UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 4, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-29764
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)
300 Delaware Avenue, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 429-8641
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 / /
As of May 14, 1999, 68,300,400 shares of International Specialty Products Inc.
common stock (par value $.01 per share) were outstanding.
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Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Thousands, except per share amounts)
Quarter Ended
----------------------
March 29, April 4,
1998 1999
---------- ----------
Net sales............................. $ 200,703 $ 212,170
Cost of products sold................. (119,177) (125,405)
Selling, general and administrative... (40,421) (43,317)
Gain on sale of assets................ - 8,541
Goodwill amortization................. (3,339) (4,195)
---------- ----------
Operating income...................... 37,766 47,794
Interest expense...................... (17,938) (20,276)
Equity in earnings of joint venture... 1,455 -
Other income (expense), net........... 9,955 (8,999)
---------- ----------
Income before income taxes............ 31,238 18,519
Income taxes.......................... (11,354) (6,497)
Minority interest in income of
subsidiary.......................... (4,212) -
---------- ----------
Net income............................ $ 15,672 $ 12,022
========== ==========
Earnings per common share:
Basic............................... $ .29 $ .17
========== ==========
Diluted............................. $ .29 $ .17
========== ==========
Weighted average number of common and
common equivalent shares outstanding:
Basic............................... 53,833 68,760
========== ==========
Diluted............................. 53,833 68,978
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
1
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
April 4,
December 31, 1999
1998 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 24,638 $ 31,553
Investments in trading securities............. 67,333 66,636
Investments in available-for-sale securities.. 233,625 271,232
Investments in held-to-maturity securities.... 12,287 4,306
Other short-term investments.................. 41,708 34,300
Accounts receivable, trade, net............... 82,227 96,202
Accounts receivable, other.................... 21,748 44,819
Receivable from related parties, net.......... 7,769 13,095
Inventories................................... 138,888 133,736
Other current assets.......................... 19,624 20,150
---------- ----------
Total Current Assets............................ 649,847 716,029
Property, plant and equipment, net.............. 553,195 555,296
Goodwill, net................................... 526,928 522,727
Other assets.................................... 35,653 34,234
---------- ----------
Total Assets.................................... $1,765,623 $1,828,286
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................... $ 87,937 $ 131,454
Current maturities of long-term debt.......... 583 524
Accounts payable.............................. 61,722 75,914
Accrued liabilities........................... 84,534 88,636
Income taxes.................................. 8,417 9,083
---------- ----------
Total Current Liabilities................... 243,193 305,611
---------- ----------
Long-term debt less current maturities.......... 896,095 902,944
---------- ----------
Deferred income taxes........................... 60,282 55,859
---------- ----------
Other liabilities............................... 64,330 66,022
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized:
no shares issued............................ - -
Common stock, $.01 par value per share;
300,000,000 shares authorized: 69,546,456
shares issued .............................. 695 695
Additional paid-in capital.................... 489,285 489,463
Treasury stock, at cost - 735,744 and
1,056,848 shares, respectively.............. (8,388) (10,859)
Retained earnings............................. 44,892 56,914
Accumulated other comprehensive loss.......... (24,761) (38,363)
---------- ----------
Total Stockholders' Equity.................. 501,723 497,850
---------- ----------
Total Liabilities and Stockholders' Equity...... $1,765,623 $1,828,286
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Quarter Ended
--------------------
March 29, April 4,
1998 1999
---------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 20,495 $ 24,638
--------- ---------
Cash provided by (used in) operating activities:
Net income............................................. 15,672 12,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of assets............................. - (8,541)
Depreciation....................................... 10,639 12,207
Goodwill amortization.............................. 3,339 4,195
Deferred income taxes.............................. 7,488 (2,939)
Increase in working capital items...................... (12,411) (15,462)
Purchases of trading securities........................ (23,173) (44,742)
Proceeds from sales of trading securities.............. 50,724 52,336
(Increase) decrease in net receivable from related
parties.............................................. (2,891) (5,326)
Change in cumulative translation adjustment............ (2,661) (11,065)
Change in minority interest in subsidiary.............. 3,745 -
Other, net............................................. 7,206 (5,979)
--------- ---------
Net cash provided by (used in) operating activities.. 57,677 (13,294)
--------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition................... (75,139) (14,383)
Proceeds from sale-leaseback transaction............... 56,050 -
Proceeds from sale of assets........................... - 11,533
Purchases of available-for-sale securities............. (157,285) (52,006)
Proceeds from sales of available-for-sale securities... 80,853 6,920
Proceeds from held-to-maturity securities.............. 311 11,440
Proceeds from sales of other short-term investments.... - 8,935
--------- ---------
Net cash used in investing activities................. (95,210) (27,561)
--------- ---------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. 3,126 -
Increase in short-term debt............................ 12,852 43,517
Increase in borrowings under revolving credit facility. 17,000 207,000
Repayments of long-term debt........................... (132) (200,097)
Repurchases of common stock............................ - (3,046)
Other, net............................................. 511 396
--------- ---------
Net cash provided by financing activities................ 33,357 47,770
--------- ---------
Net change in cash and cash equivalents.................. (4,176) 6,915
--------- ---------
Cash and cash equivalents, end of period................. $ 16,319 $ 31,553
========= =========
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -- (Continued)
Quarter Ended
--------------------
March 29, April 4,
1998 1999
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)........... $ 19,881 $ 25,500
Income taxes................................... 2,802 8,674
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for International Specialty Products
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company at April 4,
1999, and the results of operations and cash flows for the periods ended March
29, 1998 and April 4, 1999. All adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the annual
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 (the "Form 10-K").
