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 OCTOBER 1, 2000
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 November 10, 2000, 66,271,764 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)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- --------------------
OCTOBER 3, OCTOBER 1, OCTOBER 3, OCTOBER 1,
1999 2000 1999 2000
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales............................ $ 188,172 $ 195,886 $ 583,003 $ 594,084
Cost of products sold................ (106,855) (129,680) (337,664) (386,080)
Selling, general and administrative.. (37,317) (38,268) (116,322) (116,618)
Gain on sale of assets .............. - - 8,541 -
Provision for restructuring and staff
reduction ........................ (1,473) - (1,473) -
Goodwill amortization................ (4,010) (4,049) (12,296) (12,144)
--------- --------- --------- --------
Operating income..................... 38,517 23,889 123,789 79,242
Interest expense..................... (19,070) (21,810) (58,830) (62,725)
Gain on contract settlement ......... - - - 3,450
Other income, net ................... 4,057 39,451 1,228 48,548
-------- --------- --------- --------
Income from continuing operations
before income taxes................ 23,504 41,530 66,187 68,515
Income taxes......................... (8,249) (14,566) (23,231) (24,020)
--------- --------- --------- --------
Income from continuing operations.... 15,255 26,964 42,956 44,495
--------- --------- --------- --------
Discontinued operation (Note 2):
Income from discontinued operation,
net of income tax ............. 369 - 1,769 -
Gain on sale of discontinued
operation,net of income taxes
of $13,246 .................... 24,491 - 24,491 -
--------- --------- --------- --------
Income from discontinued operation .. 24,860 - 26,260 -
--------- --------- --------- --------
Net income........................... $ 40,115 $ 26,964 $ 69,216 $ 44,495
========= ========= ========= ========
</TABLE>
1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)- (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- --------------------
OCTOBER 3, OCTOBER 1, OCTOBER 3, OCTOBER 1,
1999 2000 1999 2000
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Earnings per common share:
Basic:
Continuing operations............ $ .23 $ .40 $ .63 $ .65
Discontinued operation........... .36 - .38 -
--------- -------- --------- -------
Net income....................... $ .59 $ .40 $ 1.01 $ .65
========= ======== ========= =======
Diluted:
Continuing operations............ $ .23 $ .40 $ .63 $ .65
Discontinued operation........... .36 - .38 -
--------- -------- --------- -------
Net income....................... $ .59 $ .40 $ 1.01 $ .65
========= ======== ========= =======
Weighted average number of common
and common equivalent shares
outstanding:
Basic.............................. 68,341 67,951 68,470 68,518
========= ========= ======== ========
Diluted............................ 68,522 67,951 68,644 68,518
========= ========= ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 1,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 23,309 $ 15,419
Investments in trading securities.............. 10,395 7,092
Investments in available-for-sale securities... 344,905 493,901
Other short-term investments................... 41,900 52,049
Accounts receivable, trade, net................ 82,201 94,415
Accounts receivable, other..................... 23,410 23,742
Receivable from related parties, net........... 16,901 18,238
Inventories.................................... 151,775 148,757
Other current assets........................... 20,569 22,448
---------- ----------
Total Current Assets........................ 715,365 876,061
Property, plant and equipment, net............... 570,218 568,581
Goodwill, net.................................... 510,578 498,434
Other assets..................................... 39,147 33,556
---------- ----------
Total Assets..................................... $1,835,308 $1,976,632
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 82,531 $ 88,297
Current maturities of long-term debt........... 38,543 325,213
Accounts payable............................... 63,852 63,965
Accrued liabilities............................ 86,350 84,669
Income taxes................................... 6,006 12,204
---------- ----------
Total Current Liabilities.................... 277,282 574,348
---------- ----------
Long-term debt less current maturities........... 820,141 524,908
---------- ----------
Deferred income taxes............................ 89,796 135,771
---------- ----------
Other liabilities................................ 60,828 59,945
---------- ----------
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..................... 486,137 485,946
Treasury stock, at cost - 754,199 and
2,096,692 shares, respectively................. (7,344) (14,428)
Retained earnings.............................. 119,822 164,317
