SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 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 May 12, 2000, 68,949,702 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)
QUARTER ENDED,
---------------------
APRIL 4, APRIL 2,
1999 2000
--------- ----------
Net sales............................... $ 201,648 $ 197,941
Cost of products sold................... (119,385) (129,434)
Selling, general and administrative..... (39,806) (38,862)
Gain on sale of assets.................. 8,541 -
Goodwill amortization................... (4,195) (4,048)
--------- ----------
Operating income........................ 46,803 25,597
Interest expense........................ (20,240) (19,722)
Gain on contract settlement ............ - 3,450
Other income (expense), net............. (8,876) 2,463
--------- ----------
Income from continuing operations
before income taxes................... 17,687 11,788
Income taxes............................ (6,205) (4,116)
--------- ----------
Income from continuing operations....... 11,482 7,672
Income from discontinued operation...... 540 -
--------- ----------
Net income.............................. $ 12,022 $ 7,672
========= ==========
Earnings per common share:
Basic:
Continuing operations............... $ .16 $ .11
Discontinued operation.............. .01 -
--------- ----------
Net income.......................... $ .17 $ .11
========= ==========
Diluted:
Continuing operations............... $ .16 $ .11
Discontinued operation.............. .01 -
--------- ----------
Net income.......................... $ .17 $ .11
========= ==========
Weighted average number of common
and common equivalent shares
outstanding:
Basic................................. 68,760 68,849
========= ==========
Diluted............................... 68,978 68,857
========= ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
1
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
APRIL 2,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 23,309 $ 44,952
Investments in trading securities.............. 10,395 5,400
Investments in available-for-sale securities... 344,905 440,278
Other short-term investments................... 41,900 46,077
Accounts receivable, trade, net................ 82,201 92,868
Accounts receivable, other..................... 23,410 24,955
Receivable from related parties, net........... 16,901 19,305
Inventories.................................... 151,775 150,894
Other current assets........................... 20,569 25,428
---------- ----------
Total Current Assets............................. 715,365 850,157
Property, plant and equipment, net............... 570,218 565,729
Goodwill, net.................................... 510,578 506,530
Other assets..................................... 39,147 39,189
---------- ----------
Total Assets..................................... $1,835,308 $1,961,605
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 82,531 $ 124,097
Current maturities of long-term debt........... 38,543 38,498
Accounts payable............................... 63,852 67,149
Accrued liabilities............................ 86,350 76,888
Income taxes................................... 6,006 7,854
---------- ----------
Total Current Liabilities.................... 277,282 314,486
---------- ----------
Long-term debt less current maturities........... 820,141 841,209
---------- ----------
Deferred income taxes............................ 89,796 112,556
---------- ----------
Other liabilities................................ 60,828 60,139
---------- ----------
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..................... 486,137 485,931
Treasury stock, at cost - 754,199 and
596,754 shares, respectively................. (7,344) (5,812)
Retained earnings.............................. 119,822 127,494
Accumulated other comprehensive income(loss)... (12,049) 24,907
---------- ----------
Total Stockholders' Equity................... 587,261 633,215
---------- ----------
Total Liabilities and Stockholders' Equity....... $1,835,308 $1,961,605
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER ENDED
-------------------
APRIL 4, APRIL 2,
1999 2000
-------- ---------
(THOUSANDS)
Cash and cash equivalents, beginning of period........... $ 23,130 $ 23,309
-------- ---------
Cash provided by (used in) operating activities:
Net income............................................. 12,022 7,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operation................. (540) -
Gain on sale of assets............................. (8,541) -
Depreciation....................................... 12,000 12,432
Goodwill amortization.............................. 4,195 4,048
Deferred income taxes.............................. (2,939) (1,242)
Unrealized gains on trading securities and other
short-term investments........................... (8,424) (14,840)
Increase in working capital items...................... (17,856) (12,124)
Purchases of trading securities........................ (44,742) (18,906)
Proceeds from sales of trading securities.............. 52,336 34,564
Increase in net receivable from related parties........ (5,326) (2,404)
Change in cumulative translation adjustment............ (11,065) (6,282)
Other, net............................................. 1,849 2,878
-------- --------
Net cash provided by (used in) continuing operations. (17,031) 5,796
Net cash provided by discontinued operation.......... 1,866 -
-------- --------
Net cash provided by (used in) operating activities...... (15,165) 5,796
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures................................... (14,346) (11,284)
Proceeds from sale of assets........................... 11,533 -
Purchases of available-for-sale securities............ (52,006) (94,678)
Proceeds from sales of available-for-sale securities... 6,920 64,398
Proceeds from held-to-maturity securities.............. 11,440 -
Proceeds from sales of other short-term investments.... 8,935 -
-------- --------
Net cash used in investing activities.................... (27,524) (41,564)
-------- --------
Cash provided by financing activities:
Proceeds (repayments)from sale of accounts receivable.. - (5,675)
Increase in short-term debt............................ 43,517 41,566
Increase in borrowings under revolving credit facility. 207,000 21,100
Repayments of long-term debt........................... (200,097) (110)
Repurchases of common stock............................ (3,046) -
Other, net............................................. 396 530
-------- --------
Net cash provided by financing activities................ 47,770 57,411
-------- --------
Net change in cash and cash equivalents.................. 5,081 21,643
-------- --------
Cash and cash equivalents, end of period................. $ 28,211 $ 44,952
======== ========
3
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INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)-- (CONTINUED)
QUARTER ENDED
-------------------
APRIL 4, APRIL 2,
1999 2000
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 25,464 $ 17,007
Income taxes..................................... 8,543 4,722
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for International Specialty Products
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company at April 2,
2000, and the results of operations and cash flows for the periods ended April
4, 1999 and April 2, 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. 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.
