<PAGE>
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 MARCH 31, 1999
---------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------------- -----------------
COMMISSION FILE NUMBER 1-14601
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ARCH CHEMICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 06-1526315
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
501 Merritt 7, Norwalk, CT 06856-5204
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(Address of principal executive offices) (Zip Code)
(203) 229-2900
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(Registrant's telephone number, including area code)
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(Former name, former address, and former fiscal year,
if changed since last report)
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 April 30, 1999, there were 23,002,831 outstanding shares of the
registrant's common stock.
<PAGE>
INDEX
Page
----
Part I - Financial Information:
Item 1. Financial Statements.............................................. 2
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998................................................... 2
Condensed Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998 (unaudited)..................................... 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited)............................... 4
Notes to Condensed Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................. 16
1
<PAGE>
Part I - Financial Information
Item 1. Financial Statements.
ARCH CHEMICALS, INC.
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Unaudited
March 31, December 31,
1999 1998
--------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5.4 $ 7.1
Accounts receivable, net 197.5 141.7
Inventories, net 128.1 139.3
Other current assets 30.5 25.6
-------- --------
Total current assets 361.5 313.7
Investments and advances - affiliated companies at equity 18.8 21.1
Property, plant and equipment, net 318.6 331.6
Goodwill 34.3 34.8
Other assets 18.2 20.4
-------- --------
Total assets $ 751.4 $ 721.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 5.4 $ 0.9
Accounts payable 112.1 106.7
Accrued liabilities 69.4 59.0
-------- --------
Total current liabilities 186.9 166.6
Long-term debt 81.9 7.0
Other liabilities 52.3 43.5
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share, authorized 100.0 shares:
23.0 shares issued and outstanding in 1999 23.0 -
Additional paid-in capital 422.5 -
Retained earnings from February 8, 1999 9.1 -
Equity - 519.0
Cumulative translation adjustment (24.3) (14.5)
-------- --------
Total shareholders' equity 430.3 504.5
-------- --------
Total liabilities and
shareholders' equity $ 751.4 $ 721.6
======== ========
</TABLE>
- --------------
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of the condensed financial statements.
2
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ARCH CHEMICALS, INC.
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except per share amounts)
Three Months
Ended March 31,
-----------------------
1999 1998
------- -------
Sales $ 225.0 $ 220.4
Operating expenses:
Cost of goods sold 157.7 150.1
Selling and administration 42.6 42.7
Research and development 4.5 4.4
------- -------
Operating income 20.2 23.2
Equity in earnings of affiliated companies 1.3 1.4
Interest expense 1.0 0.1
Interest income 0.3 0.2
------- -------
Income before taxes 20.8 24.7
Income taxes 7.3 8.4
------- -------
Net income $ 13.5 $ 16.3
======= =======
Basic and diluted income per common share $ 0.59 $ 0.65 (a)
Weighted average common stock outstanding -
basic and diluted 23.0 23.0 (a)
(a) Pro forma Financial Information - In January 1999, Olin Corporation
("Olin") borrowed $75 million and on February 8, 1999 the
Company assumed this debt from Olin. Pro forma income per share of
$0.65 is based upon pro forma net income of $15.0 million and pro forma
common stock outstanding of 23.0 million shares. Pro forma net income
reflects pro forma interest expense of $2.1 million on borrowings
and assumes that $75 million was outstanding and that the Company had
seasonal weighted average borrowings related to the water chemicals
segment of $40 million. Such borrowings were assumed to be at an
aggregate effective interest rate of 7% for the three months ended
March 31, 1998. Pro forma common stock outstanding represents the
number of common shares issued at the Distribution Date and assumes that
such shares were outstanding for all periods prior to the Distribution.
- --------------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of the condensed financial statements.