Accumulated other comprehensive income(loss)... (12,049) 45,130
---------- ----------
Total Stockholders' Equity................... 587,261 681,660
---------- ----------
Total Liabilities and Stockholders' Equity....... $1,835,308 $l,976,632
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
--------------------
OCTOBER 3, OCTOBER 1,
1999 2000
--------- ---------
(THOUSANDS)
Cash and cash equivalents, beginning of period........... $ 23,130 $ 23,309
-------- --------
Cash provided by operating activities:
Net income............................................. 69,216 44,495
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operation................. (26,260) -
Gain on sale of assets............................. (8,541) -
Depreciation....................................... 35,983 38,039
Goodwill amortization.............................. 12,296 12,144
Deferred income taxes.............................. 1,672 10,118
Unrealized gains on trading securities and other
short-term investments........................... (7,580) (20,191)
Increase in working capital items...................... (6,443) (2,819)
Purchases of trading securities ...................... (157,071) (41,740)
Proceeds from sales of trading securities ............. 179,096 87,839
Increase in net receivable from related parties........ (10,949) (1,337)
Change in cumulative translation adjustment............ (12,267) (12,790)
Other, net............................................. 4,008 12,901
-------- --------
Net cash provided by continuing operations........... 73,160 126,659
Net cash provided by discontinued operation.......... 4,336 -
-------- --------
Net cash provided by operating activities................ 77,496 126,659
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition .................. (46,289) (39,380)
Proceeds from sale of assets........................... 11,533 -
Proceeds from sale of discontinued operation .......... 62,000 -
Purchases of available-for-sale securities ............ (342,453) (296,448)
Purchases of held-to-maturity securities .............. (3,459) -
Purchases of other short-term investments ............. (5,600) -
Proceeds from sales of available-for-sale securities... 300,252 217,388
Proceeds from held-to-maturity securities.............. 15,746 -
Proceeds from sales of other short-term investments.... 14,717 -
-------- --------
Net cash provided by (used in) investing activities...... 6,447 (118,440)
-------- --------
Cash provided by (used in) financing activities:
Proceeds (repayments)from sale of accounts receivable.. - (5,128)
Increase (decrease)in short-term debt.................. (111) 5,766
Increase (decrease) in borrowings under revolving
credit facility...................................... 127,400 1,800
Repayments of long-term debt........................... (200,285) (10,461)
Repurchases of common stock............................ (4,987) (8,616)
Other, net............................................. 1,188 530
-------- --------
Net cash used in financing activities.................... (76,795) (16,109)
-------- --------
Net change in cash and cash equivalents.................. 7,148 (7,890)
-------- --------
Cash and cash equivalents, end of period................. $ 30,278 $ 15,419
======== ========
4
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)-- (CONTINUED)
NINE MONTHS ENDED
--------------------
OCTOBER 3, OCTOBER 1,
1999 2000
---------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 62,586 $ 59,799
Income taxes..................................... 21,688 10,212
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
<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 October 1,
2000, and the results of operations and cash flows for the periods ended October
3, 1999 and October 1, 2000. 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, 1999 (the "Form 10-K").
NOTE 1. INVESTMENTS IN DEXTER CORPORATION AND LIFE TECHNOLOGIES, INC.
Included in "Investments in available-for-sale securities" at December 31,
1999 were investments (based on market value) of $91.4 million and $149.5
million, respectively, in Dexter Corporation ("Dexter") and Life Technologies,
Inc.("Life Technologies"), a 75%-owned subsidiary of Dexter. Dexter and Life
Technologies were acquired by Invitrogen Corporation ("Invitrogen") in a merger
completed in September 2000. The Company sold its shares of Dexter common stock
prior to the merger and also has sold all of the Invitrogen common stock it
received in the merger for its Life Technologies shares. The total gain related
to these investments was approximately $150 million prior to expenses, of which
$36.8 million, after expenses, was recognized in the third quarter of 2000 and
is included in "Other income, net," and $16.4 million was recognized in prior
periods. The remaining portion of this gain, after expenses, not previously
recognized by the Company in prior periods will be recognized in the fourth
quarter of 2000.
