<PAGE>
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13255
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SOLUTIA INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1781797
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
- --------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 674-1000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO
BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING TWELVE 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
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
OUTSTANDING AT
CLASS SEPTEMBER 30, 1999
----- ------------------
COMMON STOCK, $0.01 PAR VALUE 110,143,102 SHARES
- ----------------------------- ------------------
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
NET SALES.......................................... $ 731 $ 703 $2,094 $2,168
Cost of goods sold................................. 548 515 1,613 1,587
----- ----- ------ ------
GROSS PROFIT....................................... 183 188 481 581
Marketing expenses................................. 38 35 108 109
Administrative expenses............................ 29 36 91 101
Technological expenses............................. 21 22 58 62
Amortization expense............................... 1 -- 2 --
----- ----- ------ ------
OPERATING INCOME................................... 94 95 222 309
Equity earnings from affiliates.................... 5 5 26 17
Interest expense................................... (11) (11) (30) (34)
Other income (expense)--net........................ 1 (1) 10 2
----- ----- ------ ------
INCOME BEFORE INCOME TAXES......................... 89 88 228 294
Income taxes....................................... 28 30 73 100
----- ----- ------ ------
NET INCOME......................................... $ 61 $ 58 $ 155 $ 194
===== ===== ====== ======
BASIC EARNINGS PER SHARE........................... $0.55 $0.50 $ 1.40 $ 1.67
===== ===== ====== ======
DILUTED EARNINGS PER SHARE......................... $0.53 $0.47 $ 1.34 $ 1.56
===== ===== ====== ======
Weighted average equivalent shares (in millions):
Basic.......................................... 110.3 115.6 111.1 116.3
Effect of dilutive securities:
Common share equivalents--common shares
issuable upon exercise of outstanding
stock options............................ 4.1 7.4 4.5 7.7
----- ----- ----- -----
Diluted........................................ 114.4 123.0 115.6 124.0
===== ===== ===== =====
<CAPTION>
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
NET INCOME......................................... $ 61 $ 58 $ 155 $ 194
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments................... 7 15 (19) 11
----- ----- ------ ------
COMPREHENSIVE INCOME............................... $ 68 $ 73 $ 136 $ 205
===== ===== ====== ======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 7 $ 89
Trade receivables, net of allowance of $7 in 1999 and
1998...................................................... 442 357
Miscellaneous receivables and prepaid expenses.............. 131 126
Deferred income tax benefit................................. 103 88
Inventories................................................. 337 331
------ ------
TOTAL CURRENT ASSETS........................................ 1,020 991
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 18 17
Buildings................................................... 382 371
Machinery and equipment..................................... 2,831 2,786
Construction in progress.................................... 267 127
------ ------
Total property, plant and equipment......................... 3,498 3,301
Less accumulated depreciation............................... 2,404 2,357
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 1,094 944
INVESTMENTS IN AFFILIATES................................... 396 394
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 251 274
OTHER ASSETS................................................ 272 162
------ ------
TOTAL ASSETS................................................ $3,033 $2,765
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................ $ 296 $ 278
Accrued liabilities......................................... 527 454
Short-term debt............................................. 76 --
------ ------
TOTAL CURRENT LIABILITIES................................... 899 732
LONG-TERM DEBT.............................................. 597 597
POSTRETIREMENT LIABILITIES.................................. 970 971
OTHER LIABILITIES........................................... 497 472
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock (authorized, 600,000,000 shares, par value
$0.01)
Issued: 118,400,635 shares in 1999 and 1998............. 1 1
Additional contributed capital.......................... (137) (131)
Treasury stock, at cost (8,257,533 shares in 1999 and
5,629,677 shares in 1998)............................. (200) (143)
Unearned ESOP shares........................................ (21) (25)
Accumulated other comprehensive income...................... -- 19
Reinvested earnings......................................... 427 272
------ ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................ 70 (7)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ $3,033 $2,765
====== ======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
SOLUTIA INC.