Note 1. Disposition of Assets
On April 4, 1999, the Company sold its pigments business, a non-core
product line that was part of the Personal Care business segment, for $11.5
million. The sale resulted in a first quarter pre-tax gain of $8.5 million. The
pigments product line accounted for $4.9 million of the Company's net sales in
1998. As a result, the sale will not have a material impact on the Company's
results of operations.
Note 2. Comprehensive Income
Quarter Ended
--------------------
March 29, April 4,
1998 1999
--------- ---------
(Thousands)
Net income................................. $ 15,672 $ 12,022
--------- ---------
Other comprehensive loss, net of tax:
Change in unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains (losses)
arising during the period, net of
income tax (provision) benefit of
$(2,838) and $1,363.................... 6,306 (2,259)
Less: reclassification adjustment
for gains included in net income, net
of income taxes of $3,690 and $120...... 8,316 278
--------- ---------
Total.................................... (2,010) (2,537)
Foreign currency translation adjustment.. (2,661) (11,065)
--------- ---------
Total other comprehensive loss............. (4,671) (13,602)
---------- ---------
Comprehensive income (loss)................ $ 11,001 $ (1,580)
========== =========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Comprehensive Income (Continued)
Changes in the components of "Accumulated other comprehensive loss" for the
quarter ended April 4, 1999 are as follows:
Unrealized Cumulative
Losses on Foreign Minimum Accumulated
Available- Currency Pension Other
for-sale Translation Liability Comprehensive
Securities Adjustment Adjustment Loss
---------- ----------- ---------- -------------
(Thousands)
Balance, December 31, 1998.. $(24,037) $ 3,991 $ (4,715) $(24,761)
Change for the period....... (2,537) (11,065) - (13,602)
-------- --------- -------- --------
Balance, April 4, 1999...... $(26,574) $ (7,074) $ (4,715) $(38,363)
======== ========= ======== ========
Note 3. Business Segment Information
The Company operates its Specialty Chemicals business through three
reportable business segments, in addition to the Mineral Products and Filter
Products segments. As of January 1, 1999, the Company transferred its solvents
line of products from the Pharmaceutical, Agricultural and Beverage ("PAB")
segment to the Performance Chemicals, Fine Chemicals and Industrial segment.
Accordingly, prior year financial information for these two segments have been
reclassified to conform to the 1999 presentation. The effect on the total year
1998 was to reduce sales and operating income for the PAB segment by $41.7 and
$7.2 million, respectively, and increase sales and operating income for the
Performance Chemicals, Fine Chemicals and Industrial segment by like amounts.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Business Segment Information (Continued)
Quarter Ended
----------------------
March 29, April 4,
1998 1999
--------- ----------
(Thousands)
Net sales:
Personal Care.................................... $ 54,255 $ 52,272
Pharmaceutical, Agricultural and Beverage........ 44,566 46,012
Performance Chemicals, Fine Chemicals and
Industrial..................................... 69,087 80,200
---------- ----------
Total Specialty Chemicals...................... 167,908 178,484
Mineral Products (1)............................. 23,257 23,164
Filter Products.................................. 9,538 10,522
---------- ----------
Net sales.......................................... $ 200,703 $ 212,170
========== ==========
Operating income:
Personal Care (2)................................ $ 11,946 $ 18,932
Pharmaceutical, Agricultural and Beverage........ 11,272 12,057
Performance Chemicals, Fine Chemicals and
Industrial..................................... 9,732 11,416
---------- --------
Total Specialty Chemicals...................... 32,950 42,405
Mineral Products................................... 4,618 4,213
Filter Products.................................... 730 991
---------- ----------
Total segment operating income................. 38,298 47,609
Unallocated corporate office..................... (532) 185
---------- ----------
Total operating income............................. 37,766 47,794
Interest expense and other, net.................... (6,528) (29,275)
---------- ----------
Income before income taxes......................... $ 31,238 $ 18,519
========== ==========
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $15.6 and $16.2 million for the first quarter of
1998 and 1999, respectively.