NOTE 2. DISCONTINUED OPERATION
On October 1, 1999, the Company sold the stock of its filter products
("Filter Products") subsidiaries to Hayward Industrial Products Inc. for a
purchase price of $62 million. Accordingly, the Filter Products business segment
is reported as a discontinued operation, and the consolidated financial
statements have been reclassified to report separately the operating results of
the Filter Products business segment. The Company's prior year financial
statements have been restated to reflect continuing operations.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summary operating results for the Filter Products business for the third
quarter and nine months of 1999 are as follows:
Third Nine
Quarter Months
1999 1999
----------- -----------
(Thousands)
Sales............................... $ 8,447 $ 28,729
Income before income taxes.......... 569 2,726
Income taxes........................ (200) (957)
Net income.......................... 369 1,769
NOTE 3. GAIN ON CONTRACT SETTLEMENT
In the first quarter of 2000, the Company received $3.5 million from
the settlement of a pre-1997 contract termination dispute relating to the
Company's Mineral Products business.
NOTE 4. COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
-------------------- -----------------
Oct. 3, Oct. 1, Oct. 3, Oct. 1,
1999 2000 1999 2000
------- -------- ------- -------
(Thousands)
<S> <C> <C> <C> <C>
Net income................................... $ 40,115 $ 26,964 $ 69,216 $ 44,495
-------- ------- -------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains on
available-for-sale securities:
Unrealized holding gains arising
during the period, net of income tax
(provision) benefit of $ 207, $ (26,933),
$(4,708) and $(44,297) ................... (984) 54,748 11,525 90,644
Less: reclassification adjustment for
gains (losses) included in net income,
net of income tax (provision) benefit of
$(2,583), $(13,228), $1,341 and $(2,583).. 4,395 24,390 (854) 20,675
-------- ------- -------- --------
Total....................................... (5,379) 30,358 12,379 69,969
Foreign currency translation adjustment..... 2,480 (6,081) (12,267) (12,790)
-------- ------- -------- --------
Total other comprehensive income (loss)....... (2,899) 24,277 112 57,179
-------- ------- -------- --------
Comprehensive income ......................... $ 37,216 $51,241 $ 69,328 $ 101,674
======== ======= ======== =========
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in the components of "Accumulated other comprehensive income
(loss)" for the nine months ended October 1, 2000 are as follows:
Unrealized Cumulative
Gains on Foreign Accumulated
Available- Currency Other
for-sale Translation Comprehensive
Securities Adjustment Income (Loss)
---------- ----------- -------------
(Thousands)
Balance, December 31, 1999.. $ 1,844 $(13,893) $(12,049)
Change for the period....... 69,969 (12,790) 57,179
-------- -------- --------
Balance, October 1, 2000.... $ 71,813 $(26,683) $ 45,130
======== ======== ========
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------- --------------------
Oct. 3, Oct. 1, Oct. 3, Oct. 1,
1999 2000 1999 2000
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
Net sales:
Personal Care............................. $ 43,707 $ 44,532 $ 143,366 $ 139,999
Pharmaceutical, Food and Beverage......... 41,012 55,616 125,561 174,589
Performance Chemicals, Fine Chemicals and
Industrial.............................. 80,176 75,530 242,360 222,551
--------- ---------- --------- ---------
Total Specialty Chemicals............... 164,895 175,678 511,287 537,139
Mineral Products (1)...................... 23,277 20,208 71,716 56,945
--------- ---------- --------- ---------
Net sales................................... $ 188,172 $ 195,886 $ 583,003 $ 594,084
========= ========== ========= =========
Operating income(2):
Personal Care(3).......................... $ 10,082 $ 7,503 $ 41,561 $ 22,011
Pharmaceutical, Food and Beverage......... 11,411 12,725 34,367 37,580
Performance Chemicals, Fine Chemicals and
Industrial.............................. 14,062 3 35,893 10,758
--------- ---------- --------- ---------
Total Specialty Chemicals............... 35,555 20,231 111,821 70,349
Mineral Products.......................... 4,895 3,358 14,872 8,661
-------- ---------- --------- --------
Total segment operating income............ 40,450 23,589 126,693 79,010
Unallocated corporate office.............. (460) 300 (1,431) 232
Provision for restructuring and staff
reduction ............................. (1,473) - (1,473) -
--------- ---------- --------- --------
Total operating income...................... 38,517 23,889 123,789 79,242
Interest expense and other, net............. (15,013) 17,641 (57,602) (10,727)
--------- ---------- --------- ---------
Income from continuing operations before
income taxes............................... $ 23,504 $ 41,530 $ 66,187 $ 68,515
========= ========== ========= =========
</TABLE>
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $15.2 and $15.7 million for the third quarter of
1999 and 2000, respectively, and $47.9 and $47.6 million for the first nine
months of 1999 and 2000, respectively.