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
----- -----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income.................................................. $ 155 $ 194
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes............................... -- 11
Depreciation and amortization....................... 107 103
Other............................................... 65 24
Working capital changes that provided (used) cash:
Trade receivables................................... (61) 1
Inventories......................................... 18 (30)
Accounts payable and accrued liabilities............ (21) 88
Other............................................... 4 19
Other items............................................. 14 (11)
----- -----
CASH FROM OPERATIONS........................................ 281 399
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (189) (84)
Acquisition and investment payments......................... (203) (1)
Investment and property disposal proceeds................... 16 8
----- -----
CASH FROM INVESTING ACTIVITIES.............................. (376) (77)
----- -----
FINANCING ACTIVITIES:
Net change in short-term debt............................... 76 (190)
Treasury stock purchases.................................... (70) (113)
Dividend payments........................................... -- (4)
Common stock issued under employee stock plans.............. 7 24
----- -----
CASH FROM FINANCING ACTIVITIES.............................. 13 (283)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (82) 39
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 89 24
----- -----
END OF PERIOD............................................... $ 7 $ 63
===== =====
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<PAGE>
SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
Solutia Inc. is an international producer and marketer of a
range of high performance chemical-based materials, including
Saflex(R) plastic interlayer, high technology polyester film
products, specialty chemicals, nylon and acrylic fibers and fiber
intermediates, and phosphorus derivatives. These materials are used
by our customers to make construction, automotive, and industrial
products, and household furnishings.
These financial statements should be read in conjunction with
the audited financial statements and notes to consolidated financial
statements included in Solutia's 1998 Annual Report to shareholders
and incorporated by reference in the company's annual report on Form
10-K, filed with the Securities and Exchange Commission on
March 16, 1999.
The accompanying unaudited consolidated financial statements
reflect all adjustments which in the opinion of management are
necessary to present fairly the financial position, results of
operations, comprehensive income, and cash flows for the interim
periods reported. Such adjustments are of a normal, recurring
nature. The results of operations for the three-month and nine-month
periods ended September 30, 1999, are not necessarily indicative of
the results to be expected for the full year.
2. INVENTORY VALUATION
The components of inventories as of September 30, 1999, and
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods............................. $ 235 $ 252
Goods in process........................... 129 87
Raw materials and supplies................. 91 116
----- -----
Inventories, at FIFO cost.................. 455 455
Excess of FIFO over LIFO cost.............. (118) (124)
----- -----
TOTAL...................................... $ 337 $ 331
===== =====
</TABLE>
3. CPFILMS INC. ACQUISITION
On May 25, 1999, Solutia acquired CPFilms Inc. from Akzo Nobel
N.V. for approximately $200 million. CPFilms is the world market
leader in window film and other high technology film products for
automotive and architectural after-markets and a variety of other
specialty film applications. CPFilms' 1998 annual net sales were
approximately $130 million. The acquisition has been accounted for
using the purchase method, and the preliminary purchase price
allocation resulted in goodwill and other intangible assets of
approximately $100 million. Goodwill and other intangible assets
will be amortized over their estimated useful lives of 20 years.
4. SPECIAL OPERATIONS CHARGES
During the first quarter of 1999, Solutia recorded special
operations charges of $34 million ($22 million aftertax) related to
manufacturing operations in the Chemicals and Fibers segments.
In February 1999, Chemicals' ammonia unit experienced the
failure of certain equipment critical to the production process.
Based on an analysis of the economics of purchased ammonia and the
cost to repair the equipment, Solutia decided to exit the ammonia
business. A $28 million ($18 million aftertax) charge to cost of
goods sold was recorded in the first quarter to complete the exit
plan. The charge included $2 million to write down the assets to
fair value, $4 million of dismantling costs, and $22 million of
costs for which Solutia is contractually obligated under an
operating agreement. Excluding the contractually obligated costs,
Solutia expects to complete the dismantling of the equipment and the
exit of the business by the end of the first quarter of 2000. The
ammonia
4
<PAGE>
<PAGE>
business's net sales for the three months ended September 30, 1999,
and 1998, were $0 and $5 million, respectively, and for the nine
months ended September 30, 1999, and 1998, were $1 million and
$17 million, respectively. Operating income for those periods was
minimal.
A special operations charge of $6 million ($4 million aftertax)
was also recorded to cost of goods sold primarily to write down a
Fibers segment bulk continuous filament spinning machine as a result
of a noncompetitive cost position. The charge is due to a Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of,"
review which indicated that the carrying amount of the assets
exceeded the identifiable undiscounted cash flows related to the
assets. Fair value of the assets was determined based on estimates
of market prices. Operating income derived from the machinery was
minimal in the three-month and nine-month periods ended September
30, 1999, and 1998.
5. CONTINGENCIES
During the first quarter of 1999, Solutia recorded a $29 million
($18 million aftertax) charge to cost of goods sold to increase
reserves related to the anticipated settlement of two lawsuits
brought against Monsanto Company ("Monsanto"), for which Solutia
assumed responsibility in the 1997 spin-off from Monsanto, relating
to the alleged discharge of polychlorinated biphenyls ("PCBs") from
the Anniston, Alabama plant site, and to environmental remediation
of the allegedly affected areas. The anticipated settlement of these
cases provided information that allowed management to estimate more
accurately the company's position with respect to such litigation.
