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 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 August 11, 2000, 68,010,502 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>
SECOND QUARTER ENDED SIX MONTHS ENDED
--------------------- -------------------
JULY 4, JULY 2, JULY 4, JULY 2,
1999 2000 1999 2000
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................ $ 193,183 $ 200,257 $ 394,831 $ 398,198
Cost of products sold................ (111,424) (126,966) (230,809) (256,400)
Selling, general and administrative.. (39,199) (39,488) (79,005) (78,350)
Gain on sale of assets............... - - 8,541 -
Goodwill amortization................ (4,091) (4,047) (8,286) (8,095)
--------- --------- --------- --------
Operating income..................... 38,469 29,756 85,272 55,353
Interest expense..................... (19,520) (21,193) (39,760) (40,915)
Gain on contract settlement.......... - - - 3,450
Other income (expense), net.......... 6,047 6,634 (2,829) 9,097
-------- --------- --------- --------
Income from continuing operations
before income taxes................ 24,996 15,197 42,683 26,985
Income taxes......................... (8,777) (5,338) (14,982) (9,454)
--------- --------- --------- --------
Income from continuing operations.... 16,219 9,859 27,701 17,531
Income from discontinued operation... 860 - 1,400 -
--------- --------- --------- --------
Net income........................... $ 17,079 $ 9,859 $ 29,101 $ 17,531
========= ========= ========= ========
Earnings per common share:
Basic:
Continuing operations............ $ .24 $ .14 $ .40 $ .25
Discontinued operation........... .01 - .02 -
--------- --------- --------- --------
Net income....................... $ .25 $ .14 $ .42 $ .25
========= ========= ========= ========
Diluted:
Continuing operations............ $ .24 $ .14 $ .40 $ .25
Discontinued operation........... .01 - .02 -
--------- --------- --------- --------
Net income....................... $ .25 $ .14 $ .42 $ .25
========= ========= ========= ========
Weighted average number of common
and common equivalent shares
outstanding:
Basic.............................. 68,298 68,846 68,533 68,847
========= ========= ======== ========
Diluted............................ 68,444 68,846 68,710 68,847
========= ========= ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
1
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
JULY 2,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 23,309 $ 13,112
Investments in trading securities.............. 10,395 7,892
Investments in available-for-sale securities... 344,905 411,432
Other short-term investments................... 41,900 49,618
Accounts receivable, trade, net................ 82,201 92,380
Accounts receivable, other..................... 23,410 24,025
Receivable from related parties, net........... 16,901 19,978
Inventories.................................... 151,775 148,515
Other current assets........................... 20,569 26,328
---------- ---------
Total Current Assets........................ 715,365 793,280
Property, plant and equipment, net............... 570,218 566,834
Goodwill, net.................................... 510,578 502,482
Other assets..................................... 39,147 34,017
---------- ---------
Total Assets..................................... $1,835,308 $1,896,613
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 82,531 $ 108,632
Current maturities of long-term debt........... 38,543 28,492
Accounts payable............................... 63,852 59,295
Accrued liabilities............................ 86,350 70,737
Income taxes................................... 6,006 7,683
---------- ---------
Total Current Liabilities.................... 277,282 274,839
---------- ---------
Long-term debt less current maturities........... 820,141 813,699
---------- ---------
Deferred income taxes............................ 89,796 111,691
---------- ---------
Other liabilities................................ 60,828 60,240
---------- ---------
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..................... 486,137 485,740
Treasury stock, at cost - 754,199 and
1,091,054 shares, respectively............... (7,344) (8,497)
Retained earnings.............................. 119,822 137,353
Accumulated other comprehensive income(loss)... (12,049) 20,853
---------- ---------
Total Stockholders' Equity................... 587,261 636,144
---------- ---------
Total Liabilities and Stockholders' Equity....... $1,835,308 $1,896,613
========== ==========
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
-------------------
JULY 4, JULY 2,
1999 2000
-------- ---------
(THOUSANDS)
Cash and cash equivalents, beginning of period........... $ 23,130 $ 23,309
-------- --------
Cash provided by operating activities:
Net income............................................. 29,101 17,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operation................. (1,400) -
Gain on sale of assets............................. (8,541) -
Depreciation....................................... 24,139 25,027
Goodwill amortization.............................. 8,286 8,095
Deferred income taxes.............................. 6,205 (323)
Unrealized gains on trading securities and other
short-term investments........................... (23,970) (20,870)
Increase in working capital items...................... (17,383) (27,360)
Purchases of trading securities........................ (126,989) (36,889)
Proceeds from sales of trading securities.............. 150,937 52,544
