<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ 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
For the transition period from _______ to _______
Commission file number: 1-14601
Arch Chemicals, Inc.
(Exact name of registrant as specified in its charter)
Virginia 06-1526315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
501 Merritt 7, Norwalk, CT 06851
(Address of principal executive offices) (Zip Code)
(203) 229-2900
(Registrant's telephone number, including area code)
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 October 29, 1999, there were 23,002,830 outstanding shares of the
registrant's common stock.
<PAGE>
ARCH CHEMICALS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page Numbers
------------
PART I. FINANCIAL INFORMATION:
----------------------
<S> <C> <C>
Item 1. Financial Statements..................................................... 2
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.................................................... 2
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 1999 and 1998................................. 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998........................................ 4
Notes to Condensed Consolidated Financial Statements..................... 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9 - 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 18
PART II. OTHER INFORMATION:
------------------
Item 6. Exhibits and Reports on Form 8-K......................................... 19
Signatures.......................................................................... 20
Exhibit Index....................................................................... 21
</TABLE>
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
September 30, December 31,
1999 1998
---- ----
ASSETS
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 19.2 $ 7.1
Accounts receivable, net 201.2 141.7
Inventories, net 128.8 139.3
Other current assets 27.6 25.6
-------- --------
Total current assets 376.8 313.7
Investments and advances - affiliated companies at equity 18.4 21.1
Property, plant and equipment, net 320.9 331.6
Goodwill 37.7 34.8
Other assets 23.9 20.4
-------- --------
Total assets $ 777.7 $ 721.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 28.7 $ 0.9
Accounts payable 106.1 106.7
Accrued liabilities 67.3 59.0
-------- --------
Total current liabilities 202.1 166.6
Long-term debt 81.5 7.0
Other liabilities 47.5 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 422.9 --
Retained earnings from February 8, 1999 24.9 --
Equity -- 519.0
Cumulative translation adjustment (24.2) (14.5)
-------- --------
Total shareholders' equity 446.6 504.5
-------- --------
Total liabilities and shareholders' equity $ 777.7 $ 721.6
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of the condensed consolidated
financial statements.
2
<PAGE>
ARCH CHEMICALS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 201.6 $ 203.6 $ 694.8 $ 694.4
Operating expenses:
Cost of goods sold 151.0 152.9 499.1 493.7
Selling and administration 40.1 41.0 123.9 127.9
Research and development 4.9 4.3 13.8 13.1
--------- --------- ------- ---------
Operating income 5.6 5.4 58.0 59.7
--------- --------- ------- ---------
Equity in earnings of affiliated companies 1.3 0.8 4.0 2.8
Interest expense 1.5 0.2 4.1 0.4
Interest income 0.1 0.2 0.5 0.7
--------- --------- ------- ---------
Income before taxes 5.5 6.2 58.4 62.8
Income taxes 1.4 2.2 19.9 21.4
--------- --------- ------- ---------
Net income $ 4.1 $ 4.0 $ 38.5 $ 41.4
========= ========= ======= =========
Basic and diluted income per common share $ 0.18 $ 0.14 (a) $ 1.67 $ 1.65 (a)
========= ========= ======= =========
Weighted average common shares outstanding:
Basic 23.0 23.0 (a) 23.0 23.0 (a)
========= ========= ======= =========
Diluted 23.1 23.0 (a) 23.1 23.0 (a)
========= ========= ======= =========
</TABLE>
(a) Pro forma financial information - In January 1999, Olin borrowed $75 million
and on February 8, 1999 the Company assumed this debt from Olin. Pro forma
income per share of $0.14 and $1.65 are based upon pro forma net income of $3.2
million and $38.0 million and pro forma common stock outstanding of 23.0 million
shares for the three and nine months ended September 30, 1998, respectively. Pro
forma net income reflects pro forma interest expense of $1.5 million and $5.7
million on assumed borrowings for the three and nine months ended September 30,
1998, respectively. This assumes that $75 million was outstanding for such
periods and that the Company has seasonal weighted average borrowings related to
the Water Chemicals segment of $40 million for the first six months of 1998.
Such borrowings were assumed to be at an aggregate effective rate of 7% for the
three and nine months ended September 30, 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 consolidated
financial statements.