Monsanto is a party to a number of lawsuits and claims relating
to Solutia, for which Solutia assumed responsibility in the spinoff.
In addition, Solutia is a named party to a number of lawsuits and
claims directly. Solutia intends to defend all suits and claims
vigorously. Such matters arise out of the normal course of business
and relate to product liability; government regulation, including
environmental issues; employee relations; and other issues. Certain
of the lawsuits and claims seek damages in very large amounts.
Although the results of litigation cannot be predicted with
certainty, management's belief is that the final outcome of such
litigation will not have a material adverse effect on Solutia's
consolidated financial position, profitability or liquidity in any
one year, as applicable.
5
<PAGE>
<PAGE>
6. SEGMENT DATA
Segment data for the three months and the nine months ended
September 30, 1999, and 1998, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
SEGMENT:
Polymers & Resins................... $297 $ -- $ 75 $235 $ -- $ 64
Chemicals........................... 211 1 58 228 1 63
Fibers.............................. 224 -- 26 241 -- 56
---- ---- ---- ---- ---- ----
SEGMENT TOTALS........................ 732 1 159 704 1 183
RECONCILIATION TO CONSOLIDATED TOTALS:
Sales eliminations.................. (1) (1) (1) (1)
Less unallocated service costs:
Cost of goods sold................ (12) (25)
Marketing, administrative and
technological expenses.......... (52) (63)
Amortization expense................ (1) --
Equity earnings from affiliates..... 5 5
Interest expense.................... (11) (11)
Other income (expense)--net......... 1 (1)
CONSOLIDATED TOTALS:
---- ---- ---- ----
NET SALES........................... $731 $ -- $703 $ --
==== ==== ---- ==== ==== ----
INCOME BEFORE INCOME TAXES.......... $ 89 $ 88
==== ====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
NET INTERSEGMENT NET INTERSEGMENT
SALES SALES PROFIT SALES SALES PROFIT
----- ------------ ------ ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
SEGMENT:
Polymers & Resins................ $ 815 $ -- $ 219 $ 748 $ -- $ 206
Chemicals........................ 630 4 175 675 5 173
Fibers........................... 653 -- 96 748 -- 176
------ ---- ----- ------ ---- -----
SEGMENT TOTALS..................... 2,098 4 490 2,171 5 555
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............... (4) (4) (5) (5)
Other revenues................... -- 2
Less unallocated service costs:
Cost of goods sold<F1>......... (105) (68)
Marketing, administrative and
technological expenses....... (161) (178)
Amortization expense............. (2) --
Equity earnings from
affiliates..................... 26 17
Interest expense................. (30) (34)
Other income (expense)--net...... 10 2
CONSOLIDATED TOTALS:
------ ---- ------ ----
NET SALES........................ $2,094 $ -- $2,168 $ --
====== ==== ----- ====== ==== -----
INCOME BEFORE INCOME TAXES....... $ 228 $ 294
===== =====
Segment profit includes only operating expenses directly
attributable to the segment. Unallocated service costs are managed
centrally and primarily include costs of technology, engineering and
manufacturing services that are provided to the segments.
<FN>
<F1> Unallocated cost of goods sold for the nine months ended
September 30, 1999, includes first quarter 1999 special charges
related to exiting the ammonia business ($28 million pretax,
$18 million aftertax), the write down of a Fibers segment bulk
continuous filament spinning machine ($6 million pretax, $4 million
aftertax), and the anticipated settlement of certain pending property
claims litigation relating to the Anniston, Alabama plant site
($29 million pretax, $18 million aftertax).
</TABLE>
6
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended.
These include all statements regarding the expected future financial
position, results of operations, cash flows, effect of changes in
accounting due to recently issued accounting standards, benefits
from new technology, price increases, timing of share repurchases,
cost of remediating the year 2000 issue and effect of any unremediated
or undiscovered year 2000 issues on Solutia's operations. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include,
among others, those set forth below as well as general economic,
business and market conditions, customer acceptance of new products,
raw material pricing, efficacy of new technology and facilities, and
increased competitive and/or customer pressure.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1999,
COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Net sales for the third quarter of 1999 increased 4 percent from
net sales in the third quarter of 1998. This increase was driven by
higher sales volumes in the Polymers & Resins and Fibers segments, but
was partially offset by lower average selling prices in all segments.
Polymers & Resins Segment
Net sales for the three months ended September 30, 1999,
increased 26 percent as compared to the three months ended
September 30, 1998. Sales volumes improved significantly, but were
partially offset by lower average selling prices. Approximately one-half
of the segment's sales volume increase was attributable to the CPFilms
Inc. acquisition, which occurred during the second quarter of 1999.
