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 July 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, Suite 303, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 427-5715
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 August 13, 1999, 68,316,628 shares of International Specialty Products
Inc. common stock (par value $.01 per share) were outstanding.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Thousands, except per share amounts)
Second Quarter Ended Six Months Ended
-------------------- -------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
--------- --------- --------- ---------
Net sales...........................$ 219,775 $ 202,943 $ 420,478 $ 415,113
Cost of products sold............... (125,741) (116,698) (244,918) (242,103)
Selling, general and administrative. (42,591) (42,089) (83,012) (85,406)
Gain on sale of assets.............. - - - 8,541
Goodwill amortization............... (3,336) (4,091) (6,675) (8,286)
--------- --------- --------- ---------
Operating income.................... 48,107 40,065 85,873 87,859
Interest expense.................... (19,055) (19,549) (36,993) (39,825)
Equity in earnings of joint venture. - - 1,455 -
Other income (expense), net......... 9,746 5,805 19,701 (3,194)
--------- --------- --------- ---------
Income before income taxes.......... 38,798 26,321 70,036 44,840
Income taxes........................ (14,778) (9,242) (26,132) (15,739)
Minority interest in income of
subsidiary........................ (4,980) - (9,192) -
--------- --------- --------- ---------
Net income..........................$ 19,040 $ 17,079 $ 34,712 $ 29,101
========= ========= ========= =========
Earnings per common share:
Basic.............................$ .35 $ .25 $ .64 $ .42
========= ========= ========= =========
Diluted...........................$ .35 $ .25 $ .64 $ .42
========= ========= ========= =========
Weighted average number of common
and common equivalent shares
outstanding:
Basic............................. 53,833 68,298 53,833 68,533
========= ========= ========= =========
Diluted........................... 53,833 68,444 53,833 68,710
========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
July 4,
December 31, 1999
1998 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 24,638 $ 35,232
Investments in trading securities............. 67,333 63,464
Investments in available-for-sale securities.. 233,625 229,816
Investments in held-to-maturity securities.... 12,287 -
Other short-term investments.................. 41,708 36,483
Accounts receivable, trade, net............... 82,227 96,923
Accounts receivable, other.................... 21,748 36,446
Receivable from related parties, net.......... 7,769 18,731
Inventories................................... 138,888 132,939
Other current assets.......................... 19,624 19,406
---------- ----------
Total Current Assets............................ 649,847 669,440
Property, plant and equipment, net.............. 553,195 557,562
Goodwill, net................................... 526,928 518,636
Other assets.................................... 35,653 33,488
---------- ----------
Total Assets.................................... $1,765,623 $1,779,126
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt............................... $ 87,937 $ 86,411
Current maturities of long-term debt.......... 583 38,446
Accounts payable.............................. 61,722 75,479
Accrued liabilities........................... 84,534 88,043
Income taxes.................................. 8,417 3,867
---------- ----------
Total Current Liabilities................... 243,193 292,246
---------- ----------
Long-term debt less current maturities.......... 896,095 819,329
---------- ----------
Deferred income taxes........................... 60,282 71,514
---------- ----------
Other liabilities............................... 64,330 65,611
---------- ----------
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.................... 489,285 489,628
Treasury stock, at cost - 735,744 and
1,247,036 shares, respectively.............. (8,388) (12,140)
Retained earnings............................. 44,892 73,993
Accumulated other comprehensive loss.......... (24,761) (21,750)
---------- ----------
Total Stockholders' Equity.................. 501,723 530,426
---------- ----------
Total Liabilities and Stockholders' Equity...... $1,765,623 $1,779,126
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
--------------------
June 28, July 4,
1998 1999
---------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 20,495 $ 24,638
-------- --------
Cash provided by (used in) operating activities:
Net income............................................. 34,712 29,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of assets............................. - (8,541)
Depreciation....................................... 22,949 24,561
Goodwill amortization.............................. 6,675 8,286
Deferred income taxes.............................. 13,034 6,205
Unrealized (gains) losses on trading securities and
other short-term investments..................... 307 (23,970)
Increase in working capital items...................... (3,450) (15,063)
Purchases of trading securities........................ (100,297) (126,989)
Proceeds from sales of trading securities.............. 130,878 150,937
Increase in net receivable from related parties........ (3,870) (10,962)
Change in cumulative translation adjustment............ (3,284) (14,747)
Change in minority interest in subsidiary.............. 8,646 -
Other, net............................................. 8,363 6,623
-------- --------
Net cash provided by operating activities............ 114,663 25,441
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions.................. (118,106) (31,034)
Proceeds from sale-leaseback transaction............... 56,050 -
Proceeds from sale of assets........................... - 11,533
Purchases of available-for-sale securities............. (326,627) (168,131)