(2) Personal Care operating income for the first quarter of 1999 includes a
pre-tax gain of $8.5 million from the sale of the pigments product line.
See Note 1.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Inventories
Inventories comprise the following:
December 31, April 4,
1998 1999
------------ --------
(Thousands)
Finished goods................ $ 87,241 $ 82,776
Work in process............... 24,862 21,725
Raw materials and supplies.... 30,065 32,697
-------- --------
Total......................... 142,168 137,198
Less LIFO reserve............. (3,280) (3,462)
-------- --------
Inventories................... $138,888 $133,736
======== ========
Note 5. Long-term Debt
On March 1, 1999, the Company repaid its 9% Senior Notes due March 1999
with $200 million of long-term borrowings under the Company's bank revolving
credit facility. In addition, $200 million notional value of fixed to floating
interest rate swaps matured on March 1, 1999. On March 1, 1999, the Company also
terminated forward-starting interest rate swaps entered into in 1998 in the
aggregate notional amount of $125 million. The cost to the Company to terminate
such swaps was insignificant. On March 18, 1999, the Company received a one-year
extension, to April 11, 2000, on its $38.1 million mortgage obligation.
Accordingly, such mortgage obligation is classified as long-term debt on the
Consolidated Balance Sheet.
Note 6. Restructuring Reserves
The Company recorded $73.0 million in 1998 for provisions for restructuring
and impairment loss, primarily related to its decision to shut down its
butanediol production unit at its Calvert City, Kentucky manufacturing facility.
The total charge included an accrual of $7.5 million for cash costs to be
incurred, mainly over the next twelve to eighteen months, principally for
decommissioning, demolition and remediation, and severance costs. During the
first quarter of 1999, $1.5 million of costs were charged to this accrual,
principally for decommissioning activities, leaving a reserve balance of $6.0
million as of the end of the quarter. In addition, in the third quarter of 1998,
the Company reserved $3.0 million for the consolidation of offices in its
European operations, consisting of costs to be incurred for lease obligations,
severance costs and for relocation of headquarters operations and other related
expenses. Charges against this reserve since the third quarter of 1998 have
totaled $1.7 million, including $0.6 million in the first quarter of 1999,
leaving a reserve balance of $1.3 million as of the end of the first quarter.
This program is expected to be substantially completed by the end of the year
1999.
8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be adopted earlier. The Company has not yet determined the effect of
adoption of SFAS No. 133 and has not determined the timing or method of adoption
of the statement. Adoption of SFAS No. 133 could increase volatility in earnings
and other comprehensive income.
Note 8. Contingencies
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, results of
operations or financial position of the Company. However, adverse decisions or
events, particularly as to the liability and the financial responsibility of the
Company's insurers and of the other parties involved at each site and their
insurers, could cause the Company to increase its estimate of its liability in
respect of such matters. It is not currently possible to estimate the amount or
range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 16 to Consolidated Financial Statements contained in the Form 10-K.
Tax Claim against GAF
Certain subsidiaries of the Company were members of the GAF Corporation
("GAF") consolidated Federal income tax group (the "GAF Group") in 1990 and,
accordingly, would be severally liable for any tax liability of the GAF Group in
respect of such year. Effective as of January 1, 1997, neither the Company nor
any of its subsidiaries are members of the GAF Group.