3
<PAGE>
ARCH CHEMICALS, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities
Net income $ 13.5 $ 16.3
Adjustments to reconcile net income to net cash and
cash equivalents provided (used) by operating activities
Equity in earnings of affiliates (1.3) (1.4)
Depreciation and amortization 14.1 11.6
Deferred taxes 0.8 5.5
Changes in assets and liabilities:
Receivables (56.0) (36.5)
Inventories 11.2 (4.2)
Other current assets (3.6) 0.6
Accounts payable and accrued liabilities 13.8 (17.8)
Noncurrent liabilities 2.6 (2.0)
Other operating activities 0.7 (3.9)
------ ------
Net operating activities (4.2) (31.8)
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Investing activities
Capital expenditures (6.1) (12.4)
Other investing activities 1.0 4.9
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Net investing activities (5.1) (7.5)
------ ------
Financing activities
Long-term debt borrowings 75.0 -
Short-term borrowings (repayments) 4.4 (0.7)
Transfer (to) from Olin (71.6) 35.0
------ ------
Net financing activities 7.8 34.3
------ ------
Effect of exchange rate changes on cash and cash equivalents (0.2) (0.8)
------ ------
Net decrease in cash and cash equivalents (1.7) (5.8)
Cash and cash equivalents, beginning of year 7.1 9.0
------ ------
Cash and cash equivalents, end of period $ 5.4 $ 3.2
====== ======
Supplemental cash flow information:
Taxes paid $ 2.1 $ -
Interest paid $ 0.3 $ -
</TABLE>
- -----------------------------------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of the condensed financial statements.
4
<PAGE>
ARCH CHEMICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
($ in millions, except share amounts)
BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Arch Chemicals, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of the
Company, reflect all adjustments (consisting only of normal accruals) which are
necessary to present fairly the results for interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements, accounting
policies and the notes thereto and management's discussion and analysis of
financial condition and results of operations included in the Company's Form 10-
K for the year ended December 31, 1998. The Company's water chemicals segment
is seasonal in nature as its products are primarily used in the U.S. residential
pool market. Therefore, the results of operations for the Company and in
particular the water chemicals segment for the three months ended March 31,
1999, are not necessarily indicative of the results to be expected for the
entire fiscal year.
ARCH CHEMICALS, INC. SPIN-OFF FROM OLIN CORPORATION
On February 8, 1999 ("Distribution Date"), one share of the Company's
common stock, $1 par value per share, was distributed to shareholders of Olin
Corporation ("Olin") for every two shares of Olin common stock held by such
shareholders at the record date. At the Distribution Date, the Company began
operations as a separate, publicly-owned corporation.
INVENTORY
March 31, December 31,
1999 1998
-------- ------------
Raw materials and supplies $ 51.4 $ 55.4
Work in process 14.3 14.2
Finished goods 114.2 121.7
------ ------
Inventories, gross 179.9 191.3
LIFO reserve (51.8) (52.0)
------ ------
Inventory, net $128.1 $139.3
====== ======
Inventories are valued principally by the dollar value last-in, first-out
(LIFO) method of inventory accounting. Elements of costs in inventories include
raw materials, direct labor and manufacturing overhead. Inventories under the
LIFO method are based on an annual determination of quantities and costs as of
the year-end; therefore, the condensed financial statements at March 31, 1999
reflect certain estimates relating to inventory quantities and costs at December
31, 1999.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options.
5
<PAGE>
Pro forma earnings per share is based upon pro forma net income of $15.0
and pro forma common stock outstanding of 23.0 million shares. Pro forma net
income reflects pro forma interest expense of $2.1 on borrowings and assumes
that $75.0 of debt assumed from Olin was outstanding (see Long-Term Debt) and
that the Company had seasonal weighted average borrowings related to the water
chemicals segment of $40.0. Such borrowings were assumed to be at an aggregate
effective interest rate of 7% for the three months ended March 31, 1998. Pro
forma common stock outstanding represents the number of common shares issued at
the Distribution Date and assumes that such shares were outstanding for all
periods prior to such distribution.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company's other comprehensive income consists solely of the cumulative
translation adjustment. The Company does not provide for U.S. income taxes on
foreign currency translation adjustments since it does not provide for such
taxes on undistributed earnings on foreign subsidiaries. Comprehensive income
for the three months ended March 31, 1999 and 1998 was $3.7 and $14.4,
respectively.