Increase in net receivable from related parties........ (10,962) (3,077)
Change in cumulative translation adjustment............ (14,747) (6,709)
Other, net............................................. 6,256 10,117
-------- --------
Net cash provided by continuing operations........... 20,932 18,086
Net cash provided by discontinued operation.......... 4,323 -
-------- --------
Net cash provided by operating activities................ 25,255 18,086
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition .................. (30,870) (22,241)
Proceeds from sale of assets........................... 11,533 -
Purchases of available-for-sale securities ............ (168,131) (123,293)
Purchases of held-to-maturity securities .............. (3,459) -
Purchases of other short-term investments ............. (5,600) -
Proceeds from sales of available-for-sale securities... 195,858 115,511
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...... 29,794 (30,023)
-------- --------
Cash provided by (used in) financing activities:
Proceeds (repayments)from sale of accounts receivable.. - (5,648)
Increase (decrease)in short-term debt.................. (1,526) 26,101
Increase (decrease) in borrowings under revolving
credit facility...................................... 161,400 (6,200)
Repayments of long-term debt........................... (200,223) (10,358)
Repurchases of common stock............................ (4,987) (2,685)
Other, net............................................. 859 530
-------- --------
Net cash provided by (used in)financing activities....... (44,477) 1,740
-------- --------
Net change in cash and cash equivalents.................. 10,572 (10,197)
-------- --------
Cash and cash equivalents, end of period................. $ 33,702 $ 13,112
======== ========
3
<PAGE>
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)-- (CONTINUED)
SIX MONTHS ENDED
-------------------
JULY 4, JULY 2,
1999 2000
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 45,910 $ 40,708
Income taxes..................................... 15,535 10,265
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 2,
2000, and the results of operations and cash flows for the periods ended July 4,
1999 and July 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 second
quarter and six months of 1999 are as follows:
Second Six
Quarter Months
1999 1999
----------- -----------
(Thousands)
Sales............................... $ 9,760 $ 20,282
Income before income taxes.......... 1,325 2,157
Income taxes........................ (465) (757)
Net income.......................... 860 1,400
5
<PAGE>
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
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
-------------------- ----------------
July 4, July 2, July 4, July 2,
1999 2000 1999 2000
------- -------- ------- -------
(Thousands)
<S> <C> <C> <C> <C>
Net income................................... $ 17,079 $ 9,859 $ 29,101 $ 17,531
-------- ------- -------- --------
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 $(6,278), $3,055,
$(4,915) and $(17,364) (1)................ 14,768 (4,342) 12,509 35,896
Less: reclassification adjustment for
gains (losses) included in net income,
net of income tax benefit of $1,362,
$333, $1,242 and $1,769 .................. (5,527) (715) (5,249) (3,715)
-------- ------- -------- --------
Total....................................... 20,295 (3,627) 17,758 39,611
Foreign currency translation adjustment..... (3,682) (427) (14,747) (6,709)
-------- ------- -------- --------
Total other comprehensive income (loss)....... 16,613 (4,054) 3,011 32,902
-------- ------- -------- --------
Comprehensive income ......................... $ 33,692 $ 5,805 $ 32,112 $ 50,433
======== ======= ======== ========
</TABLE>
(1) Included in "Investments in available-for-sale securities" at December 31,
1999 and July 2, 2000, respectively, is a $149.5 and $178.8 million
investment (based on market value) in Life Technologies Inc.,
representing approximately 14% of the outstanding common stock of Life
Technologies Inc. Included in "Investments in available-for-sale
securities" at December 31, 1999 and July 2, 2000, respectively, is a $91.4
and $110.4 million investment (based on market value) in Dexter Corporation
("Dexter"), representing approximately 10% of the outstanding common stock
of Dexter.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in the components of "Accumulated other comprehensive income
(loss)" for the six months ended July 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....... 39,611 (6,709) 32,902
-------- -------- --------
Balance, July 2, 2000....... $ 41,455 $(20,602) $ 20,853
======== ======== ========
NOTE 4. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- --------------------
July 4, July 2, July 4, July 2,
1999 2000 1999 2000
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
Net sales:
Personal Care............................. $ 47,387 $ 46,861 $ 99,659 $ 95,467
Pharmaceutical, Food and Beverage......... 41,712 59,129 84,549 118,973
Performance Chemicals, Fine Chemicals and
Industrial.............................. 78,809 76,091 162,184 147,021
--------- --------- --------- ---------
Total Specialty Chemicals............... 167,908 182,081 346,392 361,461
Mineral Products (1)...................... 25,275 18,176 48,439 36,737
--------- --------- --------- ---------
Net sales................................... $ 193,183 $ 200,257 $ 394,831 $ 398,198
========= ========= ========= =========
Operating income(2):