3
<PAGE>
ARCH CHEMICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
Operating activities
- --------------------
<S> <C> <C>
Net income $ 38.5 $ 41.4
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Equity in earnings of affiliates (4.0) (2.8)
Depreciation and amortization 40.1 34.3
Deferred taxes 1.2 5.5
Change in assets and liabilities, net of purchase of business:
Receivables (58.5) (0.6)
Inventories 10.9 17.6
Other current assets (0.8) 0.9
Accounts payable and accrued liabilities 5.3 (14.8)
Noncurrent liabilities (2.0) (6.1)
Other operating activities (0.5) 0.3
------- -------
Net operating activities 30.2 75.7
------- -------
Investing activities
- --------------------
Capital expenditures (34.1) (52.2)
Business acquired in purchase transaction (8.0) --
Other investing activities 1.2 (2.5)
------- -------
Net investing activities (40.9) (54.7)
------- -------
Financing activities
- --------------------
Long-term debt borrowings, net 74.6 --
Short-term borrowings (repayments) 27.7 (1.0)
Dividends paid (9.2) --
Transfer to Olin (71.6) (25.6)
Other financing activities 0.3 --
------- -------
Net financing activities 21.8 (26.6)
------- -------
Effect of exchange rate changes on cash and cash equivalents 1.0 2.1
------- -------
Net increase (decrease) in cash and cash equivalents 12.1 (3.5)
Cash and cash equivalents, beginning of year 7.1 9.0
------- -------
Cash and cash equivalents, end of period $ 19.2 $ 5.5
======= =======
Supplemental cash flow information:
Taxes paid $ 13.2 $ --
======= =======
Interest paid $ 3.5 $ 0.4
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of the condensed consolidated financial statements.
4
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
Basis of Presentation
These condensed financial statements 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 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 and nine months ended September 30, 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.
Inventories
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -------------------
<S> <C> <C>
Raw materials and supplies $ 55.2 $ 55.4
Work in process 9.9 14.2
Finished goods 116.1 121.7
----------------- -------------------
Inventories, gross 181.2 191.3
LIFO reserve (52.4) (52.0)
----------------- -------------------
Inventories, net $128.8 $139.3
================= ===================
</TABLE>
Inventories are valued principally by the dollar value last-in,
first-out ("LIFO") method of inventory accounting. Elements of costs in
inventories include raw materials, direct labor and manufacturing overhead.
Inventories under the LIFO method are based on an annual determination of
quantities and costs as of the year-end; therefore, the condensed financial
statements at September 30, 1999 reflect certain estimates relating to inventory
quantities and costs at December 31, 1999.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options.
5
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
A reconciliation of basic and diluted weighted average common shares
outstanding is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1999
------------------- -------------------
<S> <C> <C>
Basic 23.0 23.0
Common equivalent shares from stock options
using the treasury stock method 0.1 0.1
------------------- -------------------
Diluted 23.1 23.1
=================== ===================
</TABLE>
Pro forma earnings per share is based upon pro forma net income of $3.2
and $38.0 and pro forma common stock outstanding of 23.0 million shares for the
three and nine months ended September 30, 1998. Pro forma net income reflects
pro forma interest expense of $1.5 and $5.7 on borrowings for the three and nine
months ended September 30, 1998, respectively. This assumes that $75.0 of debt
assumed from Olin was outstanding (see Long-Term Debt) for such periods and that
the Company had seasonal weighted average borrowings related to the water
chemicals segment of $40.0 for the first six months of 1998. Such borrowings
were assumed to be at an aggregate effective interest rate of 7% for the three
and nine months ended September 30, 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
The Company's other comprehensive income currently 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 and nine months ended September 30, 1999 and
1998 was $5.2 and $28.8, and $7.1 and $43.5, 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 0.325%
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
$19.41 (fair market value of the common stock on the grant date). In addition,
the Company granted to certain employees approximately 245,000 performance share
units. All of these grants were made under the Company's 1999 Long Term
Incentive Plan. The options vest at the end of a three-year period and are
exercisable up to ten years from the date of grant. The performance share units
will vest if certain performance measures are met at the end of a three-year
performance period and upon vesting are paid out in shares of common stock.
Units may be paid out in shares on a basis of up to 1.5 shares for every unit
depending on the Company's performance.