See Note 3 to the Consolidated Financial Statements for additional
information regarding the acquisition. In addition, both the Nylon,
Plastics and Polymers ("NPP") business and Saflex(R) plastic
interlayer business experienced very strong sales volumes. NPP
continued to see higher sales volumes for merchant polymer as global
customers began to recover from the effects of the Asian financial
crisis and began refilling their supply pipelines. In addition,
NPP's Vydyne(R) nylon molding resins continued their volume
improvements following the formation of the alliance with Dow
Chemical on January 1, 1999. Saflex(R) plastic interlayer sales
volumes increased due to strong market environments in Europe and
North America, and strengthening Asian markets. Partially offsetting
the sales volume growth in the NPP and Saflex businesses were
contracted price reductions.
Polymers & Resins segment profit for the third quarter of 1999
increased 17 percent as compared to the third quarter of 1998. The
increase in the segment's sales volumes, as discussed above, drove
the segment profit increase. The lower average selling prices caused
segment profit as a percentage of segment net sales to decrease
slightly to 25 percent in the third quarter of 1999 from 27 percent
in the third quarter of last year.
Chemicals Segment
Net sales in the Chemicals segment for the third quarter of 1999
declined 7 percent from the comparable 1998 quarter primarily as the
result of no sales of ammonia and lower volumes of acrylonitrile. In
the first quarter of 1999, Solutia exited the ammonia business and,
as a result, had no ammonia sales during the third quarter of 1999.
See Note 4 to the Consolidated Financial Statements for additional
information. This unfavorable comparison will continue in the fourth
quarter of 1999. Acrylonitrile volumes declined due to the timing of
sales contract provisions with our acrylonitrile expansion partner.
Segment profit for the quarter ended September 30, 1999,
declined by 8 percent as compared to the quarter ended
September 30, 1998. This decrease was caused by the lower net sales
amount in the 1999 quarter, as explained above, increased raw material
costs during the 1999 quarter and less favorable manufacturing
performance. For the 1999 third quarter, segment profit as a
percentage of net sales was 27 percent as compared with 28 percent
for the comparable quarter of 1998.
7
<PAGE>
<PAGE>
Fibers Segment
The Fibers segment's net sales for the three-month period ended
September 30, 1999, declined approximately 7 percent versus the
three-month period ended September 30, 1998. This decline was caused
by lower average selling prices in each of the segment's businesses,
partially offset by volume growth in each of the segment's businesses.
The majority of the decline in average selling price occurred in the
Acrilan business as the result of competition from Asian producers in
the apparel market. The consolidation of the carpet mill industry also
continues to adversely effect the carpet business's average selling prices.
In addition, Carpet had a less favorable mix of sales in the third quarter
of 1999, as compared to the third quarter of 1998. Sales volumes in the
three-month period ended September 30, 1999, increased most significantly
in the carpet and Acrilan(R) acrylic fiber businesses as compared to the
three-month period ended September 30, 1998. Carpet sales volumes
were higher due to customer demand for unbranded staple and branded
bulk continuous filament (BCF) products. The Acrilan business
experienced volume growth for the first time since the second
quarter of 1998, with the gains being derived from export sales.
Segment profit for Fibers declined 54 percent due to lower average
selling prices and higher raw material costs in each of the segment's
businesses during the 1999 quarter. Lower capacity utilization at our
Acrilan(R) acrylic fiber plants in support of an inventory reduction targets
also adversely affected segment profit. As a result, segment profit as a
percentage of net sales was 12 percent for the 1999 third quarter as compared
with 23 percent for the comparable 1998 quarter.
Operating Income
Solutia's operating income for the third quarter of 1999 was
essentially flat with the third quarter of 1998 as improvements in
the Polymers & Resins business were more than offset by the declines
in Chemicals and Fibers. Each of the businesses' net sales and
segment profit is discussed above. Reduced administrative spending
and benefit costs offset increases in marketing expenses and
amortization of goodwill from the CPFilms acquisition.
Equity Earnings from Affiliates
Equity earnings from affiliates was $5 million in the third
quarters of both 1999 and 1998. Improved sales volumes at the
Flexsys, L.P. and the Advanced Elastomer Systems, L.P. ("AES") joint
ventures were offset by lower average selling prices.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1999,
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1998
For the nine-month period ended September 30, 1999, net sales
declined 3 percent as compared to net sales in the comparable 1998
period. The net sales decline was due to lower average selling
prices that affected all segments. In addition, sales volumes in the
Fibers and Chemicals segments were lower in the 1999 period than in
the 1998 period.