On September 15, 1997, GAF received a notice from the Internal Revenue
Service (the "IRS") of a deficiency in the amount of $84.4 million (after taking
into account the use of net operating losses and foreign tax credits otherwise
available for use in later years) in connection with the formation in 1990 of
Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants
9
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Contingencies (Continued)
partnership"), a partnership in which a subsidiary of GAF, GAF Fiberglass
Corporation, held an interest. The claim of the IRS for interest and penalties,
after taking into account the effect on the use of net operating losses and
foreign tax credits, could result in GAF incurring liabilities significantly in
excess of the deferred tax liability of $131.4 million that it recorded in 1990
in connection with this matter. GAF has advised the Company that it believes
that it will prevail in this matter, although there can be no assurance in this
regard. The Company believes that the ultimate disposition of this matter will
not have a material adverse effect on its business, financial position or
results of operations. GAF and certain subsidiaries of GAF have agreed to
jointly and severally indemnify the Company against any tax liability associated
with the surfactants partnership, which the Company would be severally liable
for, together with GAF and several current and former subsidiaries of GAF,
should GAF be unable to satisfy such liability.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - First Quarter 1999 Compared With
First Quarter 1998
The Company recorded first quarter 1999 net income of $12.0 million (17
cents diluted earnings per share) compared with $15.7 million (29 cents diluted
earnings per share) in the first quarter of 1998. The lower net income was
attributable to lower other income (expense) and higher interest expense,
partially offset by higher operating income which included an $8.5 million gain
from the sale of a product line.
Net sales for the first quarter of 1999 were $212.2 million compared with
$200.7 million for the same period in 1998. The 6% sales growth was attributable
to the Company's acquisition, effective April 1, 1998, of the remaining 50%
interest in its joint venture with Huls AG, GAF-Huls Chemie GmbH ("ISP Marl"),
which accounted for $14.6 million of sales in the first quarter of 1999. Net
sales for the quarter also reflected higher sales in the Performance Chemicals
business in Europe and the Fine Chemicals business in the United States,
partially offset by lower sales for the Industrial business (excluding the
impact of the sales of ISP Marl) and the Personal Care business segment. The
higher sales reflected increased sales in the United States, offset by lower
sales in Europe (excluding the impact of the ISP Marl sales), Latin America and
the Asia-Pacific region.
Operating income for the first quarter of 1999 was $47.8 million compared
with $37.8 million for the first quarter of 1998. The results for the first
quarter of 1999 included a pre-tax gain of $8.5 million from the sale of the
Company's pigments business, a non-core product line that was part of the
Personal Care business segment. Excluding this gain, operating income for the
quarter was $39.3 million, a 4% increase over the first quarter of 1998. The
increased operating income was primarily attributable to higher operating income
for the Performance Chemicals, Fine Chemicals and Industrial business segment
(up $1.7 million), reflecting the operating results of ISP Marl.
Interest expense for the first quarter of 1999 was $20.3 million versus
$17.9 million for the same period last year, with the increase due primarily to
higher average borrowings. Other expense, net, for the quarter was $9.0 million
compared with other income, net, of $10.0 million in the first quarter of 1998,
with the decrease resulting from investment losses in the quarter.
Business Segment Review
A discussion of operating results for each of the Company's business
segments follows. The Company operates its Specialty Chemicals business through
three reportable business segments, in addition to the Mineral Products and
Filter Products segments.
Personal Care
Sales in the first quarter of 1999 were $52.3 million, a $2.0 million
decrease compared with $54.3 million for the same period last year. The lower
sales were attributable to skin care products which experienced lower
11
<PAGE>
sales volumes and lower average price levels in some products. Sales of
hair care products were flat with the prior year's quarter.
Operating income for the first quarter of 1999 was $18.9 million and
included a pre-tax gain of $8.5 million from the sale of the pigments business.
Excluding this gain, operating income for the quarter was $10.4 million compared
with $11.9 million in last year's quarter. The decline in operating income
reflected lower sales and gross margins for skin care products due to the lower
average price levels.
Pharmaceutical, Agricultural and Beverage ("PAB")
Sales for the PAB segment were $46.0 million for the first quarter of 1999,
a 3% increase compared with $44.6 million for the first quarter of 1998, while
operating income increased by 7% to $12.1 million versus $11.3 million last
year. The increased sales reflected higher sales volumes (up $0.4 million),
favorable pricing and a favorable foreign exchange impact ($0.5 million). The
increased operating results reflected the higher sales levels and improved gross
margins due to the favorable pricing and favorable manufacturing costs.
Performance Chemicals, Fine Chemicals and Industrial
The Performance Chemicals, Fine Chemicals and Industrial segment
experienced a 16% increase in sales in the first quarter of 1999, with sales
increasing to $80.2 million from $69.1 million for the same period in 1998. The
sales increase reflected the first quarter 1999 sales of ISP Marl of $14.6
million. Excluding the effects of the ISP Marl acquisition, the remainder of the
segment showed a $3.5 million (5%) decline in sales due to unfavorable pricing,
partially offset by higher sales volumes (up $1.1 million).