Purchases of held-to-maturity securities............... - (3,459)
Purchases of other short-term investments.............. - (5,600)
Proceeds from sales of available-for-sale securities... 210,850 195,858
Proceeds from held-to-maturity securities.............. 311 15,746
Proceeds from sales of other short-term investments.... - 14,717
-------- --------
Net cash provided by (used in) investing activities... (177,522) 29,630
-------- --------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. 4,000 -
Increase (decrease) in short-term debt................. 51,580 (1,526)
Increase in borrowings under revolving credit facility. 38,000 161,400
Repayments of long-term debt........................... (366) (200,223)
Repurchases of common stock............................ - (4,987)
Other, net............................................. 204 859
-------- --------
Net cash provided by (used in) financing activities...... 93,418 (44,477)
-------- --------
Net change in cash and cash equivalents.................. 30,559 10,594
-------- --------
Cash and cash equivalents, end of period................. $ 51,054 $ 35,232
======== ========
3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -- (Continued)
Six Months Ended
--------------------
June 28, July 4,
1998 1999
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)........... $ 38,302 $ 45,975
Income taxes................................... 8,212 15,535
Acquisition of remaining 50% interest in GAF-Huls
Chemie GmbH joint venture, net of $23,732 cash
acquired*:
Fair market value of assets acquired.......... $ 48,003
Purchase price of acquisition................. 23,381
--------
Liabilities assumed........................... $ 24,622
========
*The Company had a 50% equity interest in the cash held by the joint venture
prior to the acquisition, which was classified within Other Assets on the
Consolidated Balance Sheet.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
4
<PAGE>
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 July 4,
1999, and the results of operations and cash flows for the periods ended June
28, 1998 and July 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, which resulted
in a 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
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
-------------------- ------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
--------- --------- -------- --------
(Thousands)
<S> <C> <C> <C> <C>
Net income.................................... $ 19,040 $ 17,079 $ 34,712 $ 29,101
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains arising during
the period, net of income tax effect of
$2,334, $6,278, $5,172 and $4,915......... 4,798 14,768 11,104 12,509
Less: reclassification adjustment
for gains (losses) included in net income,
net of income tax (provision) benefit of
$(2,650), $1,362, $(6,340) and $1,242...... 6,099 (5,527) 14,415 (5,249)
-------- -------- -------- --------
Total....................................... (1,301) 20,295 (3,311) 17,758
Foreign currency translation adjustment..... (623) (3,682) (3,284) (14,747)
-------- -------- -------- --------
Total other comprehensive income (loss)....... (1,924) 16,613 (6,595) 3,011
-------- -------- -------- --------
Comprehensive income.......................... $ 17,116 $ 33,692 $ 28,117 $ 32,112
======== ======== ======== ========
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2. Comprehensive Income (Continued)
Changes in the components of "Accumulated other comprehensive loss" for the
six months ended July 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....... 17,758 (14,747) - 3,011
-------- -------- -------- --------
Balance, July 4, 1999....... $ (6,279) $(10,756) $ (4,715) $(21,750)
======== ======== ======== ========
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Business Segment Information (Continued)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- --------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
Net sales:
Personal Care............................... $ 46,414 $ 47,387 $ 100,669 $ 99,659
Pharmaceutical, Agricultural and Beverage... 44,490 45,775 89,056 91,787
Performance Chemicals, Fine Chemicals and
Industrial................................ 93,657 74,746 162,744 154,946
--------- --------- --------- ---------
Total Specialty Chemicals................. 184,561 167,908 352,469 346,392
Mineral Products (1)........................ 25,022 25,275 48,279 48,439
Filter Products............................. 10,192 9,760 19,730 20,282
--------- --------- --------- ---------
Net sales..................................... $ 219,775 $ 202,943 $ 420,478 $ 415,113
========= ========= ========= =========
Operating income:
Personal Care (2)........................... $ 9,981 $ 11,289 $ 21,927 $ 30,221
Pharmaceutical, Agricultural and Beverage... 11,761 13,334 23,033 25,391
Performance Chemicals, Fine Chemicals and
Industrial................................ 19,815 9,238 29,547 20,654
--------- --------- --------- ---------
Total Specialty Chemicals................. 41,557 33,861 74,507 76,266
Mineral Products............................ 5,343 5,764 9,961 9,977
Filter Products............................. 1,659 1,596 2,389 2,587
--------- --------- --------- ---------
Total segment operating income.............. 48,559 41,221 86,857 88,830
Unallocated corporate office................ (452) (1,156) (984) (971)
--------- --------- --------- ---------
Total operating income........................ 48,107 40,065 85,873 87,859
Interest expense and other, net............... (9,309) (13,744) (15,837) (43,019)
--------- --------- --------- ---------
Income before income taxes.................... $ 38,798 $ 26,321 $ 70,036 $ 44,840
========= ========= ========= =========
<FN>
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $16.4 and $16.5 million for the second quarter of
1998 and 1999, respectively, and $32.0 and $32.7 million for the first six
months of 1998 and 1999, respectively.