Personal Care(3).......................... $ 12,197 $ 6,195 $ 31,479 $ 14,508
Pharmaceutical, Food and Beverage......... 12,247 12,079 22,956 24,855
Performance Chemicals, Fine Chemicals and
Industrial.............................. 9,417 8,853 21,831 10,755
--------- --------- --------- ---------
Total Specialty Chemicals............... 33,861 27,127 76,266 50,118
Mineral Products.......................... 5,764 2,674 9,977 5,303
--------- --------- --------- ---------
Total segment operating income............ 39,625 29,801 86,243 55,421
Unallocated corporate office.............. (1,156) (45) (971) (68)
--------- --------- --------- ---------
Total operating income...................... 38,469 29,756 85,272 55,353
Interest expense and other, net............. (13,473) (14,559) (42,589) (28,368)
--------- --------- --------- ---------
Income from continuing operations before
income taxes............................... $ 24,996 $ 15,197 $ 42,683 $ 26,985
========= ========= ========= =========
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $16.5 and $15.5 million for the second quarter of
1999 and 2000, respectively, and $32.7 and $31.8 million for the first six
months of 1999 and 2000, respectively.
(2) Operating income for the second quarter and first six 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 six months of 1999 includes a
pre-tax gain of $8,5 million from the sale of the pearlescent pigments
product line.
NOTE 5. INVENTORIES
Inventories comprise the following:
December 31, July 2,
1999 2000
------------ ----------
(Thousands)
Finished goods................ $107,583 $ 80,030
Work-in-process............... 18,457 35,098
Raw materials and supplies.... 25,735 33,387
-------- ---------
Inventories................... $151,775 $ 148,515
======== =========
At December 31, 1999 and July 2, 2000, $47.7 and $42.3 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 $0.4 million lower at July 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
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The
reserve balance as of July 2, 2000 was $0.2 million, representing remaining
demolition costs. This program will be 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- tax
provision for severance of $2.3 million. This program was completed in the
second quarter of 2000.
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 and SFAS No. 138, 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. 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,
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 - SECOND QUARTER 2000 COMPARED WITH
SECOND QUARTER 1999
The Company recorded second quarter 2000 income from continuing operations
of $9.9 million ($.14 diluted earnings per share) compared with $16.2 million
($.24 diluted earnings per share) in the second quarter of 1999. The lower
results were attributable to lower operating income and higher interest expense.
Net sales for the second quarter of 2000 were $200.3 million compared with
$193.2 million for the same period in 1999. The increase in sales resulted
primarily from $16.7 million of sales from the Kelco 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 Mineral Products business segment and the Fine
Chemicals business 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 the adverse effect of
the stronger U.S. dollar ($5.6 million), particularly in Europe. The lower sales
reflected sales declines in the U.S., partially offset by 14%, 9% and 12% sales
increases in Europe, and the Asia-Pacific and Latin America regions,
respectively.
Operating income for the second quarter of 2000 was $29.8 million compared
with $38.5 million for the second quarter of 1999. The unfavorable operating
results for the second quarter of 2000 were attributable primarily to lower
results in the Personal Care business segment due to higher manufacturing costs
and an unfavorable product mix, the impact of the lower sales volumes for
Mineral Products and Fine Chemicals due to the expired customer contracts
previously mentioned, continued lower pricing in butanediol and solvents, and
the adverse effect of the stronger U.S. dollar ($2.5 million), partially offset
by improved results for the Industrial business due to the higher sales of
butanediol and solvents and by the contribution to operating income by the
alginates business. Selling, general and administrative expenses increased
slightly in the second 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 was offset by higher
research and development spending and higher selling and distribution expenses.
Interest expense for the second quarter of 2000 was $21.2 million versus
$19.5 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 second quarter was $6.6 million compared with $6.0 million
in last year's second quarter, with the increase primarily the result of lower
other nonoperating expenses.
11
<PAGE>
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 second quarter of 2000 were $46.9 million compared with
$47.4 million for the same period last year. The lower sales resulted primarily
from the unfavorable impact of the stronger U.S. dollar ($1.3 million), mainly
in Europe, partially offset by improved sales volumes in both skin care and hair
care products.
Operating income for the second quarter of 2000 was $6.2 million
compared with $12.2 million in last year's quarter, with the lower results
reflecting higher manufacturing costs and an unfavorable product mix, together
with the adverse impact of the stronger U.S. dollar in Europe.