Polymers & Resins Segment
Polymers & Resins net sales for the 1999 period increased
9 percent as compared to the 1998 period due to higher sales volumes,
but were partially offset by lower average selling prices. The sales
volume increase was attributable to the CPFilms acquisition, strong
sales volumes of Saflex(R) plastic interlayer and improved volumes
of merchant polymer. Approximately one-half of the volume increase
was attributable to the second quarter acquisition of CPFilms. See
Note 3 to the Consolidated Financial Statements for additional
information regarding the acquisition. Lower average selling prices
were most significant in the Saflex and the NPP businesses. For
Saflex(R) plastic interlayer, selling prices were lower in the 1999
period than those in the 1998 period due to the pricing provisions
of some long-term sales contracts. NPP prices declined due to
competition in the merchant polymer market.
Polymers & Resins segment profit for the 1999 period increased
6 percent from the 1998 period due to the net sales trends discussed
above and Solutia's cost reduction efforts, including those related
to personnel costs. Segment profit was 27 percent in the period
ended September 30, 1999, as compared to 28 percent for the period
ended September 30, 1998.
8
<PAGE>
<PAGE>
Chemicals Segment
Net sales declined primarily due to volume declines, and to a
lesser extent, lower average selling prices. The decline in sales
volume was driven by two intermediates products: ammonia and
chlorobenzenes. During the first quarter of 1999, certain equipment,
at the Luling, Louisiana facility, that was critical to the
production of ammonia failed. Because of the cost to repair the
equipment and the availability of ammonia in the marketplace,
Solutia decided not to repair the equipment, and instead to exit the
business. For the nine months ended September 30, 1999, net sales
were $16 million lower than in the comparable 1998 period due to
these events. The exit from the ammonia business is further
discussed below in Operating Income. The decrease in chlorobenzene
volumes was primarily due to lower demand as Flexsys increases
production at its new PPD2 plant, which does not require
chlorobenzenes as a raw material. Average selling price declines
experienced during 1999 were caused by contracts with negotiated
price declines and contracts that contain formula pricing tied to
the cost of the raw material components. Through most of the 1999
period, the prices of raw material feedstocks for certain products
fell, resulting in lower selling prices.
In spite of the decline in net sales, segment profit for the
nine-month period ended September 30, 1999, was essentially flat as
compared to the nine-month period ended September 30, 1998. In 1999,
the Chemicals segment benefited from purchasing ammonia at prices
lower than manufactured cost, favorable manufacturing performance,
and Solutia's on-going cost reduction efforts, including those
related to personnel costs. For the first nine months of 1999,
segment profit as a percentage of net sales was 28 percent as
compared with 26 percent for the first nine months of 1998.
On April 30, 1999, Solutia announced an agreement with FMC
Corporation to form a joint venture to manufacture and market
phosphorus chemicals. Solutia will contribute its Phosphorus
Derivatives business and will hold a 50 percent ownership share. The
formation of the joint venture is being reviewed by the Federal
Trade Commission under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976.
Fibers Segment
The Fibers segment net sales for the nine months ended
September 30, 1999, were down approximately 13 percent as compared to
the nine months ended September 30, 1998. Approximately two-thirds of the
segment's net sales decline was attributed to lower average selling
prices, with the remaining one-third of the decline resulting from
decreased sales volumes.
Of those declines, the Acrilan business was responsible for all
of the year-over-year sales volume decline and for approximately
40 percent of the year-over-year average selling price decline. These
declines were caused by the weak market conditions in Asia Pacific
that resulted from the financial crisis in that region. In addition,
that region's lower demand caused a residual effect on markets in
the Americas as Asia Pacific producers sought alternative outlets
for their products. The impact of these events began early in the
third quarter of 1998 and have continued through the third quarter
of 1999.
Solutia's carpet business was responsible for the remainder of
the average selling price decrease. Carpet experienced lower average
sales prices in the nine months of 1999 as compared to the same
period of the prior year due to the consolidation of the carpet mill
industry. Partially offsetting the carpet fiber average selling
price declines was increased sales volume.
Segment profit for Fibers decreased 45 percent due to the net
sales decline and higher manufacturing costs, but was partially
offset by lower raw material costs and the effects of Solutia's cost
reduction initiatives, including those related to personnel costs.
Operating Income
Solutia's operating income for the first nine months of 1999
declined by 28 percent as compared to the first nine months of 1998
due principally to special charges taken in the first quarter of
1999.
In February 1999, Chemicals' ammonia unit experienced the
failure of certain equipment critical to the production process.
