volumes versus the third quarter of 1999. North American
volumes increased 4%.
Third quarter 2000 prices in U.S. dollar terms were flat with the comparable
1999 period. 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 implemented on July 1, 2000 were offset by the negative impact of
currency translation.
The overall plant operating rate for the third quarter of 2000 was 98.1% of
nameplate capacity compared to 92.6% in the third quarter of 1999. Plant
operating rates are expected to remain high as demand continues.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
The TiO2 and Related Products segment increased profits by $20 million (24%)
compared to the first nine months of 1999. Net sales of $1,027 million increased
$99 million (11%) over the comparable period last year.
Sales volumes continue to improve due to strong demand in all market places,
except Latin America, with the strongest gains in the Asia/Pacific region.
Economic recovery and new business growth in this region resulted in sales
volumes 35% over the first half of 1999. Volumes into the Middle East have more
than tripled over last year, while in North America volumes increased 5%,
consistent within GDP growth.
<PAGE>
Average selling prices in U.S. dollar terms declined 1% compared to the first
nine months of 1999, partially offsetting higher sales volumes. This decline has
occurred despite previously announced price increases in local currencies, and
results primarily from the strength of the U.S. dollar compared to the Euro as
mentioned above.
The overall plants' operating rate for the first nine months of 2000 was 95%, an
7 percentage point increase over the 1999 period of 88.1%.
Acetyls
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In Millions)
(Unaudited)
Net sales $ 95 $ 60 $ 244 $ 162
Operating income 14 7 30 16
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Operating income was $14 million for the third quarter of 2000, an increase of
$7 million (100%) from the third quarter of 1999. Net sales of $95 million in
the third quarter of 2000 were 58% higher than the third quarter of 1999 due to
higher prices and improved overall market conditions.
VAM prices increased 34% in the third quarter of 2000 compared to the third
quarter of 1999. Volumes were 30% above the third quarter of 1999 as the
marketplace has been strong. Higher feedstock costs and continued firm demand
have led to announced price increases of $0.03 per pound in the U.S., $75 per
metric ton in Asia and 150DM per metric ton in Europe, to take effect October 1,
2000. Management expects these price increases to be realized if the current
demand continues.
The acetic acid market remains strong. However, volumes were down 16% from the
same quarter of 1999 due mainly to a major customer not taking its planned
volumes in July and September and an outage at the Linde Syngas unit in August.
Selling prices have increased 44% from the third quarter of 1999. Price
increases have been announced for acetic acid which are similar to those
announced for VAM as discussed above.
An outage at the Linde syngas unit in August kept supplies tight in the methanol
market with prices rising during the quarter. Average prices were 57% higher
than in the third quarter of 1999. High natural gas costs supported higher
selling prices during the quarter.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
For the first nine months of 2000, the acetyls business had operating income of
$30 million, an increase of $14 million (88%) from the same period of 1999. Net
sales were $244 million compared to $162 million for the first nine months of
1999.
The VAM market continues to improve due to tight supply and growing demand.
Volumes were up 29% over last year and selling prices increased 28% from the
first nine months of 1999.
Demand remains good in the acetic acid marketplace. Despite this, volumes were
down 5% from last year. This was due mainly to a major customer not taking its
planned volumes in July and September and an outage at the Linde Syngas unit in
August. Selling prices have increased 23% from the same period last year.
Rising natural gas costs, while helping to support higher prices in the methanol
market, negatively impacted acetyls margins.
Specialty Chemicals
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In Millions)
(Unaudited)
Net sales $ 27 $ 29 $ 88 $ 95
Operating income 5 5 18 22
<PAGE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Third quarter 2000 operating income of $5 million was equal to the third quarter
of 1999. Net sales were $2 million lower quarter-on-quarter at $27 million.
The slight decline in profit was driven by lower selling prices (15%) as a
result of changes in the competitive landscape that occurred during 1999. Sales
volumes were 7% higher than the third quarter of 1999 but 15% lower than the
second quarter of 2000. The vitamin intermediate market remains weak.