Summary operating results for the Filter Products business for the first
quarter of 1999 are as follows:
First
Quarter
1999
-----------
(Thousands)
Sales.......................................... $10,522
Income before income taxes..................... 832
Income taxes................................... (292)
Net income..................................... 540
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. 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 3. COMPREHENSIVE INCOME
Quarter Ended
--------------------
April 4, April 2,
1999 2000
--------- ---------
(Thousands)
Net income..................................... $ 12,022 $ 7,672
-------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains (losses) arising
during the period, net of income tax
(provision) benefit of $1,363
and $(20,419).............................. (2,259) 40,238
Less: reclassification adjustment
for gains (losses) included in net income,
net of income tax (provision) benefit of
$(120) and $ 1,436 ......................... 278 (3,000)
--------- ---------
Total........................................ (2,537) 43,238
Foreign currency translation adjustment...... (11,065) (6,282)
--------- ---------
Total other comprehensive income (loss)........ (13,602) 36,956
--------- ---------
Comprehensive income (loss).................... $ (1,580) $ 44,628
========= =========
Changes in the components of "Accumulated other comprehensive income
(loss)" for the quarter ended April 2, 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....... 43,238 (6,282) 36,956
-------- -------- --------
Balance, April 2, 2000...... $ 45,082 $(20,175) $ 24,907
======== ======== ========
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. BUSINESS SEGMENT INFORMATION
Quarter Ended
---------------------
April 4, April 2,
1999 2000
--------- ---------
(Thousands)
Net sales:
Personal Care......................................... $ 52,272 $ 48,606
Pharmaceutical, Food and Beverage..................... 42,837 59,844
Performance Chemicals, Fine Chemicals and
Industrial.......................................... 83,375 70,930
--------- ---------
Total Specialty Chemicals........................... 178,484 179,380
Mineral Products (1).................................. 23,164 18,561
--------- ---------
Net sales............................................... $ 201,648 $ 197,941
========= =========
Operating income(2):
Personal Care(3)...................................... $ 19,282 $ 8,313
Pharmaceutical, Food and Beverage..................... 10,709 12,776
Performance Chemicals, Fine Chemicals and
Industrial.......................................... 12,414 1,902
-------- ---------
Total Specialty Chemicals........................... 42,405 22,991
Mineral Products...................................... 4,213 2,629
-------- ---------
Total segment operating income........................ 46,618 25,620
Unallocated corporate office.......................... 185 (23)
--------- ---------
Total operating income.................................. 46,803 25,597
Interest expense and other, net......................... (29,116) (13,809)
--------- ---------
Income from continuing operations before
income taxes........................................... $ 17,687 $ 11,788
========= =========
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $16.2 and $16.3 million for the first quarter of
1999 and 2000, respectively.
(2) Operating income for the first quarter 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 quarter of 1999 includes a
pre-tax gain of $8.5 million from the sale of the pearlescent pigments
product line.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INVENTORIES
Inventories comprise the following:
December 31, April 2,
1999 2000
------------ ----------
(Thousands)
Finished goods................ $107,583 $ 96,835
Work-in-process............... 18,457 29,671
Raw materials and supplies.... 25,735 24,388
-------- ---------
Inventories................... $151,775 $ 150,894
======== =========
At December 31, 1999 and April 2, 2000, $47.7 and $45.4 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 $0.2 million lower at April 2,
2000.
NOTE 6. 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 7. 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
quarter of 2000, $5.1 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. The reserve balance as of April 2,
2000 was $0.5 million, representing remaining demolition costs. The Company
expects this program to be completed by July 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
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
through normal attrition or termination, for which the Company recorded a pre-
tax provision for severance of $2.3 million. The applicable severance reserve
remaining as of April 2, 2000 was $0.1 million.