6
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
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 (loss) includes the equity in earnings of affiliated companies.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------ ------------------------------
Sales:
<S> <C> <C> <C> <C>
Microelectronic Chemicals $ 55.2 $ 55.1 $160.8 $176.5
Water Chemicals 63.2 66.4 284.6 258.0
Performance Chemicals 83.2 82.1 249.4 259.9
------------------------ ------------------------------
Total Sales $201.6 $203.6 $694.8 $694.4
======================== ==============================
Operating Income (Loss):
Microelectronic Chemicals $ (1.5) $ (3.7) $ (2.8) $ (0.6)
Water Chemicals (0.8) (3.0) 33.3 21.7
Performance Chemicals -
Before Nonrecurring Expenses 11.5 12.9 33.8 41.4
------------------------ ------------------------------
Total Operating Income
Before Nonrecurring
Expenses 9.2 6.2 64.3 62.5
Nonrecurring Expenses (a) (2.3) -- (2.3) --
------------------------ ------------------------------
Total Operating Income $ 6.9 $ 6.2 $ 62.0 $ 62.5
======================== ==============================
Capital Spending:
Microelectronic Chemicals $ 4.7 $ 14.4 $ 9.3 $ 33.1
Water Chemicals 4.8 2.5 6.9 7.2
Performance Chemicals 8.2 5.9 17.9 11.9
------------------------ ------------------------------
Total Capital Spending $ 17.7 $ 22.8 $ 34.1 $ 52.2
======================== ==============================
</TABLE>
(a) Nonrecurring expenses associated with the Performance Chemicals segment
relate to an arbitration award and expenses related to the decision to
delay the construction of a facility in China.
7
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
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 nine months ended September 30, 1999 except that on
August 18, 1999, an arbitration panel ruled unfavorably against the Company in a
matter concerning a toxicology data package resulting in a nonrecurring charge
during the third quarter.
See the Company's most recent Form 10-K for additional information on
the above items.
Subsequent Event
On October 28, 1999, Arch's Board of Directors approved a stock
repurchase program whereby the Company is authorized to buy back up to 1.2
million shares of its common stock, representing approximately 5% of outstanding
shares.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
- --------
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 when it 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.
Historically, 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.
In addition, segment operating income includes the equity in earnings of
affiliated companies.
Results of Operations
- ---------------------
Consolidated
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales $201.6 $203.6 $694.8 $694.4
Gross Margin 50.6 50.7 195.7 200.7
Selling and Administration 37.8 41.0 121.6 127.9
Nonrecurring Expenses 2.3 -- 2.3 --
Research and Development 4.9 4.3 13.8 13.1
Equity in Earnings of Affiliated Companies 1.3 0.8 4.0 2.8
Interest Expense 1.5 1.5 (a) 4.1 5.7 (a)
Net Income $ 4.1 $ 3.2 (a) $ 38.5 $38.0 (a)
Basic and Diluted Income Per Share $ 0.18 $ 0.14 (a) $ 1.67 $1.65 (a)
Weighted Average Common Stock Outstanding:
Basic 23.0 23.0 (a) 23.0 23.0 (a)
Diluted 23.1 23.0 (a) 23.1 23.0 (a)
</TABLE>
Note:
- -----
(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 $0.14 and $1.65 are based upon pro forma net
income of $3.2 million and $38.0 million and pro forma common stock outstanding
of 23.0 million shares for the three and nine months ended September 30, 1998,
respectively. Pro forma net income reflects pro forma interest expense of $1.5
million and $5.7 million on borrowings for the three and nine months ended
September 30, 1998, respectively. This assumes that $75 million was outstanding
for such periods and that the Company had seasonal weighted average borrowings
related to the water chemicals segment of $40 million for the first six months
of 1998. Such borrowings were assumed to be at an aggregate effective interest
rate of 7% for the three and nine months ended September 30, 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.
9
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended September 30, 1999 Compared to 1998
Sales decreased 1%. The decrease in sales was due to a 4% decrease in
pricing offset in part by a 3% increase in volumes. The decrease in pricing
and increase in volumes was primarily related to the microelectronic
chemicals and performance chemicals segments.
Gross margin percentage was 25.1% and 24.9% for 1999 and 1998,
respectively. The increase in gross margin was due to higher volumes in the
microelectronic chemicals and performance chemicals segments, partially
offset by lower volumes in the water chemicals segment. In addition, 1999
results were impacted by lower manufacturing costs partly due to the timing
of a plant maintenance outage for water chemicals.
Selling and administration expenses, excluding nonrecurring expenses, as a
percentage of sales decreased to 18.8% in 1999 from 20.1% in 1998. The
decrease is primarily the result of cost-saving initiatives which more than
offset incremental public company costs. Nonrecurring expenses of $2.3
million associated with an unfavorable arbitration award and the decision to
delay construction of a facility in China were incurred during the quarter.
Including nonrecurring expenses, selling and administrative expenses as a
percentage of sales were 19.9% in 1999.