Crude sulfate turpentine costs, the principal raw material for specialty
chemical products, remain low at $0.83 per gallon for the third quarter of 2000
compared to $1.10 per gallon for the third quarter of 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Operating income for the first nine months of 2000 was $18 million, a decrease
of $4 million (18%) from the comparable period of 1999. Net sales of $88 million
were $7 million (7%) lower than 1999. Although sales volumes were up 13% over
the first nine months, new industry capacity and competition have caused selling
prices to decline over 18% compared to the same period of 1999. Demand remains
good for fragrance and flavor chemicals, while the vitamin intermediate market
remains weak.
Crude sulphate turpentine costs were at $0.85 per gallon for the nine months
ended September 30, 2000, $0.55 per gallon lower than the nine months ended
September 30, 1999.
Equistar
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In Millions)
(Unaudited)
Equity earnings $ 16 $ 3 $ 73 $ 4
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
The Company's 29.5% interest in Equistar generated equity earnings of $16
million (after interest) for the third quarter of 2000 compared to $3 million
for the third quarter of 1999. On an operating basis, Equistar's income (in
total) increased $34 million from $76 million in the third quarter of 1999 to
$110 million in the third quarter of 2000.
Ethylene prices were 27% higher than in the third quarter of 1999. However,
softening demand has caused prices to drop during the quarter, down 3% from the
second quarter of 2000.
Feedstock costs have increased 36% from the third quarter of 1999 and 12% from
the second quarter of 2000.
Polymers prices were up only 1% over the third quarter of 1999 and down 9% from
the second quarter of 2000. Volumes were up 8% from the third quarter of 1999
and up 12% from the second quarter of 2000, due mainly to increased export sales
and the lack of a plant turnaround in the second quarter.
Feedstock costs are expected to rise slightly in the fourth quarter.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
The Company's 29.5% interest in Equistar generated equity earnings of $73
million (after interest) from the first nine months of 2000 compared to $4 for
the first nine months of 1999. On an operating basis, Equistar's income (in
total) increased $244 million from the first nine months of 1999 to $407 million
for the first nine months of 2000.
As mentioned before, the demand for ethylene remained strong compared to the
first nine months of 1999, providing support for price increases. However,
ethylene margins were affected by higher feedstock costs, which partially offset
these price increases. Prices are now decreasing due to softening demand in the
market.
<PAGE>
The polymers segment was negatively impacted due to the higher feedstock costs,
which increased 27% compared to the first nine months of 1999. However, prices
were higher supported by the higher ethylene prices. Volumes were flat with the
first nine months of 1999 in anticipation of lower prices.
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 the financial position of such operations is included
as a component of comprehensive income in the consolidated statement of changes
in shareholders' 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 used in operating activities in the nine months ended September 30, 2000
was $11 million compared to $19 million provided for the nine months ended
September 30, 1999. The decrease was due primarily to a tax settlement of $151
million offset by differences in working capital changes.
Cash provided by investing activities was $13 million compared to $184 million
provided in the first nine months of 1999. The first nine months of 2000
reflects $83 million of distributions from Equistar partially offset by $72
million used for capital expenditures. The 1999 period reflects proceeds of $123
million from the syngas transaction, proceeds from the sale of the remaining
interest in Suburban Propane of $75 million and distributions from Equistar of
$51 million, partially offset by capital expenditures of $79 million.
Cash provided by financing activities was $11 million in the first nine months
of 2000 compared to $225 million in the first nine months of 1999. The 2000
period reflects $69 million for the repurchase of shares used offset by an
increase in debt of $107 million. 1999 reflects $200 million for the repurchase
of shares.
The Company expects to spend approximately $100 million in 2000 for capital
expenditures.
<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>
PART II. OTHER INFORMATION
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, 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: November ___, 2000 [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