(2) Operating income for the third quarter and first nine months of 1999 for
the three Specialty Chemicals business segments have been reclassified to
conform to the 2000 presentation, based on a reallocation of certain
manufacturing costs.
(3) Personal Care operating income for the first nine months of 1999 includes a
pre-tax gain of $8.5 million from the sale of the pearlescent pigments
product line.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INVENTORIES
Inventories comprise the following:
December 31, October 1,
1999 2000
------------ ----------
(Thousands)
Finished goods................ $107,583 $ 91,908
Work-in-process............... 18,457 13,739
Raw materials and supplies.... 25,735 43,110
-------- ---------
Inventories................... $151,775 $ 148,757
======== =========
At December 31, 1999 and October 1, 2000, $47.7 and $38.3 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, they would have been
$2.7 million higher at December 31, 1999 and $1.6 million lower at October 1,
2000.
NOTE 7. LONG-TERM DEBT
On April 11, 2000, the Company repaid $10.0 million of the $38.1 million
mortgage on its headquarters property. The Company received a nine-month
extension, to January 11, 2001, on the remaining $28.1 million of the mortgage
obligation.
NOTE 8. 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 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, principally for decommissioning,
demolition and remediation, and severance costs. During 1999 and the first six
months of 2000, $5.4 million of costs were charged against this reserve. In
addition, in 1999, the Company reversed $1.9 million of such previously recorded
restructuring reserves, representing an excess demolition reserve of $0.8
million and $1.1 million of other reserves, mainly for raw materials contract
terminations, which were no longer required. This program was completed in the
third quarter of 2000.
In the third quarter of 1999, the Company implemented a staff reduction
program impacting corporate and worldwide executive and administrative staff
positions. As a result, a total of 79 positions were eliminated in 1999 through
normal attrition or termination, for which the Company recorded a pre-
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tax provision for severance of $2.3 million. This program was completed in the
second quarter of 2000.
NOTE 9. 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 a 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,
as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years
beginning after June 15, 2000. If the Company had adopted SFAS No. 133 as of
October 1, 2000, the impact on the Company's Consolidated Financial Statements
would not have been significant. Adoption of SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
NOTE 10. 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, liquidity, results
of operations, cash flows 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 17 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
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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. For additional information relating to GAF,
reference is made to Note 17 to Consolidated Financial Statements contained in
the Form 10-K. GAF has advised the Company that the trends described in the Form
10-K relating to the asbestos litigation against GAF have continued and, as a
result, have had a material adverse effect on GAF's financial condition.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER 2000 COMPARED WITH
THIRD QUARTER 1999
The Company recorded third quarter 2000 income from continuing operations
of $27.0 million ($.40 diluted earnings per share) compared with $15.3 million
($.23 diluted earnings per share) in the third quarter of 1999. The increase in
income from continuing operations was primarily attributable to higher
investment income, partially offset by lower operating income and higher
interest expense. Including income from discontinued operation of $24.9 million
($.36 diluted earnings per share), which reflected an after-tax gain on the sale
of the Company's Filter Products business of $24.5 million, net income for the
third quarter of 1999 was $40.1 million ($.59 diluted earnings per share).