Research and development expenses as a percentage of sales were 2% in 1999
and 1998.
Equity in earnings of affiliated companies increased $0.5 million due to
the favorable performance of both of the Company's joint ventures.
Interest expense was $1.5 million in 1999 and was comparable to pro forma
interest expense of $1.5 million in 1998.
The effective tax rate for the third quarter was 25% in 1999 and 34% in
1998. During the quarter, the full-year effective tax rate was reduced from
35% to 34% due to a change in estimated foreign taxes. This resulted in the
lower effective tax rate for the quarter.
Nine Months Ended September 30, 1999 Compared to 1998
Sales were comparable to the prior year, as a 3% increase in volumes was
offset by a 3% decrease in pricing. The increase in volumes was related to the
water chemicals segment, offset somewhat by lower volumes in the microelectronic
chemicals segment. The decrease in pricing was primarily related to the
microelectronic chemicals and performance chemicals segments.
Gross margin percentage was 28.2% for 1999 and 28.9% for 1998. The decrease
in gross margin was primarily due to the weakness in the semiconductor industry
resulting in both lower volumes and pricing in the microelectronic chemicals
segment, and lower pricing in the performance chemicals segment. In addition,
1999 results were impacted by higher manufacturing costs in the performance
chemicals segment.
Selling and administration expenses, excluding the nonrecurring expenses
discussed above, as a percentage of sales decreased to 17.5% in 1999 from 18.4%
in 1998. The decrease is primarily a result of cost-saving initiatives which
more than offset incremental public company costs and higher advertising
expenses in the water chemicals segment. Including nonrecurring expenses,
selling and administration expenses as a percentage of sales were 17.8% in 1999.
Research and development expenses as a percentage of sales were 2% in 1999
and 1998.
10
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Equity in earnings of affiliated companies increased $1.2 million due to
the favorable performance of both of the Company's joint ventures.
Interest expense was $4.1 million in 1999 compared to pro forma interest
expense of $5.7 million in 1998. The decrease was primarily due to lower average
working capital borrowings and lower rates on such borrowings than those assumed
in prior years.
The effective tax rate of 34% is consistent with 1998.
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 and nine months ended September 30, 1999 and 1998, include
$2.4 million and $7.1 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, and diluted income per share is now expected to
be in the $1.75 range due in part to the short-term impact of higher raw
material costs and the continued negative performance of the process chemicals
product line. Excluding the nonrecurring charges of $2.3 million, diluted income
per share is expected to be in the $1.82 range.
Microelectronic Chemicals
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
----- ----- ----- ----
($ in millions)
Results of Operations
Sales $55.2 $55.1 $160.8 $176.5
Operating Loss (1.5) (3.7) (2.8) (0.6)
Three Months Ended September 30, 1999 Compared to 1998
Sales were comparable to the prior year. The segment reported improved
operating performance in 1999 compared to 1998. The results for the quarter were
negatively impacted by the depressed results of the process chemicals product
line. Process chemicals reported sales of $16.7 million and incurred an
operating loss of $3.1 million compared to sales of $18.8 million and an
operating loss of $3.1 million in 1998.
Excluding the impact of the process chemicals product line, sales increased
6% and operating income improved significantly. This increase in operating
income was due to higher sales across all product lines, lower operating
expenses resulting from cost reduction initiatives, and favorable joint venture
performance.
11
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Nine Months Ended September 30, 1999 Compared to 1998
Sales decreased 9%. The segment reported an operating loss in both periods.
The results for the nine month period were negatively impacted by the depressed
results of the process chemicals product line. Process chemicals reported sales
of $50.7 million and incurred an operating loss of $8.8 million in 1999 compared
to sales of $60.7 million and an operating loss of $5.9 million in 1998. The
lower results reported for the process chemicals business are primarily due to
changes in the competitive environment which have created a more commodity
driven marketplace resulting in lower volumes and pricing.
Excluding the impact of the process chemicals product line, sales decreased
5%, however operating income was higher. This decrease in sales was due in large
part to the weakness in the semiconductor industry as compared to a year ago.
The increase in operating income was due to lower operating expenses resulting
from cost reduction initiatives and favorable joint venture performance.