NOTE 8. 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, 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 9. 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.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Tax Claim against GAF
Certain subsidiaries of the Company were members of the GAF Corporation
("GAF") consolidated Federal income tax group (the "GAF Group") in 1990 and,
accordingly, would be severally liable for any tax liability of the GAF Group in
respect of such year. Effective as of January 1, 1997, neither the Company nor
any of its subsidiaries are members of the GAF Group.
On September 15, 1997, GAF received a notice from the Internal Revenue
Service (the "IRS") of a deficiency in the amount of $84.4 million (after taking
into account the use of net operating losses and foreign tax credits otherwise
available for use in later years) in connection with the formation in 1990 of
Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants 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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - First Quarter 2000 Compared With
First Quarter 1999
The Company recorded first quarter 2000 income from continuing operations
of $7.7 million ($.11 diluted earnings per share) compared with $11.5 million
($.16 diluted earnings per share) in the first quarter of 1999. The results for
the first quarter 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 quarter of 1999
included an $8.5 million pre-tax gain from the sale of the Company's pearlescent
pigments business, a non-core product line. Excluding the effect of such
non-recurring items in each period, income from continuing operations for the
first quarter of 2000 was $5.4 million ($.08 diluted earnings per share)
compared with $5.9 million ($.09 diluted earnings per share) for the first
quarter of 1999. On a comparable basis, the lower results were attributable to
lower operating income, offset by higher other income.
Net sales for the first quarter of 2000 were $197.9 million compared with
$201.6 million for the same period in 1999. The decline in sales was
attributable to lower sales in all business segments except the Pharmaceutical,
Food and Beverage business segment, which included $18.2 million of sales from
the Kelco Alginates business that was acquired in October 1999. The decrease
resulted primarily from lower sales for the Fine Chemicals business and 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 ($5.4 million), particularly
in Europe. The lower sales reflected sales declines in the U.S. and Europe,
partially offset by 14% and 19% sales increases in the Asia Pacific and Latin
America regions, respectively.
Operating income for the first quarter of 2000 was $25.6 million compared
with $38.3 million (excluding the $8.5 million gain on the sale of the
pearlescent pigments business) for the first quarter of 1999. The unfavorable
operating results for the first quarter of 2000 were attributable to a lower
gross margin due mainly to continued lower pricing in butanediol and solvents,
the impact of lower sales volumes due to the expired customer contracts
previously mentioned and the adverse effect of the stronger U.S. dollar ($3.0
million). Operating income for the Pharmaceutical, Food and Beverage business
segment increased 19%, reflecting the results of the alginates business acquired
in October 1999. The operating income for all other business segments declined
in the quarter as a result of the factors discussed above. Selling, general and
administrative expenses decreased by $0.9 million (2%) in the first quarter of
2000, as an 11% reduction in administrative expenses that resulted from the
Company's third quarter 1999 reduction in corporate staff and other
11
<PAGE>
expense reduction efforts were partially offset by 13% higher research and
development spending.
Interest expense for the first quarter of 2000 was $19.7 million compared
with $20.2 million for the same period last year. The decrease was due to lower
average borrowings, partially offset by higher average interest rates. Other
income, net, for the quarter was $2.4 million compared with other expense, net,
of $8.9 million in last year's first quarter, with the improvement due
principally to $9.6 million higher 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 segment.
Personal Care
Sales in the first quarter of 2000 were $48.6 million compared with
$52.3 million for the same period last year. The lower sales resulted from the
continued lower average pricing in both skin care and hair care and the
unfavorable impact of the stronger U.S. dollar in Europe, and also reflect 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 quarter of 2000 was $8.3 million
compared with $19.3 million in last year's quarter, 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 $2.4 million,
primarily reflecting the lower pricing and sales volumes discussed above.
Pharmaceutical, Food and Beverage ("PFB")
Sales for the PFB segment were $59.8 million for the first quarter of
2000, a 40% increase compared with $42.8 million for the first quarter of 1999,
while operating income increased by 19% to $12.8 million versus $10.7 million
last year. The increases in sales and operating income were both attributable to
the alginates business, acquired in October 1999, which recorded sales of $18.2
million in the first quarter of 2000. Sales for the remainder of the PFB segment
decreased by $1.2 million as a result of unfavorable foreign exchange in Europe
($1.4 million), partially offset by increased volumes for the Pharmaceutical
business, primarily in the antiseptic market in the Asia Pacific region.