Net sales for the third quarter of 2000 were $195.9 million compared with
$188.2 million for the same period in 1999. The increase in sales resulted
primarily from $15.1 million of sales from the Alginates business that was
acquired in October 1999, and, to a lesser extent, higher sales of butanediol
and solvents due to higher volumes. Partially offsetting these sales increases
were lower sales for the Fine Chemicals business and the Mineral Products
business segment as a result of customer contracts that expired in each of the
businesses at the end of 1999, lower pricing in butanediol and solvents, and the
adverse effect of the stronger U.S. dollar in Europe ($7.5 million). The higher
sales reflected 14%, 24% and 3% sales increases in Europe and the Latin America
and Asia-Pacific regions, respectively, partially offset by 3% lower sales in
the U.S.
Operating income for the third quarter of 2000 was $23.9 million compared
with $38.5 million for the third quarter of 1999, which reflected a $1.5 million
charge related to a staff reduction program and restructuring program (see Note
8 to Consolidated Financial Statements). The unfavorable operating results for
the third quarter of 2000 were attributable primarily to higher raw material and
energy costs, lower pricing in the Industrial business, the adverse effect of
the stronger U.S. dollar ($4.2 million), the impact of the lower sales volumes
for Fine Chemicals and Mineral Products due to the expired customer contracts
previously mentioned, and an unfavorable product mix in the Personal Care
business segment, partially offset by the contribution to operating income by
the Alginates business. Selling, general and administrative expenses increased
slightly in the third quarter of 2000, as a reduction in administrative expenses
that resulted from the Company's third quarter 1999 reduction in corporate staff
and other expense reduction efforts were offset by higher selling and
distribution expenses and higher research and development spending.
13
<PAGE>
Interest expense for the third quarter of 2000 was $21.8 million versus
$19.1 million for the same period last year. The increase was due primarily to
higher average interest rates and, to a lesser extent, higher average
borrowings. "Other income, net", for the third quarter was $39.5 million
compared with $4.1 million in last year's third quarter, with the increase the
result of higher investment income, reflecting a pre-tax gain of $36.8 million,
after expenses, from the sale of the Company's investment in Dexter Corporation
("Dexter"). Dexter and Life Technologies, Inc. ("Life Technologies"), a
75%-owned subsidiary of Dexter, were acquired by Invitrogen Corporation
("Invitrogen") in a merger completed in September 2000. The Company sold its
shares of Dexter common stock prior to the merger and also has sold all of the
Invitrogen common stock it received in the merger for its Life Technologies
shares. The total gain related to these investments was approximately $150
million prior to expenses, of which the $36.8 million mentioned above was
recognized in the third quarter of 2000 and $16.4 million was recognized in
prior periods. The remaining portion of this gain, after expenses, not
previously recognized by the Company will be recognized in the fourth quarter of
2000. See also Note 1 to Consolidated Financial Statements.
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 segment.
Personal Care
Sales in the third quarter of 2000 were $44.5 million compared with
$43.7 million for the same period last year. The higher sales resulted primarily
from improved sales volumes in hair care products, partially offset by the
unfavorable impact of the stronger U.S. dollar in Europe($1.5 million).
Operating income for the third quarter of 2000 was $7.5 million
compared with $10.1 million in last year's quarter, with the lower results
reflecting an unfavorable product mix and higher manufacturing and operating
costs, together with the adverse impact of the stronger U.S. dollar in Europe
($1.3 million).
Pharmaceutical, Food and Beverage ("PFB")
Sales for the PFB segment were $55.6 million for the third quarter of
2000, a 36% increase compared with $41.0 million for the third quarter of 1999,
while operating income increased to $12.7 million from $11.4 million last year.
The increase in sales was attributable to the Alginates
14
<PAGE>
business, acquired in October 1999, which recorded sales of $15.1 million
in the third quarter of 2000. Sales for the remainder of the PFB segment
decreased by $0.5 million as favorable volumes, mainly in the oral care and
antiseptics markets, were offset by the unfavorable impact of the stronger U.S.
dollar in Europe($1.6 million).