(2) Personal Care operating income for the first six months of 1999 includes a
pre-tax gain of $8.5 million from the sale of the pigments product line.
See Note 1.
</FN>
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4. Inventories
Inventories comprise the following:
December 31, July 4,
1998 1999
------------ --------
(Thousands)
Finished goods................ $ 87,241 $ 77,256
Work in process............... 24,862 24,373
Raw materials and supplies.... 30,065 34,769
-------- --------
Total......................... 142,168 136,398
Less LIFO reserve............. (3,280) (3,459)
-------- --------
Inventories................... $138,888 $132,939
======== ========
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.
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
and a writedown to fair value of certain butanediol production assets at its
Texas City and Seadrift, Texas manufacturing facilities. The total charge
included an accrual of $7.5 million for cash costs to be incurred, mainly over
the next twelve months, principally for decommissioning, demolition and
remediation, and severance costs. During the first six months of 1999, $3.1
million of costs were charged to this accrual, principally for decommissioning
activities and severance, leaving a reserve balance of $4.4 million as of the
end of the second 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 $2.6
million, including $1.4 million in the first six months of 1999, leaving a
reserve balance of $0.4 million as of the end of the second quarter. This
program is expected to be substantially completed by the end of the year 1999.
8
<PAGE>
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, 2000,
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
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Contingencies (Continued)
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
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 - Second Quarter 1999 Compared With
Second Quarter 1998
The Company recorded second quarter 1999 net income of $17.1 million (25
cents diluted earnings per share) compared with $19.0 million (35 cents diluted
earnings per share) in the second quarter of 1998. The lower net income was
attributable to lower operating and other income and higher interest expense.
Net sales for the second quarter of 1999 were $202.9 million compared with
$219.8 million for the same period in 1998. The decline in sales was
attributable to lower sales volumes and unfavorable pricing for the Industrial
business within the Performance Chemicals, Fine Chemicals and Industrial
business segment, partially offset by increased sales volumes for the Fine
Chemicals and Performance Chemicals businesses and the Pharmaceutical,
Agricultural and Beverage ("PAB") and Personal Care segments. The lower sales
principally reflected sales declines in Europe, due to the lower Industrial
sales, and Latin America, partially offset by an 8% sales increase in the
Asia-Pacific region.
Operating income for the second quarter of 1999 was $40.1 million compared
with $48.1 million for the second quarter of 1998. The decrease in operating
income was driven by lower profits in the Industrial business as a result of the
sales decline, partially offset by higher profits in all other specialty
chemicals businesses.
Interest expense for the second quarter of 1999 was $19.5 million versus
$19.1 million for the same period last year, with the increase due to higher
average borrowings. Other income, net, for the quarter was $5.8 million compared
with $9.7 million in the second quarter of 1998, with the decrease resulting
primarily from lower investment income.
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 second quarter of 1999 were $47.4 million compared with $46.4
million for the same period last year. The higher sales were attributable to
hair care products, which experienced a 6% sales growth due to strong U.S. sales
in hair care preservatives and polymers. In addition, sales were up in the
Asia-Pacific region due to improving Asia economies. Sales of skin care products
declined from the prior year's quarter due in part to the first quarter sale of
the pigments business (see Note 1 to Consolidated Financial Statements).
Operating income for the second quarter of 1999 was $11.3 million compared
with $10.0 million in last year's quarter. The 13% increase in
11
<PAGE>
operating income primarily resulted from the higher hair care sales and
also reflected higher skin care profits due to an improved gross margin.