LONG-TERM DEBT
On January 27, 1999, Olin obtained an unsecured $125 revolving five-year
credit facility which expires in January 2004 and an unsecured $125, 364-day
facility which expires in January 2000 (collectively, the "Credit Facility").
Olin borrowed $75 under the Credit Facility. On February 8, 1999, the Company
succeeded to the Credit Facility and assumed the $75 of debt.
The Credit Facility contains leverage and interest coverage ratio
covenants, and restricts the payment of dividends in excess of $65 plus 50% of
cumulative net income under certain circumstances. Facility fees are payable on
the unused credit and range from 0.125% to 0.30%. The Company may select
various floating rate borrowing options, including but not limited to, LIBOR
plus .325% to 1.00% and Prime.
1999 LONG TERM INCENTIVE PLAN
On February 9, 1999, the Company granted to certain employees approximately
968,000 options to purchase common stock at an exercise price of $19.41 (fair
market value of the common stock on the grant date). In addition, the Company
granted to certain employees approximately 245,000 performance share units. All
these grants were made under the Company's 1999 Long Term Incentive Plan. The
options vest at the end of a three-year period and are exercisable up to ten
years from the date of grant. The performance share units will vest if certain
performance measures are met at the end of a three-year performance period and
upon vesting are paid out in shares of common stock. Units may be paid out in
shares on a basis of up to 1.5 shares for every unit depending on the Company's
performance.
DIVIDEND
On April 29, 1999, the Company declared its first quarterly dividend of
$.20 on each share of the Company's common stock. The dividend is payable on
June 10, 1999, to shareholders of record at the close of business on May 10,
1999.
6
<PAGE>
SEGMENT INFORMATION
The Company has organized its segments around differences in products and
services, which is how the Company manages its business. Segment operating
income includes the equity in earnings of affiliated companies.
Three Months
Ended March 31,
------------------------
1999 1998
------ ------
SALES:
Microelectronic Chemicals $ 52.2 $ 62.4
Water Chemicals 93.0 71.1
Performance Chemicals 79.8 86.9
------ ------
Total Sales $225.0 $220.4
====== ======
OPERATING INCOME (LOSS):
Microelectronic Chemicals $ (0.9) $ 2.4
Water Chemicals 12.5 6.7
Performance Chemicals 9.9 15.5
------ ------
Total Operating Income $ 21.5 $ 24.6
====== ======
CAPITAL SPENDING:
Microelectronic Chemicals $ 2.6 $ 7.2
Water Chemicals 1.0 2.2
Performance Chemicals 2.5 3.0
------ ------
Total Capital Spending $ 6.1 $ 12.4
====== ======
COMMITMENTS AND CONTINGENCIES
As a result of the spin-off from Olin and through an agreement, the Company
is only responsible for environmental liabilities at the Company's current
operating plant sites and certain offsite locations.
Environmental exposures are difficult to assess for numerous reasons,
including the identification of new sites, developments at sites resulting from
investigatory studies, advances in technology, changes in environmental laws and
regulations and their application, the scarcity of reliable data pertaining to
identified sites, the difficulty in assessing the involvement and financial
capability of other potentially responsible parties and the Company's ability to
obtain contributions from other parties and the length of time over which site
remediation occurs.
There are a variety of non-environmental legal proceedings pending or
threatened against the Company. There has been no significant change in status
of such items during the three months ended March 31, 1999.
See the Company's most recent Form 10-K for additional information on the
above items.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
This management's discussion and analysis of financial condition and results of
operations also covers periods when the Company was not a separate, independent
corporation and operated as the specialty chemical businesses of Olin. However,
such discussion and analysis has been prepared as if the Company were a separate
entity for all such periods discussed. In analyzing the results of operations
for the Company and its segments, the following matters should be considered.