Operating income for the Pharmaceutical and Beverage businesses
decreased 19% in the third quarter of 2000 compared with the same period in
1999. The principal factors for the decline were the adverse effect of the
stronger U.S. dollar in Europe ($1.4 million), unfavorable pricing and higher
operating expenses. The unfavorable results for the Pharmaceutical and Beverage
businesses were offset by the contribution to operating income by the Alginates
business.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the third quarter of 2000 were $75.5 million compared with
$80.2 million in the third quarter of 1999. The lower sales were primarily
attributable to a 39% sales decrease for the Fine Chemicals business, which was
significantly impacted by the expiration of a substantial custom manufacturing
agreement at the end of 1999. Higher sales volumes of other Fine Chemicals
products partially offset the impact of this contract expiration. Sales for the
Performance Chemicals business decreased by 2%, primarily due to unfavorable
pricing and the adverse effect of the stronger U.S. dollar in Europe($0.6
million). Mostly offsetting these sales declines were 6% higher sales for the
Industrial business, reflecting increased volumes for butanediol and solvents,
including $5.9 million in sales from product exchange arrangements pursuant to
which the Company sold butanediol, at cost, to other butanediol producers,
partially offset by continued unfavorable pricing for butanediol and solvents,
and by the adverse effect of the stronger U.S. dollar in Europe ($3.7 million).
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was breakeven for the third quarter of 2000 versus $14.1
million income for the same period last year. The principal factors for this
decline were higher raw material and energy costs, significantly lower pricing
in the Industrial business, and the adverse impact from the expiration of the
Fine Chemicals custom manufacturing agreement.
Mineral Products
Sales for the Mineral Products segment for the third quarter of 2000
were $20.2 million compared with $23.3 million for the third quarter of 1999.
The lower sales were attributable to substantially lower trade sales, resulting
from the loss of two major trade customers for colored roofing granules in the
fourth quarter of 1999. Sales to Building Materials Corporation of America
("BMCA"), an affiliate, increased 3% in the third quarter of 2000 compared with
the same period last year due to higher volumes. Operating income for the third
quarter of 2000 was $3.4 million compared with $4.9 million for the third
quarter of 1999, reflecting the
15
<PAGE>
impact of the trade contract expirations and, to a lesser extent, higher
energy costs.
RESULTS OF OPERATIONS - FIRST NINE MONTHS 2000 COMPARED WITH
FIRST NINE MONTHS 1999
For the first nine months of 2000, the Company recorded income from
continuing operations of $44.5 million ($.65 diluted earnings per share)
compared with $43.0 million ($.63 diluted earnings per share) for the same
period in 1999. The results for the first nine months of 2000 include a pre-tax
gain of $3.5 million from the settlement of a pre-1997 contract termination
dispute relating to the Mineral Products business segment, while the results for
the first nine months of 1999 included an $8.5 million pre-tax gain from the
sale of the Company's pearlescent pigments business and a $1.5 million charge
related to staff reduction and restructuring programs. Excluding the effect of
such non-recurring items in each period, income from continuing operations for
the first nine months of 2000 was $42.3 million ($.62 diluted earnings per
share) compared with $38.4 million ($.56 diluted earnings per share) for the
first nine months of 1999. On a comparable basis, the improved results were
attributable to higher investment income, partially offset by lower operating
income and higher interest expense. Including income from discontinued operation
of $26.3 million ($.38 diluted earnings per share), which reflected an after-tax
gain on the sale of the Company's Filter Products business of $24.5 million, net
income for the first nine months of 1999 was $69.2 million ($1.01 diluted
earnings per share).
Net sales for the first nine months of 2000 were $594.1 million compared
with $583.0 million for the same period in 1999. The increase in sales resulted
primarily from $50.0 million of sales from the Alginates business that was
acquired in October 1999 and, to a lesser extent, higher sales of butanediol and
solvents due to higher volumes. Offsetting these sales increases were lower
sales for the Fine Chemicals business and the Mineral Products business segment
as a result of customer contracts that expired in each of the businesses at the
end of 1999, lower sales volumes in the Performance Chemicals business, lower
pricing in butanediol and solvents and in the Personal Care business segment,
and the adverse effect of the stronger U.S. dollar in Europe($18.3 million). The
higher sales reflected 7%, 9% and 18% sales increases in Europe and the
Asia-Pacific and Latin America regions, respectively, partially offset by 4%
lower sales in the U.S.