Pharmaceutical, Food and Beverage ("PFB")
Sales for the PFB segment were $59.1 million for the second quarter of
2000, a 42% increase compared with $41.7 million for the second quarter of 1999,
while operating income decreased to $12.1 million from $12.2 million last year.
The increase in sales was attributable to the alginates business, acquired in
October 1999, which recorded sales of $16.7 million in the second quarter of
2000. Sales for the remainder of the PFB segment increased by $0.7 million as a
result of 7% favorable volumes, mainly in the Beverage business and the oral
care market, partially offset by the unfavorable impact of the stronger U.S.
dollar ($1.4 million), mainly in Europe.
Operating income for the Pharmaceutical and Beverage businesses
decreased 20% in the second 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 a lower gross margin due to higher
manufacturing costs. 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 second quarter of 2000 were $76.1 million compared with
$78.8 million in the second quarter of 1999. The lower sales were primarily
attributable to a 24% sales decrease for the Fine Chemicals business, which was
significantly impacted by the expiration of a substantial custom
12
<PAGE>
manufacturing agreement at the end of 1999. Higher sales volumes of other
Fine Chemicals products, mainly related to incremental new business, partially
offset the impact of this contract expiration. Sales for the Performance
Chemicals business decreased by 13%, primarily due to lower sales volumes of
agricultural and polymer products in Europe, North America and Latin America
and, to a lesser extent, unfavorable foreign exchange, mainly in Europe. Mostly
offsetting these sales declines were 14% higher sales for the Industrial
business, reflecting increased volumes for butanediol and solvents, including
$2.4 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 $8.9 million for the second quarter of 2000 versus $9.4
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 and 35% lower Performance Chemicals results due to the
lower sales volumes, partially offset by higher profits from the Industrial
business due to the increased sales volumes of butanediol and solvents.
Mineral Products
Sales for the Mineral Products segment for the second quarter of 2000
were $18.2 million compared with $25.3 million for the second 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, decreased 6% in the second quarter of 2000 compared with
the same period last year due to lower volumes. Operating income for the second
quarter of 2000 was $2.7 million compared with $5.8 million for the second
quarter of 1999, reflecting the impact of the trade contract expirations and the
lower sales volumes to BMCA.
RESULTS OF OPERATIONS - FIRST SIX MONTHS 2000 COMPARED WITH
FIRST SIX MONTHS 1999
For the first six months of 2000, the Company recorded income from
continuing operations of $17.5 million ($.25 diluted earnings per share)
compared with $27.7 million ($.40 diluted earnings per share) for the same
period in 1999. The results for the first six 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 six months of 1999 included an $8.5 million pre-tax gain from the sale
of the Company's pearlescent pigments business. Excluding the effect of such
non-recurring items in each period, income
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from continuing operations for the first six months of 2000 was $15.3
million ($.22 diluted earnings per share) compared with $22.2 million ($.32
diluted earnings per share) for the first six months of 1999. On a comparable
basis, the lower results were attributable to lower operating income, partially
offset by higher investment income.
Net sales for the first six months of 2000 were $398.2 million compared
with $394.8 million for the same period in 1999. The increase in sales resulted
primarily from $34.9 million of sales from the Kelco 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 Mineral Products business segment and the Fine Chemicals business
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 ($10.8 million), particularly
in Europe. The lower sales reflected sales declines in the U.S., partially
offset by 4%, 11% and 15% sales increases in Europe and the Asia-Pacific and
Latin America regions, respectively.
Operating income for the first six months of 2000 was $55.4 million
compared with $76.7 million (excluding the $8.5 million gain on the sale of the
pearlescent pigments business) for the first six months of 1999. The lower
operating results for the first six months of 2000 were attributable primarily
to lower results in the Personal Care business segment due to higher
manufacturing costs and an unfavorable product mix, lower sales volumes in
Mineral Products, Fine Chemicals and Performance Chemicals, continued lower
pricing in butanediol and solvents, and the adverse effect of the stronger U.S.
dollar ($5.6 million), partially offset by the contribution to operating income
by the alginates business. Selling, general and administrative expenses
decreased by $0.7 million in the first six 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 six months of 2000 was $40.9 million
compared with $39.8 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 six months of 2000 was $9.1 million versus
other expense, net, of $2.8 million for the first six months of 1999, with the
improvement primarily the result of 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.