The Company's water chemicals segment is seasonal in nature. Approximately
forty percent of the sales in the water chemicals business occur in the second
quarter of the fiscal year, as sales in the U.S. residential pool market are
concentrated between Memorial Day and the Fourth of July. Accordingly, results
of operations for the periods presented are not necessarily indicative of the
results to be expected for an entire fiscal year.
RESULTS OF OPERATIONS
CONSOLIDATED
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
(In millions, except per
share amounts)
Sales $225.0 $220.4
Gross Margin 67.3 70.3
Selling and Administration 42.6 42.7
Research and Development 4.5 4.4
Equity in Earnings of Affiliated Companies 1.3 1.4
Interest Expense 1.0 2.1 (a)
Net Income 13.5 15.0 (a)
Basic and Diluted Income Per Share $0.59 $0.65 (a)
Weighted Average Common Stock Outstanding -- Basic and Diluted 23.0 23.0 (a)
</TABLE>
Notes:
(a) Pro Forma Financial Information - In January 1999, Olin Corporation ("Olin")
borrowed $75 million and on February 8, 1999, the Company assumed this debt
from Olin. Pro forma income per share of $0.65 is based upon pro forma net
income of $15.0 million and pro forma common stock outstanding of 23.0
million shares. Pro forma net income reflects pro forma interest expense of
$2.1 million on borrowings and assumes that $75 million was outstanding and
that the Company had seasonal weighted average borrowings related to the
water chemicals segment of $40 million. Such borrowings were assumed to be
at an aggregate effective interest rate of 7% for the three months ended
March 31, 1998. Pro forma common stock outstanding represents the number of
common shares issued at the Distribution Date and assumes that such shares
were outstanding for all periods prior to the Distribution.
8
<PAGE>
Three Months Ended March 31, 1999 Compared to 1998
Sales increased 2.1%. The increase in sales is due to a 3.8% increase in
volume and a 1.7% decrease in pricing. The increase in volumes was principally
related to the water chemicals segment, offset somewhat by lower volumes in the
microelectronics and performance chemicals segments. The decrease in pricing
was related to the microelectronic chemicals and performance chemicals segments,
as water chemicals pricing was comparable to the prior year.
Gross margin percentage was 29.9% and 31.9% for 1999 and 1998, respectively.
The decrease in gross margin was due to the weakness in the semiconductor
industry resulting in both lower volumes and pricing in the microelectronic
chemicals segment, and lower volumes and pricing in the performance chemicals
segment while the water chemicals segment's gross margin percentage was
consistent with the prior year. In addition, 1999 results were impacted by
higher manufacturing costs in the performance chemicals segment.
Selling and administration expenses as a percentage of sales decreased to
18.9% in 1999 from 19.4% in 1998 due to higher sales. The amount of expenses
were comparable to the prior year as incremental public company costs were
offset by lower corporate expenses. In addition higher advertising and sales
promotional expenses in the water chemicals segment were offset by lower
expenses primarily in the microelectronic chemicals segment associated with cost
reduction programs.
Research and development expenses as a percentage of sales were 2% in 1999 and
1998, and the amount of expenses were comparable to the prior year.
Equity in earnings of affiliated companies were comparable to last year.
Interest expense was $1.0 million in 1999 compared to pro forma interest
expense of $2.1 million in 1998. The decrease was primarily due to lower average
working capital.