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $11.4 million for the first quarter of 1999, an increase
of $1.7 million (17%) over the $9.7 million recorded in the first quarter of
1998. The higher operating income reflected the first quarter 1999 operating
results for ISP Marl, partially offset by lower gross margins for the remainder
of the segment, reflecting the unfavorable pricing.
Mineral Products
Sales for the Mineral Products segment for the first quarter of 1999 were
$23.2 million, down slightly from the $23.3 million recorded in the first
quarter of 1998. Sales to Building Materials Corporation of America, an
affiliate, increased by $0.6 million to $16.2 million on sales volume increases,
offset by $0.7 million lower sales to trade customers due to lower sales
volumes. Operating income for the first quarter of 1999 was $4.2 million
compared with $4.6 million for the same period in 1998, with the decrease
resulting from the lower sales volumes and higher operating expenses.
Filter Products
Sales for the Filter Products segment increased by 10% to $10.5 million in
the first quarter of 1999, compared with $9.5 million in the
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first quarter of 1998, principally reflecting higher sales volumes.
Operating income improved 36% to $1.0 million compared with $0.7 million last
year, resulting from the higher sales and improved gross margins.
Liquidity and Financial Condition
During the first quarter of 1999, the Company's net cash outflow before
financing activities was $40.9 million, including the use of $13.3 million of
cash for operations, the reinvestment of $14.4 million for capital programs,
$11.5 million of cash generated from the sale of assets (see Note 1 to
Consolidated Financial Statements), and the use of $24.7 million of cash for net
purchases of available-for-sale and held-to-maturity securities and other
short-term investments.
Cash invested in additional working capital totaled $15.5 million during
the first quarter of 1999, mainly reflecting a $37.0 million increase in
receivables, partially offset by a $20.0 million increase in payables and
accrued liabilities. The increase in receivables reflected a $14.0 million
increase in trade receivables due to higher sales in March 1999 versus December
1998, a $9.8 million increase in the receivable from the purchaser of the
Company's domestic trade accounts receivable, and a $13.2 million increase in
other receivables due primarily to higher VAT receivables. The net cash used for
operating activities was net of a $7.6 million cash inflow from net sales of
trading securities.
Net cash provided by financing activities during the first quarter of 1999
totaled $47.8 million, reflecting a $207 million increase in borrowings under
the Company's bank revolving credit facility in order to repay the Company's
$200 million 9% Senior Notes due March 1999, and also a $43.5 million increase
in short-term borrowings. In addition, financing activities included a $3.0
million cash outlay for repurchases of common stock pursuant to the Company's
repurchase program. The Company announced in March 1999 that its Board of
Directors had approved the repurchase of 1.5 million shares of its common stock.
This amount is in addition to the repurchase of one million shares, announced in
September 1998. The repurchased shares will be held for general purposes,
including the issuance of shares under the Company's stock option plan.
As a result of the foregoing factors, cash and cash equivalents increased
by $6.9 million during the first quarter of 1999 to $31.6 million, excluding
$376.5 million of trading, available-for-sale and held-to-maturity securities
and other short-term investments.
The Company recorded $73.0 million in 1998 for provisions for restructuring
and impairment loss, primarily related to its decision to shut down its
butanediol production unit at its Calvert City, Kentucky manufacturing facility.
The total charge included an accrual of $7.5 million for cash costs to be
incurred, mainly over the next twelve to eighteen months, principally for
decommissioning, demolition and remediation, and severance costs. During the
first quarter of 1999, $1.5 million of costs were charged to this accrual,
principally for decommissioning activities, leaving a reserve balance of $6.0
million as of the end of the quarter. In addition, in the third quarter of 1998,
the Company reserved $3.0 million for the consolidation of offices in its
European operations, consisting of costs to be incurred for lease obligations,
severance costs and for relocation of headquarters operations and other related
13
<PAGE>
expenses. Charges against this reserve since the third quarter of 1998 have
totaled $1.7 million, including $0.6 million in the first quarter of 1999,
leaving a reserve balance of $1.3 million as of the end of the first quarter.
This program is expected to be substantially completed by the end of the year
1999.
See Note 8 to Consolidated Financial Statements for information regarding
contingencies.