Based on an analysis of the economics of purchased ammonia and the
cost to repair the equipment, Solutia decided to exit the ammonia
business. A $28 million ($18 million aftertax) special operations
9
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<PAGE>
charge to cost of goods sold was recorded in the first quarter of
1999 to complete the exit plan. The charge included $2 million to
write down the assets to fair value, $4 million of dismantling
costs, and $22 million of costs for which Solutia is contractually
obligated under an operating agreement. Excluding the contractually
obligated costs, Solutia expects to complete the dismantling of the
equipment and exit of the business by the end of the first quarter
of 2000. The ammonia business' net sales for the nine months ended
September 30, 1999, and 1998, were $1 million and $17 million,
respectively. Operating income for those periods was minimal.
A special operations charge of $6 million ($4 million aftertax)
was recorded to cost of goods sold to write down certain Fibers
segment assets to their fair values. The charge is due to a review
under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be
Disposed Of," ("SFAS No. 121"). The review stemmed from a historical
trend of operating losses and a forecast that the trend would
continue. The SFAS No. 121 review indicated that the carrying amount
of the assets exceeded the identifiable undiscounted cash flows
related to the assets. Fair value of the assets was determined based
on estimates of market prices.
Also during the first quarter of 1999, Solutia recorded a
$29 million ($18 million aftertax) charge to cost of goods sold related
to the anticipated settlement of two lawsuits brought against
Monsanto Company relating to the alleged discharge of polychlorinated
biphenyls ("PCBs") from the Anniston, Alabama plant site. The anticipated
settlement of these cases provided information that allowed management
to estimate more accurately the company's position with respect to
such litigation.
Partially offsetting the decline in operating income, caused by
the special charges and lower segment profit discussed above, were
lower personnel and benefits costs associated with Solutia's
on-going cost reduction efforts.
Equity Earnings from Affiliates
Equity earnings from affiliates increased to $26 million in the
nine months ended September 30, 1999, from $17 million in the nine
months ended September 30, 1998. The increase was driven by improved
sales volumes and profitability at the Flexsys joint venture, which
benefited from the PPD2 unit's good operating performance, and at
the AES joint venture, which experienced higher sales volumes and
good manufacturing performance.
OUTLOOK
During the third quarter 1999, costs of many raw material
feedstocks increased, ending the trend of declining prices for raw
materials. Recent forecasts of raw material pricing indicate that
prices are expected to continue their increase during the fourth
quarter of 1999. Solutia has announced a series of price increases and
expects that average selling prices will rise for those products with
formula pricing, but there will be a delay in implementing those price
increases. Until those price increases are implemented over the next
several months, gross margin pressure is expected to continue.
LIQUIDITY AND CAPITAL RESOURCES
Solutia's working capital at September 30, 1999, decreased to
$121 million from $259 million at December 31, 1998. The decrease
was primarily due to higher short-term borrowings, accrued
liabilities, accounts payable and lower cash balances. During the
second quarter of 1999, Solutia acquired CPFilms in an all-cash
transaction that was funded with short-term borrowings. See Note 3
to the Consolidated Financial Statements for additional information.
The increased accrued liability and accounts payable balances are
due to normal fluctuations in these accounts. Cash balances declined
primarily due to increased spending on investment activities. During
the 1999 period, Solutia received advance payments from third
parties of $56 million.
Solutia's share repurchase program continued during the third
quarter of 1999 with approximately 0.9 million shares repurchased at
a cost of $20 million. Shares repurchased during the nine months
ended September 30, 1999, total approximately 3.0 million shares, at
a cost of approximately $70 million. As of September 30, 1999,
shares repurchased under the second 5.0 million share repurchase
program were 4.9 million.
On October 27, 1999, Solutia announced the authorization of its
third 5 million share repurchase program. The company expects to
begin share repurchases under this authorization in the fourth
quarter of 1999.
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Solutia believes that its cash flow from operations,
supplemented by periodic additional borrowings, provides it with
sufficient resources to finance operations and planned capital
needs.
THE YEAR 2000 ISSUE
Overview
The year 2000 ("Y2K") issue refers to the inability of a
date-sensitive computer program to recognize a two-digit date field
designated "00" as the year 2000. Mistaking "00" for 1900 could
result in a system failure or miscalculations causing disruptions to
operations, including manufacturing, a temporary inability to
process transactions, send invoices, or engage in other normal
business activities. This is a significant issue for most, if not
all, companies, with far reaching implications, some of which cannot
be anticipated or predicted with any degree of certainty.
Solutia began addressing its Y2K issues in 1996. The planning
phase of the process was completed during 1997. Effective
December 31, 1998, Solutia adopted the Y2K Readiness Disclosure format
of the Chemical Manufacturers Association ("CMA"), of which Solutia is a
member. The CMA disclosure format uses four process categories and
five functional areas. Solutia has conformed its Y2K reporting to
the CMA disclosure format. The following sections contain a summary
of Solutia's Y2K readiness and detailed discussions of Solutia's Y2K
issues.