The effective tax rate increased to 35% in 1999 from 34% in 1998 due to
anticipated higher state income taxes stemming from the elimination of tax
saving strategies resulting from the spin-off.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance chemicals'
surfactants business and a three-year supply agreement. Of the proceeds
received, $12 million was allocated to the sale of the surfactants business
based on the fair value of such business and $30 million was allocated to the
supply agreement. No gain or loss was recorded on the sale. In the supply
agreement, the Company agreed to reserve production capacity for surfactants
products at its Brandenburg, Kentucky facility and to supply BASF with such
products in exchange for a $30 million payment made at the time of signing the
agreement, plus recovery of all fixed and variable costs during the term of the
agreement. The agreement expires on December 31, 2000 unless extended; the
Company does not believe it will be extended. The $30 million payment was
recorded as deferred income and is amortized ratably into operating income over
the three-year term. Unless the supply agreement is extended beyond 2000, which
the Company does not expect to happen, no future income will be realized with
respect to this supply agreement after December 31, 2000. Sales and operating
income for the three months ended March 31, 1999 and March 31, 1998, include
$2.4 million, respectively, related to the amortization of deferred income under
the supply agreement.
For the full fiscal year, the Company's 1999 sales and operating income are
expected to be higher than 1998. Diluted income per share is expected to be in
the $1.85 range.
9
<PAGE>
MICROELECTRONIC CHEMICALS
Three Months
Ended March 31,
1999 1998
------------- ------------
($ in millions)
RESULTS OF OPERATIONS
Sales $52.2 $62.4
Operating Income (Loss) (0.9) 2.4
Three Months Ended March 31, 1999 Compared to 1998
Sales decreased 16.3% with an operating loss in 1999 compared to an operating
profit in 1998. The sales decrease was in large part due to the weakness of the
semiconductor industry as compared to a year ago. Sales were lower primarily in
the North American market while European sales were comparable. The operating
loss was due to lower volumes and pricing which were offset somewhat by lower
operating expenses.
The Company expects its microelectronic chemicals businesses to be profitable
for the year due to the benefits of its cost reduction, quality improvement and
operating efficiency programs, as well as an expected modest recovery of the
semiconductor industry in the second half of 1999.
WATER CHEMICALS
Three Months
Ended March 31,
1999 1998
----------- -----------
($ in millions)
RESULTS OF OPERATIONS
Sales $93.0 $71.1
Operating Income 12.5 6.7
Three Months Ended March 31, 1999 Compared to 1998
Sales increased 30.8% and operating income increased 86.6%. The increase in
sales was attributable to strong seasonal demand for branded products (HTH(R),
Sock-It(R), Super Sock-It(R), and Pace(R)), early customer order patterns as
compared to 1998, and strong export sales. Strong sales from the two
distribution businesses, Superior Pool and Hydrochim, also contributed to the
sales increase. Prices were comparable to last year as higher average brand
prices were offset by lower non-brand prices. Operating income increased as
additional sales volumes more than offset increased advertising and sales
promotional expenses.
The Company expects improved operating performance in 1999 as compared to 1998
primarily from projected increases in volumes of branded products.
10
<PAGE>
PERFORMANCE CHEMICALS
Three Months
Ended March 31,
1999 1998
----------- -----------
($ in millions)
RESULTS OF OPERATIONS
Sales $79.8 $86.9
Operating Income 9.9 15.5
Three Months Ended March 31, 1999 Compared to 1998
Sales and operating income decreased 8.2% and 36.1%, respectively.
Lower sales in the performance urethanes and organics business were
attributable to lower volumes in Latin America, combined with lower pricing for
nonfoam polyols and propylene glycol products. Operating income decreased from
the prior year as lower volumes and pricing more than offset improved domestic
product mix and favorable operating expenses from cost reduction programs.
Higher sales in the biocides business were primarily attributable to increased
international volumes related to the anti-dandruff and building products
markets. Operating income decreased from the prior year as higher international
operating costs more than offset the higher volumes. In addition, manufacturing
expenses were negatively impacted by an unscheduled outage at the Rochester
plant resulting from a severe snowstorm.
Lower sales volumes in the hydrazine business resulted from the effects of the
Asian economic conditions on hydrate shipments combined with lower propellant
sales due to different launch schedules. Operating income decreased from the
prior year due to the sales shortfall and an unanticipated, extended plant
outage resulting in unfavorable manufacturing costs.