Pharmaceutical, Agricultural and Beverage ("PAB")
Sales for the PAB segment were $45.8 million for the second quarter of
1999, a 3% increase compared with $44.5 million for the second quarter of 1998,
while operating income increased by 13% to $13.3 million versus $11.8 million
last year. The increased sales primarily reflected favorable pricing and higher
sales volumes, partially offset by the unfavorable impact of the stronger U.S.
dollar. The increased operating results reflected the higher sales levels, an
improved gross margin due to the favorable pricing and favorable manufacturing
costs, and lower operating expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the second quarter of 1999 were $74.7 million compared with $93.7
million in the second quarter of 1998. The decline in sales was attributable to
the Industrial business where lower sales of intermediates and solvents
products, reflecting lower sales volumes and unfavorable pricing, principally in
Europe, resulted in a 37% decrease in sales for the Industrial business. Sales
for the Fine Chemicals and Performance Chemicals businesses were up 17% and 4%,
respectively, due to higher sales volumes partially offset by unfavorable
pricing for Fine Chemicals.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $9.2 million for the second quarter of 1999 versus $19.8
million for the same period last year. The shortfall in operating profits was
attributable to the Industrial business, which experienced a loss for the
quarter due to the decreased sales of its intermediates and solvents products.
This loss was partially offset by a 9% improvement in operating profits for the
Fine Chemicals business due to higher sales and lower costs due to higher
product yields and increased manufacturing efficiencies. Operating profits for
the Performance Chemicals business increased 42% for the quarter due primarily
to an improved gross margin as a result of favorable manufacturing cost
variances, and lower operating expenses, partially offset by the adverse impact
of the stronger U.S. dollar.
Mineral Products
Sales for the Mineral Products segment for the second quarter of 1999 were
$25.3 million compared with $25.0 million for the second quarter of 1998. Sales
to Building Materials Corporation of America, an affiliate, increased by $0.1
million to $16.5 million on sales volume increases, while sales to trade
customers increased by $0.2 million (2.5%), also due to sales volume increases.
Operating income for the second quarter of 1999 was $5.8 million compared with
$5.3 million for the same period in 1998, with the 8% increase resulting from
the higher sales volumes and lower operating expenses.
Filter Products
Sales for the Filter Products segment were $9.8 million in the second
quarter of 1999 versus $10.2 million in the second quarter of 1998,
12
<PAGE>
reflecting lower sales volumes and the unfavorable effect of foreign
exchange. Operating income decreased to $1.6 million compared with $1.7 million
last year, due to the adverse impact of foreign exchange.
Results of Operations - Six Months 1999 Compared With
Six Months 1998
For the first six months of 1999, the Company recorded net income of $29.1
million (42 cents diluted earnings per share), compared with $34.7 million (64
cents diluted earnings per share) for the first six months 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 six months of 1999 were $415.1 million compared
with $420.5 million for the same period in 1998. The decrease in sales was
attributable to lower sales in the Company's Industrial business, and, to a
lesser extent, the skin care business, partially offset by sales increases in
all other businesses. The lower sales principally reflected sales declines in
Europe, as a result of the lower Industrial sales, and Latin America, partially
offset by sales increases in the U.S. and the Asia-Pacific region.
Operating income for the first six months of 1999 was $87.9 million and
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 first six months was
$79.3 million compared with $85.9 million for the first six months of 1998. The
decrease was principally attributable to lower profits in the Industrial
business as a result of decreased sales, and, to a lesser extent, lower profits
in the skin care business, partially offset by improved profits in all other
specialty chemicals businesses.
Interest expense for the first six months of 1999 was $39.8 million versus
$37.0 million for the same period last year, with the increase due to higher
average borrowings. Other expense, net, for the first six months was $3.2
million compared with other income, net, of $19.7 million in the first six
months of 1998, with the decrease resulting principally from lower investment
income.
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 for the first six months of 1999 were $99.7 million compared with
$100.7 million for the same period last year. The lower sales were attributable
to skin care products which experienced lower sales volumes, reflecting the
first quarter sale of the pigments business, and also lower average price levels
in some products. Sales of hair care products were up 3% due to strong U.S.
sales in hair care preservatives and polymers, and
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also due to higher sales in the Asia-Pacific region as a result of
improving Asian economies.
Operating income for the first six months of 1999 was $30.2 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 first six months was $21.7 million
compared with $21.9 million for the first six months of 1998. Operating profits
for skin care products were down due to lower sales and a lower gross margin due
to unfavorable pricing, while hair care profits increased by 8% due to the
increased sales volumes and lower operating expenses.