Summary of Y2K Readiness
The following table summarizes Solutia's Y2K readiness. The
percentage in each column indicates the completion of each process
step listed.
<TABLE>
<CAPTION>
CONTINGENCY
INVENTORY/ PLANS IMPLEMENTATION
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION DEVELOPED DATE
---------- ----------- ------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Business
Applications........ 100% 100% 100% 100% See Mid-1999
Manufacturing and
Warehousing
Equipment........... 100% 100% 100% 100% Comments 3rd Qtr. 1999
Information Technology
Technical
Infrastructure...... 100% 100% 100% 100% Below 3rd Qtr. 1999
Environmental
Operations
Systems............. 100% 100% 100% 100% 3rd Qtr. 1999
Business Partners..... 100% -- -- -- 3rd Qtr. 1999
</TABLE>
Business Applications
Solutia inventoried and assessed its business applications
during 1997 and determined that significant portions of its software
required modification or repair to function properly beyond
December 31, 1999. Solutia has addressed the majority of these Y2K issues
through the installation of software licensed from SAP AG which is
Y2K compliant. The final transition to SAP was completed successfully
in May 1999. In addition, all critical issues that were not addressed
by SAP were remediated as of October 1999.
Manufacturing and Warehousing Equipment and Environmental
Operations Systems
Solutia's manufacturing and warehousing equipment and its
environmental operations systems include primary process control
systems and devices with embedded chips. Both have been inventoried
and assessed. Remediation and testing of primary process control
systems and devices with embedded chips was essentially complete as
of September 30, 1999. The few remaining items were remediated and
tested during October 1999.
Information Technology Technical Infrastructure
Solutia's information technology ("IT") technical infrastructure
area is primarily comprised of host server systems, computer
networking infrastructure, voice systems, and desktop computer
workstations and software. The
11
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<PAGE>
inventory and assessment of the IT technical infrastructure area was
completed in early 1999. Remediation and testing of the issues
identified has been completed.
Business Partners
Solutia's business partners include its suppliers and service
providers (supply chain), and its customers. Solutia is continuing
its on-going process to identify and assess those business partners
in the supply chain that provide materials, products or services
critical to the company's operations. As of September 30, 1999,
approximately 95 percent of Solutia's critical suppliers reported
that they had completed their remediation. For the remaining
suppliers who have not responded to information requests or have not
completed their remediation, Solutia is identifying alternate
sources of supply and/or developing contingency plans. Solutia will
continue its audits of selected suppliers to verify the completion
of their Y2K preparedness efforts throughout the remainder of 1999.
Solutia has been working with customers to address their Y2K
concerns regarding Solutia's ability to operate. Plans to address
the ability of our significant customers to accept our products
after December 31, 1999, have been developed in conjunction with
Solutia's contingency planning, as described below.
Integrated Testing
Solutia's integrated Y2K testing of critical systems included
three components: 1) a baseline test, 2) a year-end rollover test,
and 3) a leap-year rollover test. All components of the testing have
been completed and no significant issues have been identified.
However, given the nature of Solutia's manufacturing and other
operations, full-scale integrated testing was not practical in some
areas and, therefore, was limited in scope to avoid significant
disruption of the company's operations. Solutia has obtained
statements of compliance from vendors and other compliance evidence,
and has developed contingency plans to mitigate the risk of not
performing integrated testing in those areas.
Y2K Communication and Events Management Process
Solutia has completed a Y2K Communication and Events Management
Process to monitor, test and accumulate data on the effects of the
Y2K date change on the company. The process will begin on
December 31, 1999, and will continue through January 3, 2000. Procedures
to monitor and test the date change include the establishment of a
detailed events and communication system, the idling, testing and
restarting of a number of manufacturing processes, and slowdown or
shutdown of other manufacturing processes. Approximately 55 percent
of Solutia's manufacturing processes will be shutdown or idled
during this four-day rollover period. Of these shutdowns,
approximately 30 percent are related to the New Year's holiday and
are not caused by the Y2K date change. The processes to be idled
will temporarily discontinue processing over the Y2K date change,
and will undergo maintenance and testing during that downtime. Data
on the effects of the date change will be monitored and accumulated
on a process area by process area basis.
Contingency Planning
During the first quarter of 1999, Solutia completed the
development of a contingency planning process for Y2K issues. The
process engaged the manufacturing sites in the evaluation of their
existing contingency plans in light of possible Y2K effects. Y2K
contingency plans for all manufacturing sites and all corporate,
sales office and other non-manufacturing locations, are in place and
are undergoing testing. Plans include procedures that should quickly
assess and communicate any Y2K problem, solve the problem and
communicate the resolution of the problem. These plans should
minimize the impact of any unremediated and unresolved Y2K issues
on Solutia's operations and financial position.