In November 1997, the Company completed a transaction with BASF whereby the
Company received $42 million for the sale of its performance chemicals'
surfactants business and a three-year supply agreement. Of the proceeds
received, $12 million was allocated to the sale of the surfactants business
based on the fair value of such business and $30 million was allocated to the
supply agreement. No gain or loss was recorded on the sale. In the supply
agreement, the Company agreed to reserve production capacity for surfactants
products at its Brandenburg, Kentucky facility and to supply BASF with such
products in exchange for a $30 million payment made at the time of signing the
agreement, plus recovery of all fixed and variable costs during the term of the
agreement. The agreement expires on December 31, 2000 unless extended; the
Company does not believe it will be extended. The $30 million payment was
recorded as deferred income and is amortized ratably into operating income over
the three-year term. Unless the supply agreement is extended beyond 2000, which
the Company does not expect to happen, no future income will be realized with
respect to this supply agreement after December 31, 2000. Sales and operating
income for the three months ended March 31, 1999 and March 31, 1998, include
$2.4 million, respectively, related to the amortization of deferred income under
the supply agreement.
The Company expects slightly improved operating performance in 1999 as
compared to 1998 from its performance chemicals businesses due to improved sales
primarily from biocides, lower administration expenses and decreased
distribution costs which are expected to be slightly offset by increased
depreciation expenses.
11
<PAGE>
LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA
CASH FLOW DATA
Three Months
Ended March 31,
1999 1998
------------ ------------
($ in millions)
PROVIDED BY (USED FOR)
Net Operating Activities $(4.2) $(31.8)
Capital Expenditures (6.1) (12.4)
Net Investing Activities (5.1) (7.5)
Net Financing Activities 7.8 34.3
Prior and up to the spin-off, the Company's financing requirements were
provided by Olin.
For the three months ended March 31, 1999, the reduction in cash flow used for
net operating activities was primarily attributable to lower working capital as
compared to 1998. Lower inventories and higher accounts payable and accrued
liabilities were offset somewhat by higher accounts receivable levels as the
Company continued its focus on managing its working capital.
Capital expenditures for the first quarter of 1999 as compared to 1998
decreased approximately 50%. The decrease is primarily attributable to the
completion of certain capital projects in the microelectronic chemicals segment
in 1998.
Capital expenditures for 1999 are expected to decrease approximately 10-15%
from 1998 as a result of the completion of such capital projects in 1998.
On January 27, 1999, Olin obtained an unsecured $125 million revolving five-
year credit facility which expires in January 2004 and an unsecured $125
million, 364-day facility which expires in January 2000 (collectively the
"Credit Facility"). Olin borrowed $75 million under the Credit Facility. On
February 8, 1999, the Company succeeded to the Credit Facility and assumed the
$75 million of debt.
The Credit Facility contains leverage and interest coverage ratio covenants,
and restricts the payment of dividends in excess of $65 million plus 50% of
cumulative net income under certain circumstances. Facility fees are payable on
the unused credit and range from 0.125% to 0.30%. The Company may select
various floating rate borrowing options, including but not limited to, LIBOR
plus .325% to 1.00% and Prime. At March 31, 1999, the Company had $175 million
of available borrowings under this Credit Facility. The Company believes that
the Credit Facility is adequate to satisfy its liquidity needs for the near
future.
On April 29, 1999, the Company declared its first quarterly dividend of $.20
on each share of the Company's common stock. The dividend is payable on June
10, 1999, to shareholders of record at the close of business on May 10, 1999.
12
<PAGE>
YEAR 2000 COMPUTER SYSTEMS
The Company views the impact of the Year 2000 as a critical business issue. It
manages the process by having each business identify its own Year 2000 issues
and develop appropriate corrective action steps, while instituting a series of
management processes that coordinate and manage the process across business
boundaries and the corporate center. The process includes corporate oversight
and provides for consistent attention to progress made against planned
activities and a forum for issue resolution at the business and corporate levels
with periodic assessments made by independent parties which are periodically
reported to the Company's Board of Directors.