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Personal Care
Sales for the first six months of 2000 were $95.5 million compared with
$99.7 million for the same period last year. The lower sales resulted primarily
from the unfavorable impact of the stronger U.S dollar ($2.3 million), mainly in
Europe, 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 six months of 2000 was $14.5 million
compared with $31.5 million in last year's six-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 $8.4 million,
with the unfavorable results reflecting higher manufacturing costs and an
unfavorable product mix, the lower average pricing and the adverse impact of the
stronger U.S. dollar in Europe.
Pharmaceutical, Food and Beverage ("PFB")
Sales for the PFB segment were $119.0 million for the first six months of
2000, a 41% increase compared with $84.5 million for the first six months of
1999, while operating income increased to $24.9 million versus $23.0 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 $34.9
million in the first six months of 2000. Sales for the remainder of the PFB
segment decreased by $0.5 million as a result of unfavorable foreign exchange
($2.7 million), mainly in Europe, partially offset by increased volumes in the
excipients and oral care markets and the Beverage business in the Asia-Pacific
and Latin America regions.
Operating income for the Pharmaceutical and Beverage businesses decreased
14% in the first six 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, a lower gross margin due to higher manufacturing costs, and
higher operating expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first six months of 2000 were $147.0 million compared with
$162.2 million in the same period in 1999. The lower sales were primarily
attributable to a 28% 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
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this contract expiration. Sales for the Performance Chemicals business
decreased by 15%, primarily due to lower sales volumes of agricultural products
in all regions and polymer products in Europe, and unfavorable exchange ($1.3
million), mainly in Europe. Sales for the Industrial business increased by 2%,
reflecting increased sales volumes for butanediol and solvents, including $4.9
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.
Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment was $10.8 million for the first six months of 2000 versus
$21.8 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
41% 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 $36.7 million for the first six
months of 2000 compared with $48.4 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. Sales to BMCA decreased 3% due to lower volumes.
Operating income for the first six months of 2000 decreased 47% to $5.3 million
compared with $10.0 million for the same period last year, mainly reflecting the
impact of the trade contract expirations.
LIQUIDITY AND FINANCIAL CONDITION
During the first six months of 2000, the Company's net cash outflow
before financing activities was $11.9 million, including $18.1 million of cash
generated from operations, the reinvestment of $27.1 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 $7.8 million of cash for net purchases of available-for-sale
securities.
Cash invested in additional working capital totaled $27.4 million
during the first six months of 2000, mainly reflecting an $18.5 million net
decrease in payables and accrued liabilities and a $5.1 million increase in
receivables. The net cash generated from operating activities also included a
$15.7 million cash inflow from net sales of trading securities and a $6.6
million loan against Company-owned insurance policies.
Net cash provided by financing activities during the first six months
of 2000 totaled $1.7 million, reflecting a $26.1 million increase in short-
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term borrowings, offset by $10.4 million in repayments of long-term debt, a
$6.2 million decrease in borrowings under the Company's bank revolving credit
facility, and a $5.6 million repayment related to the Company's sale of domestic
trade accounts receivable. In addition, financing activities included a $2.7
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 $10.2 million during the first six months of 2000 to $13.1 million,
excluding $468.9 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. The reserve
balance as of July 2, 2000 was $0.2 million, representing remaining demolition
costs. This program will be 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-tax
provision for severance of $2.3 million. This program was completed in the
second quarter of 2000.
On June 26, 2000, the Company commenced a tender offer for all of the
outstanding shares of Dexter Corporation ("Dexter") at a price of $45 per share
in cash. On July 11, 2000, the Company terminated its tender offer in light of
Dexter's agreement with Invitrogen Corp. ("Invitrogen"), in which Invitrogen
would acquire all of Dexter's outstanding shares and all of the outstanding
shares of Life Technologies Inc. (Dexter's 75%-owned subsidiary) not owned by
Dexter, in each case for cash and stock.
See Note 9 to Consolidated Financial Statements for information
regarding contingencies.
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* * *
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.
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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.
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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 15, 2000, each
nominated director was reelected, with at least 62,933,634 votes in favor of and
not more than 1,772,400 votes withheld from, each nominee; the adoption of the
Company's 2000 Long-Term Incentive Plan was approved, with 53,309,826 votes in
favor, 3,671,369 votes against and 59,836 abstentions; and the proposed
amendment to the Company's 1991 Incentive Plan for Key Employees and Directors
was approved, with 56,615,777 votes in favor, 5,390,500 votes against and 34,754
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule for the six months ended July 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 July 2, 2000.
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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 15, 2000 BY: /s/Randall R. Lay
--------------- -----------------
Randall R. Lay
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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