Operating income for the first nine months of 2000 was $79.2 million
compared with $116.7 million (excluding nonrecurring gains and charges
previously discussed) for the first nine months of 1999. The lower operating
results for the first nine months of 2000 were attributable primarily to lower
results in the Personal Care business segment due to an unfavorable product mix
and higher manufacturing costs, lower sales volumes
16
<PAGE>
in Fine Chemicals, Mineral Products and Performance Chemicals, higher raw
material and energy costs, continued lower pricing in butanediol and solvents,
and the adverse effect of the stronger U.S. dollar ($10.0 million), partially
offset by the contribution to operating income by the Alginates business.
Selling, general and administrative expenses increased slightly in the first
nine months of 2000, as a reduction in administrative expenses that resulted
from the Company's third quarter 1999 reduction in corporate staff and other
expense reduction efforts were offset by higher research and development
spending and higher selling and distribution expenses.
Interest expense for the first nine months of 2000 was $62.7 million
compared with $58.8 million for the same period last year. The increase was due
to higher average interest rates, partially offset by lower average borrowings.
Other income, net, for the first nine months of 2000 was $48.5 million compared
with $1.2 million for the first nine months of 1999, with the improvement the
result of higher investment income, reflecting the pre-tax gain of $36.8
million, after expenses, from the sale of the Company's investment in Dexter.
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 segment.
Personal Care
Sales for the first nine months of 2000 were $140.0 million compared with
$143.4 million for the same period last year. The lower sales resulted primarily
from the unfavorable impact of the stronger U.S. dollar in Europe($3.8 million),
and the continued lower average pricing in both skin care and hair care
products, and also reflected the absence of sales from the pearlescent pigments
business, which recorded $1.3 million of sales in the first quarter of 1999
prior to its sale.
Operating income for the first nine months of 2000 was $22.0 million
compared with $41.6 million in last year's nine-month period, which included the
$8.5 million pre-tax gain from the sale of the pearlescent pigments business.
Excluding the effect of that gain, operating income decreased by $11.0 million,
with the unfavorable results reflecting an unfavorable product mix and higher
manufacturing and operating costs, lower average pricing and the adverse impact
of the stronger U.S. dollar in Europe($3.0 million).
Pharmaceutical, Food and Beverage ("PFB")
Sales for the PFB segment were $174.6 million for the first nine months of
2000, a 39% increase compared with $125.6 million for the first nine months of
1999, while operating income increased to $37.6 million
17
<PAGE>
versus $34.4 million last year. The increase in sales and operating income
were both attributable to the Alginates business, acquired in October 1999,
which recorded sales of $50.0 million in the first nine months of 2000. Sales
for the remainder of the PFB segment decreased by $1.0 million as a result of
the unfavorable impact of the stronger U.S. dollar in Europe ($4.3 million),
partially offset by increased volumes in the excipients and oral care markets
and the Beverage business.
Operating income for the Pharmaceutical and Beverage businesses decreased
16% in the first nine months of 2000 compared with the same period in 1999. The
principal factors for the decline were the adverse effect of the stronger U.S.