The Company recognizes that the Year 2000 issue is not limited to computer
programs normally associated with the processing of business information, but
can also be found in certain equipment and processes used in manufacturing and
operation of facilities. Furthermore, it also recognizes that the potential
exists for Year 2000 issues within the supply chain. The Company's approach was
to subdivide the program into four distinct segments: 1) Business Systems; 2)
Manufacturing; 3) Supply Chain; and 4) Infrastructure.
In the business systems segment, the Company has positioned itself very
favorably with respect to software and equipment that is Year 2000 compliant. In
1994, the Company began implementing a Year 2000 compliant client-server system,
Peoplesoft, to address payroll and human resource needs and it presently uses
such system in all domestic operations. Deployment of Peoplesoft was completed
in 1997. In 1993, the Company began implementing for all domestic businesses a
client-server system, SAP, for core business requirements as a vehicle to obtain
certain improvements in the business processes. SAP is currently utilized in all
of its domestic businesses. Since SAP was also a certified Year 2000 compliant
solution, migration plans were adjusted to take advantage of the business
benefit while eliminating the cost of remediating old legacy system code.
Deployment has been aggressive with all domestic functions and locations fully
transferred to SAP as of March 1999. In recognition of the key role that SAP
plays in the Company's business operations, an independent system test was
performed as further protection of Year 2000 compliance. Results of the
successful system testing have been documented and preserved as supportive
evidence in responding to Year 2000 inquiries from our customers. International
locations have upgraded their existing operational and personnel systems to Year
2000 compliant versions and will continue using existing systems until
conversion to SAP during 2000 and beyond.
In the manufacturing segment, plant level employees and independent
assessments were used to identify places where embedded systems exist and
categorize them by the potential impact to the business. The plan, which takes
maximum advantage of "planned outages" in order to minimize the impact on
operations, targets completion in May 1999.
The supply chain segment has seen much activity in terms of assessing vendor
Year 2000 preparedness, identifying alternate sources, as well as insertion of
certain Year 2000 compliance language in all purchase orders issued. The Company
has completed a review of single source and critical suppliers. During 1999, the
Company will continue to re-evaluate its suppliers on a periodic basis.
Personal computers, networks, and PBX's represent the majority of items in the
Company's infrastructure segment. The Company has deployed new Pentium Year 2000
compliant equipment in large numbers to support its SAP deployment program and
for internal standards compliance. In addition, the Company has utilized
software tools to test the entire PC inventory for Year 2000 compliance. The
Company's wide area network is already Year 2000 compliant as are most of its
PBX's and voice mail systems. The non-compliant equipment is planned to be
replaced with compliant versions as leases expire but no later than June 1999.
The Company believes its Year 2000 initiative is on track to address all
significant Year 2000 issues by the middle of 1999, and is supported by the
findings of an independent assessment completed in December 1998. The
independent assessment does not address the accuracy of the Company's cost
estimates. Plans include an additional independent assessment in July 1999.
13
<PAGE>
Plans for a worst case scenario in the unlikely event of a major failure due
to a Year 2000 problem which causes significant disruptions to business
operations are being formulated. In the area of business systems, management
believes that the Company, with its operating units already migrated to Year
2000 compliant solutions, has already significantly reduced its potential risk.
As added protection, software migration plans to a new release of Peoplesoft
which is planned in 1999, include Year 2000 testing scenarios.
The Company continues to focus attention to the manufacturing segment. It has
deployed several independent initiatives to identify embedded systems, develop
comprehensive equipment lists, obtained vendor certifications of Year 2000
compliance, and to insure that adequate remediation plans are in place. It has
developed plans for further testing with respect to key manufacturing equipment
and systems, during periods of scheduled outages.
The Company will continue to monitor progress against plans in the business
systems, manufacturing, infrastructure, and supply chain segments, and take
corrective action should slippage occur. The use of vendor-supplied Year 2000
compliant solutions, coupled with substantive pre-testing of key systems and a
strong management commitment and oversight are the cornerstone of the Company's
Year 2000 program.