12
<PAGE>
Operating income for the Pharmaceutical and Beverage businesses
decreased 7% in the first 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 and higher operating expenses (principally 24% higher
research and development spending), partially offset by the impact of increased
Pharmaceutical sales volumes.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first quarter of 2000 were $70.9 million compared with
$83.4 million in the first quarter of 1999. The lower sales were primarily
attributable to a 35% 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 could only partially offset the loss of this contract. Sales for the
Performance Chemicals business decreased by 17%, primarily due to lower sales
volumes in Europe. Sales for the Industrial business decreased by 7% due to
continued unfavorable pricing in butanediol, N-methyl pyrrolidone and
tetrahydrofuran, mainly in Europe, and the adverse impact of the stronger U.S.
dollar in Europe, partially offset by increased volumes, which included $2.5
million in sales from product exchange arrangements pursuant to which the
Company sold butanediol, at cost, to other butanediol producers.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $1.9 million for the first quarter of 2000 versus $12.4
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, and
the lower Performance Chemicals sales volumes in Europe.
Mineral Products
Sales for the Mineral Products segment for the first quarter of 2000
were $18.6 million compared with $23.2 million for the first quarter of 1999.
The lower sales were attributable to 68% lower trade sales, resulting from the
loss of two major trade customers for colored roofing granules in the fourth
quarter of 1999, partially offset by an additional $1.0 million in sales from
new customers in the first quarter of 2000. Sales to Building Materials
Corporation of America, an affiliate, increased slightly in the first quarter of
2000 over the same period last year. Operating income for the first quarter of
2000 was $2.6 million compared with $4.2 million for the first quarter of 1999,
reflecting the impact of the trade contract expirations.
13
<PAGE>
Liquidity and Financial Condition
During the first quarter of 2000, the Company's net cash outflow before
financing activities was $35.8 million, including $5.8 million of cash generated
from continuing operations, the reinvestment of $11.3 million for capital
programs and the use of $30.3 million of cash for net purchases of
available-for-sale securities.
Cash invested in additional working capital totaled $12.1 million
during the first quarter of 2000, mainly reflecting a $6.5 million increase in
receivables and a $4.2 million net decrease in payables and accrued liabilities.
The net cash generated from operating activities also included a $15.7 million
cash inflow from net sales of trading securities.
Net cash provided by financing activities during the first quarter of
2000 totaled $57.4 million, reflecting a $21.1 million increase in borrowings
under the Company's bank revolving credit facility and a $41.6 million increase
in short-term borrowings, partially offset by a $5.7 million repayment related
to the Company's sale of domestic trade accounts receivable.
As a result of the foregoing factors, cash and cash equivalents
increased by $21.6 million during the first quarter of 2000 to $45.0 million,
excluding $491.8 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 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 quarter of 2000, $5.1 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. The reserve
balance as of April 2, 2000 was $0.5 million, representing remaining demolition
costs. The Company expects this program to be completed by July 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-tax
provision for severance of $2.3 million. The applicable severance reserve
remaining as of April 2, 2000 was $0.1 million.
14
<PAGE>
On January 27, 2000, the Company announced that it had notified Dexter
Corporation ("Dexter") of its intent to present at Dexter's 2000 Annual Meeting
of Shareholders, and solicit proxies in favor of, a series of resolutions
designed to facilitate the Company's business combination proposal. Under the
proposal, as amended on March 23, 2000, Dexter shareholders would receive at
least $50 per share in cash, subject to the execution of a mutually acceptable
merger agreement. The Company has filed with the Securities and Exchange
Commission a preliminary proxy statement in connection with Dexter's Annual
Meeting. On March 23, 2000, the Company received a binding commitment from a
financial institution to provide, subject to customary conditions, senior credit
facilities in the aggregate amount of $1.825 billion to, among other things,
finance the acquisition of Dexter.
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. The forward-looking statements included herein are
made only as of the date of this Quarterly Report on Form 10-Q and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." As of December 31, 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. At April 2, 2000, the value of long contracts was $77.5
million, while 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.
16
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule for the quarter ended April 2, 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 April 2, 2000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL SPECIALTY PRODUCTS INC.
DATE: May 16, 2000 BY: /s/Randall R. Lay
------------ -----------------
Randall R. Lay
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 2000 10-Q OF INTERNATIONAL SPECIALTY PRODUCTS INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-02-2000
<CASH> 44,952
<SECURITIES> 445,678
<RECEIVABLES> 92,868
<ALLOWANCES> 0
<INVENTORY> 150,894
<CURRENT-ASSETS> 850,157
<PP&E> 565,729
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,961,605
<CURRENT-LIABILITIES> 314,486
<BONDS> 841,209
0
0
<COMMON> 695
<OTHER-SE> 632,520
<TOTAL-LIABILITY-AND-EQUITY> 1,961,605
<SALES> 197,941
<TOTAL-REVENUES> 197,941
<CGS> 129,434
<TOTAL-COSTS> 129,434
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 19,722
<INCOME-PRETAX> 11,788
<INCOME-TAX> 4,116
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