Water Chemicals
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
----- ----- ----- ----
($ in millions)
Results of Operations
Sales $63.2 $66.4 $284.6 $258.0
Operating Income (Loss) (0.8) (3.0) 33.3 21.7
Three Months Ended September 30, 1999 Compared to 1998
Sales decreased 5% during the seasonally slower third quarter. The segment
reported improved operating performance in 1999 compared to 1998. The sales
decrease was principally driven by lower branded product volumes as sales of the
distribution businesses, Superior Pool Products and Hydrochim, were comparable
to last year. The improvement in operating results was attributable to lower
manufacturing costs and lower raw material costs (chlorinated isocyanurates),
which more than offset reduced operating profits in the distribution businesses.
The lower manufacturing costs were partly due to the timing of a plant
maintenance outage.
Nine Months Ended September 30, 1999 Compared to 1998
Sales increased 10% and operating income increased 53%. The increase in
sales was attributable to increased volumes from the distribution businesses and
higher bulk, export and branded volumes (HTH(R) and Pace(R)). Prices were
comparable to last year as higher average brand prices were offset by lower bulk
prices. Operating income increased as additional sales volumes and the favorable
performance of its joint venture, more than offset increased advertising
expenses. Operating income for the distribution businesses was comparable to
prior year.
The distribution businesses' operating margins are below those of the other
water chemical product lines and do not have a stragetic connection with any of
Arch's other businesses. Therefore, the Company is pursuing strategic options
with respect to its distribution businesses which may involve one or both of
such businesses.
12
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Performance Chemicals
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
----- ----- ----- - ----
($ in millions)
Results of Operations
<S> <C> <C> <C> <C>
Sales $83.2 $82.1 $249.4 $259.9
Operating Income:
Before Nonrecurring Expenses 11.5 12.9 33.8 41.4
Nonrecurring Expenses (2.3) -- (2.3) --
---- ---- ---- ----
Operating Income 9.2 12.9 31.5 41.4
</TABLE>
Three Months Ended September 30, 1999 Compared to 1998
Sales increased 1% and operating income decreased 29%. Excluding $2.3
million of nonrecurring expenses relating to an unfavorable arbitration award
and the decision to delay construction of a facility in China, both of which are
associated with the biocides business, operating income decreased 11% primarily
due to lower hydrazine hydrate pricing.
Performance urethanes and organics sales were comparable as higher
propylene glycol volumes were offset by lower pricing in Latin America,
principally related to surfactants products. Operating income was comparable as
lower selling, general and administrative expenses offset higher raw material
costs.
Biocides sales were 24% higher primarily due to increased volumes in the
anti-dandruff and building products markets. Operating income before
nonrecurring expenses was higher, as the impact of higher sales was partially
offset by higher manufacturing costs.
Hydrazine sales were 20% lower due to lower hydrazine hydrate pricing and
volumes, partially offset by strong sales of UltraPureTM hydrazine. The lower
hydrazine hydrate sales were caused by poor economic conditions in Asia.
Operating income decreased due to lower hydrazine hydrate sales and higher
manufacturing costs.
Sulfuric acid sales were comparable. Operating income was lower as a result
of higher manufacturing costs.
Nine Months Ended September 30, 1999 Compared to 1998
Sales decreased 4% and operating income decreased 24%. Excluding the
nonrecurring expenses discussed above, operating income decreased 18% primarily
due to lower hydrazine hydrate sales.
Performance urethanes and organics sales decreased due to lower pricing and
volumes for nonfoam polyols and lower pricing for propylene glycol products
combined with lower volumes and prices in Latin America, principally related to
the surfactants businesses. 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.
13
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Biocides sales were higher primarily due to increased international volumes
related to the anti-dandruff and building products markets. Operating income
before nonrecurring expenses was higher due to the impact of higher sales
partially offset by higher international operating costs. In addition,
manufacturing expenses were negatively impacted by an unscheduled outage at the
Rochester plant during the first quarter of 1999 resulting from a severe
snowstorm.
Hydrazine sales were lower due to lower hydrazine hydrate prices and
volumes caused by poor Asian economic conditions and lower Ultra PureTM sales
due to the timing of 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.
Sulfuric acid sales were comparable to prior year as lower volumes offset
higher pricing. Operating income increased slightly compared to prior year.
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 and nine months ended September 30, 1999 and 1998, include
$2.4 million and $7.1 million, respectively, related to the amortization of
deferred income under the supply agreement.
Liquidity, Investment Activity and Other Financial Data
- -------------------------------------------------------
Cash Flow Data
Nine Months
Ended September 30,
1999 1998
---- ----
($ in millions)
Provided By (Used For)
Net Operating Activities $ 30.2 $ 75.7
Capital Expenditures (34.1) (52.2)
Net Investing Activities (40.9) (54.7)
Net Financing Activities 21.8 (26.6)
Prior and up to the spin-off, the Company's financing requirements were provided
by Olin.