Pharmaceutical, Agricultural and Beverage ("PAB")
Sales for the PAB segment were $91.8 million for the first six months of
1999, a 3% increase compared with $89.1 million for the first six months of
1998, while operating income increased by 10% to $25.4 million versus $23.0
million last year. The increased sales primarily reflected favorable pricing and
higher sales volumes. The increased operating results reflected the higher sales
levels, an improved gross margin due to the favorable pricing and favorable
manufacturing costs, and lower operating expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first six months of 1999 were $154.9 million compared with
$162.7 million in the first six months of 1998. The decrease in sales was
attributable to the Industrial business where lower sales of intermediates and
solvents products, reflecting lower sales volumes and unfavorable pricing,
principally in Europe, resulted in a 19% decrease in sales for the Industrial
business. Sales for the Fine Chemicals and Performance Chemicals businesses were
up 37% and 7%, respectively, due to higher sales volumes partially offset by
unfavorable pricing for Fine Chemicals.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $20.7 million for the first six months of 1999 versus
$29.5 million for the same period last year. The lower operating profits was
attributable to the Industrial business, which experienced a 97% decrease for
the period due to the decreased sales of its intermediates and solvents
products. This decrease was partially offset by a 42% improvement in operating
profits for the Fine Chemicals business due to the higher sales volumes,
partially offset by unfavorable pricing. Operating profits for the Performance
Chemicals business increased 43% due to increased sales volumes, an improved
gross margin, due to favorable manufacturing cost variances, and lower operating
expenses, partially offset by the unfavorable effect of the stronger U.S.
dollar.
Mineral Products
Sales for the Mineral Products segment for the first six months of 1999
were $48.4 million compared with $48.3 million for the first six months of 1998.
Sales to Building Materials Corporation of America, an affiliate, increased by
$0.7 million to $32.7 million on sales volume increases, partially offset by
$0.5 million lower sales to trade customers due to lower sales volumes.
Operating income for the first six months of
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1999 remained flat at $10.0 million compared with the same period in 1998,
as the effect of the higher sales volumes were offset by increased operating
expenses.
Filters Products
Sales for the Filter Products segment increased by 3% to $20.3 million in
the first six months of 1999, compared with $19.7 million in the first six
months of 1998, principally reflecting higher sales volumes. Operating income
improved 8% to $2.6 million compared with $2.4 million last year, resulting from
the higher sales and improved gross margins.
Liquidity and Financial Condition
During the first six months of 1999, the Company's net cash flow before
financing activities was $55.1 million, including $25.4 million of cash
generated from operations, the reinvestment of $31.0 million for capital
programs, $11.5 million of cash generated from the sale of assets (see Note 1 to
Consolidated Financial Statements), and the generation of $49.1 million of cash
from net sales of available-for-sale and held-to-maturity securities and other
short-term investments.
Cash invested in additional working capital totaled $15.1 million during
the first six months of 1999, mainly reflecting a $29.4 million increase in
receivables, partially offset by an $11.3 million increase in payables and
accrued liabilities. The increase in receivables reflected a $14.7 million
increase in trade receivables due to higher sales in June 1999 versus December
1998, a $4.6 million increase in the receivable from the purchaser of the
Company's domestic trade accounts receivable, and a $10.1 million increase in
other receivables. The net cash generated from operating activities also
included a $23.9 million cash inflow from net sales of trading securities.
Net cash used in financing activities during the first six months of 1999
totaled $44.5 million, reflecting a $161.4 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 $1.5 million decrease in
short-term borrowings. In addition, financing activities included a $5.0 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 an additional 1.5 million shares of its common stock.
This amount is in addition to the repurchase of one million shares, announced in
September 1998 which has been completed. 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 $10.6 million during the first six months of 1999 to $35.2 million, excluding
$329.8 million of trading and available-for-sale 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 months, principally for
15
<PAGE>
decommissioning, demolition and remediation, and severance costs. During
the first six months of 1999, $3.1 million of costs were charged to this
accrual, principally for decommissioning activities and severance, leaving a
reserve balance of $4.4 million as of the end of the second 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 $2.6 million, including $1.4
million in the first six months of 1999, leaving a reserve balance of $0.4
million as of the end of the second 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 has
substantially completed its Year 2000 Program for IT and non-IT equipment and
expects to complete this program by the end of the third quarter of 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 has substantially completed these activities
and expects to complete these activities by the end of the third quarter of
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
$250,000 in connection with evaluating Year 2000 compliance of
16
<PAGE>
its non-IT systems. The Company anticipates that additional costs to
remediate should approximate no more than $1.0 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 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 most 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.
17
<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 long contracts valued at $56.1 million and short contracts valued
at $276.7 million. At July 4, 1999, the value of long contracts was $33.9
million. All 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.
18
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 24, 1999, each
nominated director was reelected, with at least 61,485,694 votes in favor of and
not more than 2,408,006 votes withheld from, each nominee.
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 July 4, 1999.
19
<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: August 17, 1999 BY: /s/Randall R. Lay
--------------- -----------------
Randall R. Lay
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 1999 10-Q OF INTERNATONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
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<SECURITIES> 293,280
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