dollar in Europe ($3.4 million), a lower gross margin due to higher
manufacturing costs, and higher operating expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first nine months of 2000 were $222.6 million compared with
$242.4 million in the same period in 1999. The lower sales were primarily
attributable to a 32% sales decrease for the Fine Chemicals business, which was
significantly impacted by the expiration of a substantial custom manufacturing
agreement at the end of 1999. Higher sales volumes of other Fine Chemicals
products partially offset the impact of this contract expiration. Sales for the
Performance Chemicals business decreased by 10%, primarily due to lower sales
volumes of agricultural and polymer products in Europe and North America, and
the adverse effect of the stronger U.S. dollar in Europe($1.9 million). Sales
for the Industrial business increased by 3%, reflecting increased sales volumes
for butanediol and solvents, including $10.7 million in sales from product
exchange arrangements pursuant to which the Company sold butanediol, at cost, to
other butanediol producers, partially offset by continued unfavorable pricing
for butanediol and solvents.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $10.8 million for the first nine months of 2000 versus
$35.9 million for the same period last year. The principal factors for this
decline were the adverse impact from the expiration of the Fine Chemicals custom
manufacturing agreement, the unfavorable pricing in the Industrial business,
higher raw material and energy costs in the Industrial business, and 29% lower
Performance Chemicals results due to the lower sales volumes, partially offset
by the impact of the higher volumes for the Industrial business.
Mineral Products
Sales for the Mineral Products segment were $56.9 million for the first
nine months of 2000 compared with $71.7 million for the same period last year.
The decline in sales was attributable to substantially lower trade sales,
resulting from the loss of two major trade customers for colored roofing
granules in the fourth quarter of 1999. Operating income for the first nine
months of 2000 decreased 42% to $8.7 million compared with $14.9 million for the
same period last year, mainly reflecting the
18
<PAGE>
impact of the trade contract expirations and, to a lesser extent, higher
energy costs.
LIQUIDITY AND FINANCIAL CONDITION
During the first nine months of 2000, the Company's net cash flow
before financing activities was $8.2 million, including $126.7 million of cash
generated from operations, the reinvestment of $44.2 million for capital
programs, a $4.9 million cash arbitration award which resulted in an adjustment
of the purchase price of the acquisition of the Kelco Alginates business, and
the use of $79.1 million of cash for net purchases of available-for-sale
securities.
Cash invested in additional working capital totaled $2.8 million during
the first nine months of 2000, mainly reflecting a $7.4 million increase in
receivables and a $1.8 million increase in inventories, partially offset by a
$4.0 million net increase in payables and accrued liabilities. The net cash
generated from operating activities also included a $46.1 million cash inflow
from net sales of trading securities and a $6.6 million loan against
Company-owned insurance policies.
Net cash used in financing activities during the first nine months of
2000 totaled $16.1 million, mainly reflecting $10.5 million in repayments of
long-term debt and a $5.1 million repayment related to the Company's sale of
domestic trade accounts receivable, partially offset by a $5.8 million increase
in short-term borrowings and a $1.8 million increase in borrowings under the
Company's bank revolving credit facility. In addition, financing activities
included an $8.6 million cash outlay for repurchases of common stock pursuant to
the Company's repurchase program.
As a result of the foregoing factors, cash and cash equivalents
decreased by $7.9 million during the first nine months of 2000 to $15.4 million,
excluding $553.0 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 and a writedown to fair value of certain butanediol 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, principally for
decommissioning, demolition and remediation, and severance costs. During 1999
and the first six months of 2000, $5.4 million of costs were charged against
this reserve. In addition, in 1999, the Company reversed $1.9 million of such
previously recorded restructuring reserves, representing an excess demolition
reserve of $0.8 million and $1.1 million of other reserves, mainly for raw
materials contract terminations, which were no longer required. This program was
completed in the third quarter of 2000.
19
<PAGE>
See Note 9 to Consolidated Financial Statements for information regarding
contingencies.
* * *
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. Important factors that could cause such differences
are discussed in the Company's filings with the U.S. Securities and Exchange
Commission. 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.
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, 1999,
equity-related financial instruments employed by the Company to reduce market
risk included long contracts valued at $50.1 million and short contracts valued
at $6.5 million. All short contracts were terminated in the first quarter of
2000. Since such instruments are marked-to-market each month, with unrealized
gains and losses included in the results of operations, there was no economic
cost to the Company to terminate these instruments.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule for the nine months ended October 1,
2000, 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 October 1, 2000.
21
<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: November 14, 2000 BY: /s/Randall R. Lay
----------------- -----------------
Randall R. Lay
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
<PAGE>