Nonetheless, in the unlikely occurrence of some unforeseen event, divisional
emergency teams skilled in each of the disciplines will be formed during the
last half of 1999. They will be deployed to assist local personnel in the event
of a Year 2000 issue at the turn of the millennium.
The Company does not expect Year 2000 initiative costs to exceed $7 million
over the next 9 months, inclusive of the cost for continued deployment of SAP
and related infrastructure.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company is currently evaluating the effect this statement will have on its
financial position and results of operations in the period of adoption.
In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The Company adopted this
statement as of January 1, 1999, and it did not have a material effect on its
financial position or results of operations.
Also in 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities." This Statement of Position requires the expensing of certain costs
such as pre-operating expenses and organizational costs associated with the
Company's start-up activities, and is effective for fiscal years beginning after
December 15, 1998. The Company adopted this statement as of January 1, 1999, and
it did not have a material effect on its financial position or results of
operations.
14
<PAGE>
CAUTIONARY STATEMENT UNDER FEDERAL SECURITIES LAWS
The information in this Form 10-Q contains forward-looking statements that are
based on management's beliefs, certain assumptions made by management and
management's current expectations, estimates and projections about the markets
and economy in which the Company and its business segments operate. Words such
as "anticipates," "believes," "estimates," "expects," "forecasts," "opines,"
"plans," "projects," "should," "will," and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expected or forecasted in such forward-looking statements. The Company does not
undertake any obligation to update publicly any forward-looking statements,
whether as a result of future events, new information or otherwise. Future
factors which could cause actual results to differ materially from those
discussed include but are not limited to: general economic and business and
market conditions, lack of moderate growth in the U.S. economy or even a slight
recession in 1999, loss of a key customer, higher than expected raw material
costs for certain chemical product lines, increased foreign competition in the
calcium hypochlorite markets, lack of stability, recovery or growth in the
semiconductor industry, the Company's ability to maintain chemical price
increases, the supply/demand balance for the Company's products, failure to
achieve targeted cost reduction programs, unsuccessful entry into new markets
for electronic chemicals, continued poor economic conditions in Asia, capital
expenditures, such as cost overruns, in excess of those scheduled, the
occurrence of unexpected manufacturing interruptions/outages, environmental
costs in excess of those projected, increased competitive and/or customer
pressure, customer acceptance of new products, efficacy of new technology,
changes in U.S. laws and regulations, costs or difficulties relating to the
establishment of the Company as an independent entity, and unfavorable court or
jury decisions.
15
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended March
31, 1999 except for a Form 8-K filed with respect to Item 5 on
February 17, 1999.
16
<PAGE>
SIGNATURES
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.
ARCH CHEMICALS, INC.
(Registrant)
By: Louis S. Massimo
-----------------------
Vice President and
Chief Financial Officer
(Authorized Officer)
Date: May 14, 1999
17
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--------- -----------
27. Financial Data Schedule.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN ITEM 1 OF FORM 10-Q FOR THE PERIOD ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. FIGURES ARE ROUNDED TO THE NEAREST 100,000 (EXCEPT EPS).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,400
<SECURITIES> 0
<RECEIVABLES> 197,500
<ALLOWANCES> 0
<INVENTORY> 128,100
<CURRENT-ASSETS> 361,500
<PP&E> 842,700
<DEPRECIATION> (524,100)
<TOTAL-ASSETS> 751,400
<CURRENT-LIABILITIES> 186,900
<BONDS> 81,900
0
0
<COMMON> 23,000
<OTHER-SE> 407,300
<TOTAL-LIABILITY-AND-EQUITY> 751,400
<SALES> 225,000
<TOTAL-REVENUES> 225,000
<CGS> 157,700
<TOTAL-COSTS> 157,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> 20,800
<INCOME-TAX> 7,300
<INCOME-CONTINUING> 13,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,500
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