14
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the nine months ended September 30, 1999, the reduction in cash flow
provided by net operating activities was primarily attributable to higher
working capital due to higher seasonal demand, resulting in higher accounts
receivable in the water chemicals segment as compared to 1998.
Capital expenditures for the first nine months of 1999 as compared to 1998
decreased approximately 35%. The decrease is primarily attributable to the
completion of certain capital projects in the microelectronic chemicals segment
in 1998 and as a result of the Company's focus on reducing capital spending
levels.
Capital expenditures for 1999 are expected to decrease approximately 25-35%
from 1998 as a result of the completion of such capital projects in 1998, the
decision to delay construction of a facility in China, and the Company's
continued focus on reducing capital spending levels.
In September 1999, Arch purchased the hydroquinone di (beta-hydroxyethyl)
ether ("HQEE") specialty chemicals business of Eastman Chemical Company,
Kingsport, Tennessee.
On September 10, 1999, the Company paid its second quarterly dividend of
$0.20 on each share of common stock. Total dividends paid to shareholders were
$9.2 million during the first nine months of 1999.
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 0.325% to 1.00% and the prime rate. At September 30, 1999, the
Company had $167 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 October 28, 1999, Arch's Board of Directors approved a stock repurchase
program whereby the Company is authorized to buy back up to 1.2 million shares
of its common stock, representing approximately 5% of outstanding shares. The
Company believes that its current financing ability and liquidity is more than
adequate to fund this program and allows it to continue to pursue strategic
acquisitions.
On October 28, 1999, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on December
10, 1999, to shareholders of record at the close of business on November 10,
1999.
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.
15
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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. Through a remediation
plan, which has made maximum advantage of "planned outages" in order to minimize
the impact on operations, Arch remains with 11 items for full compliance. These
remaining items are scheduled to be completed during November 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 the remainder of 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 and all voice mail systems and PBX's are now Year
2000 compliant.
The Company believes its Year 2000 initiative is on track to address
significant Year 2000 issues, and is supported by the findings of independent
assessments completed in December 1998 and July 1999. The independent
assessments did not address the accuracy of the Company's cost estimates.
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 newer releases of core business
systems (e.g. Peoplesoft, SAP) include Year 2000 testing scenarios.
16
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company continues to focus attention to the manufacturing segment. It
has deployed several independent initiatives to identify embedded systems,
develop comprehensive equipment lists, obtain vendor certifications of Year 2000
compliance, and 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,
contingency plans have been developed, which include a provision for the
formation of emergency teams skilled in each of the disciplines. They will be
deployed to assist local personnel in the event of a Year 2000 issue at the turn
of the millennium. A plan to track the millennium rollover status at each of
Arch's locations has also been developed. A centralized Year 2000 command center
will be established and manned throughout the rollover time period. In addition,
certain manufacturing plants have scheduled partial to total shutdowns during
the millennium rollover.
The Company does not expect Year 2000 initiative costs to exceed $1 million
over the next three 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, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. 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.
17
<PAGE>
ARCH CHEMICALS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 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, quality improvement and operating efficiency 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, failure of customers to accept
new products such as deep UV, 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 arbitration, court or jury
decisions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes from that reported in the Company's Form 10-K for the year
ended December 31, 1998.
18
<PAGE>
ARCH CHEMICALS, INC.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-K.
27. Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
19
<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)
November 12, 1999 By: Louis S. Massimo
----------------
Louis S. Massimo
Vice President and Chief
Financial Officer
20
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
--- ----------- ----
27. Financial Data Schedule 22
21
<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
September 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,200
<SECURITIES> 0
<RECEIVABLES> 201,200
<ALLOWANCES> 0
<INVENTORY> 128,800
<CURRENT-ASSETS> 376,800
<PP&E> 863,000
<DEPRECIATION> 542,100
<TOTAL-ASSETS> 777,700
<CURRENT-LIABILITIES> 202,100
<BONDS> 81,500
0
0
<COMMON> 23,000
<OTHER-SE> 423,600
<TOTAL-LIABILITY-AND-EQUITY> 777,700
<SALES> 694,800
<TOTAL-REVENUES> 694,800
<CGS> 499,100
<TOTAL-COSTS> 499,100
<OTHER-EXPENSES> 137,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,100
<INCOME-PRETAX> 58,400
<INCOME-TAX> 19,900
<INCOME-CONTINUING> 38,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,500
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.67
</TABLE>