Costs
To date, Solutia has incurred approximately $8 million in costs
related to Y2K work, excluding the cost of SAP implementation.
Management currently estimates that additional costs to evaluate and
remediate the remaining issues will be minimal. These costs will be
expensed as incurred during the remainder of 1999.
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Risks
Based on Solutia's work to address its Y2K issues, including the
performance of integrated testing, the development of a Y2K rollover
action plan, and the implementation of contingency plans, management
does not expect the Y2K issue to pose significant operational problems
for the company. However, there can be no guarantee that Solutia will
not be effected by Y2K problems at the company's customers,
suppliers, and service providers. If the company's customers,
suppliers, and service providers fail to rectify their Y2K issues in
their own systems or fail to implement appropriate contingency
plans, the resultant effect on the company could be material.
Management anticipates the most reasonably likely worst-case
scenario would involve a temporary shutdown of certain units if, in
management's judgment, the company cannot run certain processes
safely from an environmental, safety and health standpoint. Through
the use of the Y2K rollover action plan and contingency plans, the
company expects to mitigate any effect of the Y2K issue on the
company or third parties.
The estimated costs, the anticipated effects of Y2K problems,
and the sufficiency of Solutia's Y2K rollover action plans and
contingency plans are based on management's best estimates, which
were derived from numerous assumptions about future events. These
assumptions include the availability of certain resources,
third-party modification plans and other factors. There can be no
guarantee that these estimates will be achieved and actual results
could differ materially. Specific factors that might cause material
differences include, but are not limited to, the ability of vendors,
suppliers, and other third parties to complete their Y2K remediation
and readiness procedures, and the ability to identify and correct
all relevant computer codes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activity." SFAS
No. 133 provides comprehensive and consistent standards for the
recognition and measurement of derivative and hedging activities.
It requires that derivatives be recorded on the Statement of
Consolidated Financial Position at fair value and establishes
criteria for hedges of changes in the fair value of assets,
liabilities or firm commitments, hedges of variable cash flows of
forecasted transactions, and hedges of foreign currency exposures of
net investments in foreign operations. Changes in the fair value of
derivatives that do not meet the criteria for hedges would be
recognized in the Statement of Consolidated Income. During
June 1999, FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133," to defer the effective date of SFAS No.
133 by one year. The standard will now be effective for the Company
beginning January 1, 2001. The Company does not expect the adoption
of SFAS No. 133 to have a material effect on the consolidated
financial statements.
13
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Solutia's annual report on Form 10-K for the year ended
December 31, 1998, described a number of lawsuits brought against Monsanto
in Harris County (Texas) District Court relating to alleged exposure to
substances present at or emanating from the Brio Superfund site near
Houston, Texas. The Company has arrived at an agreement in principle
to settle for $50,000 an action brought by four plaintiffs alleging
business losses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--See the Exhibit Index at page 16 of this report.
(b) The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1999.
14
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
SOLUTIA INC.
-----------------------------------
(Registrant)
/s/ ROGER S. HOARD
-----------------------------------
(Vice President and Controller)
(On behalf of the Registrant and as
Principal Accounting Officer)
Date: October 29, 1999
15
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<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Omitted--Inapplicable
3 Omitted--Inapplicable
4 Omitted--Inapplicable
10 Omitted--Inapplicable
11 Omitted--Inapplicable; see "Statement of Consolidated
Income" on page 1.
15 Omitted--Inapplicable
18 Omitted--Inapplicable
19 Omitted--Inapplicable
22 Omitted--Inapplicable
23 Omitted--Inapplicable
24 Omitted--Inapplicable
27 Financial Data Schedule
99 Omitted--Inapplicable
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Consolidated Income of Solutia Inc. and Subsidiaries for
the nine months ended September 30, 1999, and the Statement of Consolidated
Financial Position as of September 30, 1999. Such information is qualified
in its entirety by reference to such combined financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 449
<ALLOWANCES> 7
<INVENTORY> 337
<CURRENT-ASSETS> 1,020
<PP&E> 3,498
<DEPRECIATION> 2,404
<TOTAL-ASSETS> 3,033
<CURRENT-LIABILITIES> 899
<BONDS> 597
<COMMON> 1
0
0
<OTHER-SE> 69
<TOTAL-LIABILITY-AND-EQUITY> 3,033
<SALES> 2,094
<TOTAL-REVENUES> 2,094
<CGS> 1,613
<TOTAL-COSTS> 1,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 228
<INCOME-TAX> 73
<INCOME-CONTINUING> 155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.34
</TABLE>