Year 2000 Compliance
The Company has implemented a formal Year 2000 program (the "Year 2000
Program") to (i) address the inability of some of its information technology
("IT") and "non-IT" equipment that the Company believes is significant to its
business, including certain devices with embedded technology, to accurately read
and process certain dates, including dates in the year 2000 and afterwards) (the
"Year 2000 Issues"); (ii) investigate Year 2000 Issues of third parties
significant to the Company's business; and (iii) establish contingency plans
where appropriate.
The Company has completed the installation of a new Enterprise Resource
Planning System ("ERP System") and has replaced or remediated most of its
personal computers and other IT equipment that may have Year 2000 Issues.
Although the ERP System was implemented for purposes other than remediating Year
2000 Issues, management believes that the ERP System is Year 2000 compliant. In
this regard, the Company has performed Year 2000 testing of the ERP system and
did not discover any major Year 2000 Issues. With respect to its non-IT
equipment, the Company and its consultants are presently inventorying,
evaluating, remediating and testing this equipment. The Company expects to
substantially complete its Year 2000 Program for IT and non-IT equipment by
mid-1999.
The Company is also requesting information on the Year 2000 Issues of third
parties significant to the Company's business. The Company is evaluating the
responses from many of these entities and is requesting more information as
appropriate. Based on the information gathered from its Year 2000 Program, the
Company is developing contingency plans to minimize the impact of Year 2000
Issues on its business. The Company expects to substantially complete these
activities by mid-1999.
The Company does not believe that the costs of its Year 2000 Program will
be material to its financial position or results of operations. While the
Company believes that it addressed most of its IT Year 2000 Issues by installing
the ERP System and replacing or remediating personal computers, neither the
timing nor extent of these activities were directly related to the Company's
Year 2000 Program. The Company also has incurred outside costs of approximately
$100,000 in connection with evaluating year 2000 compliance of its non-IT
systems. The Company anticipates that additional costs to remediate should
approximate no more than $1.5 million in the aggregate. The Company expects that
the source of any funds that may be necessary to pay the costs of addressing its
Year 2000 Issues will be provided from cash balances or cash generated from
operations. The Company intends to charge such costs against earnings as the
costs are incurred.
Management believes that it has taken reasonable steps in developing its
Year 2000 Program. Notwithstanding these actions, there can be no assurance
14
<PAGE>
that all of the Company's Year 2000 Issues or those of its key suppliers,
service providers or customers will be resolved or addressed satisfactorily
before the Year 2000 commences. Management believes that the reasonably likely
"worst case scenario" resulting from Year 2000 Issues could be the failure by
the Company's key suppliers, service providers, customers and other third
parties to address their Year 2000 Issues. If this were to occur, and there were
no alternatives available to the Company, then the Company's usual channels of
supply and distribution could be disrupted, in which event the Company could
experience a material adverse impact on its business, results of operations or
financial position.
* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee" or other words or
phrases of similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. The Company's
operations are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement. The forward-looking statements included herein are
made only as of the date of this Quarterly Report on Form 10-Q and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.
15
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." As of December 31, 1998,
equity-related financial instruments employed by the Company to reduce market
risk included short contracts valued at $276.7 million. At April 4, 1999, the
value of short contracts was $85.0 million. All such short contracts were
terminated as of May 6, 1999. Since the Company marks-to-market such instruments
each month, there was no economic cost to the Company to terminate these
instruments. In addition, the Company's 9% Senior Notes and $200 million
notional value of fixed to floating interest rate swaps matured on March 1,
1999, and the Company terminated $125 million notional amount of floating to
fixed forward-starting interest rate swaps on March 1, 1999. The cost to the
Company to terminate such swaps was insignificant.
16
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
(b) No Reports on Form 8-K were filed during the quarter ended April 4, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERNATIONAL SPECIALTY PRODUCTS INC.
DATE: May 18, 1999 BY: /s/Randall R. Lay
------------ -----------------
Randall R. Lay
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 1999 10-Q OF INTERNATIONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-04-1999
<CASH> 31,553
<SECURITIES> 342,174
<RECEIVABLES> 96,202
<ALLOWANCES> 0
<INVENTORY> 133,736
<CURRENT-ASSETS> 716,029
<PP&E> 555,296
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<BONDS> 902,944
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<COMMON> 695
<OTHER-SE> 497,155
<TOTAL-LIABILITY-AND-EQUITY> 1,828,286
<SALES> 212,170
<TOTAL-REVENUES> 212,170
<CGS> 125,405
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