<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, 2000
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 31, 2000, there were 22,129,905 outstanding shares of the
registrant's common stock.
<PAGE>
ARCH CHEMICALS, INC.
INDEX
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<TABLE>
<CAPTION>
Page Numbers
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<S> <C>
PART I. FINANCIAL INFORMATION:
---------------------
Item 1. Financial Statements................................................. 2
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999................................................ 2
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999............................. 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999.................................... 4
Notes to Condensed Consolidated Financial Statements................. 5-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 10-18
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,
2000 1999
---- ----
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 23.5 $ 12.1
Accounts receivable, net 213.6 168.6
Inventories, net 147.4 147.3
Other current assets 28.3 26.7
Assets held for sale 80.4 -
--------- ---------
Total current assets 493.2 354.7
Investments and advances - affiliated companies at equity 31.8 20.8
Property, plant and equipment, net 364.5 326.7
Goodwill 140.6 37.1
Other assets 26.2 20.2
--------- ---------
Total assets $ 1,056.3 $ 759.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 2.5 $ 21.0
Accounts payable 124.3 108.1
Accrued liabilities 110.3 57.1
--------- ---------
Total current liabilities 237.1 186.2
Long-term debt 286.0 76.8
Other liabilities 77.6 44.7
Commitments and contingencies
Shareholders' equity:
Common stock, par value $1 per share, Authorized 100.0 shares:
22.1 shares issued and outstanding in 2000 (22.6 in 1999) 22.1 22.6
Additional paid-in capital 423.3 431.9
Retained earnings from (February 8, 1999) 48.0 23.8
Accumulated other comprehensive loss (37.8) (26.5)
--------- ---------
Total shareholders' equity 455.6 451.8
--------- ---------
Total liabilities and shareholders' equity $ 1,056.3 $ 759.5
========= =========
</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,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 200.3 $ 201.6 $ 694.2 $ 694.8
Costs and expenses:
Cost of goods sold 149.1 151.0 501.3 499.1
Selling and administration 40.2 40.1 122.4 123.9
Research and development 4.4 4.9 12.1 13.8
Equity in (earnings) of affiliated companies (2.3) (1.3) (5.9) (4.0)
Acquisition related costs 2.2 - 2.2 -
Restructuring charge 7.5 - 7.5 -
Other (gains) and losses (10.6) - (10.6) -
Interest expense, net 2.8 1.4 8.2 3.6
--------- -------- --------- ---------
Income before taxes 7.0 5.5 57.0 58.4
Income tax provision 2.4 1.4 19.4 19.9
--------- -------- --------- ---------
Net income $ 4.6 $ 4.1 $ 37.6 $ 38.5
========= ======== ========= =========
Net income per common share:
Basic $ 0.21 $ 0.18 $ 1.69 $ 1.67
========= ======== ========= =========
Diluted $ 0.21 $ 0.18 $ 1.68 $ 1.67
========= ======== ========= =========
Weighted average common shares outstanding:
Basic 22.2 23.0 22.3 23.0
========= ======== ========= =========
Diluted 22.2 23.1 22.3 23.1
========= ======== ========= =========
Dividends declared per share $ 0.20 $ 0.20 $ 0.60 $ 0.40
========= ======== ========= =========
</TABLE>
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,
-------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
--------------------
Net income $ 37.6 $ 38.5
Adjustments to reconcile net income to net cash and
cash equivalents provided (used) by operating activities:
Equity in earnings of affiliates (5.9) (4.0)
Depreciation and amortization 39.8 40.1
Deferred taxes 8.4 1.2
Other (gains) and losses (10.6) -
Acquisition related costs 2.2 -
Restructuring charge 7.5 -
Changes in assets and liabilities net of
purchases and sales of businesses:
Receivables 2.2 (58.5)
Inventories 16.5 10.9
Other current assets (1.6) (0.8)
Accounts payable and accrued liabilities (20.9) (8.2)
Noncurrent liabilities (0.3) (2.0)
Other operating activities (2.9) (0.5)
------- -------
Net operating activities from continuing operations 72.0 16.7
Change in net assets held for sale 4.5 -
------- -------
Net operating activities 76.5 16.7
------- -------
Investing activities
--------------------
Capital expenditures (43.2) (34.1)
Businesses acquired in purchase transactions, net of cash acquired (140.5) (8.0)
Proceeds from sales of businesses 21.1 -
Disposition of property, plant and equipment 6.3 -
Investments and advances - affiliated companies at equity (3.4) -
Other investing activities 3.2 1.2
------- -------
Net investing activities (156.5) (40.9)
------- -------
Financing activities
--------------------
Long-term debt assumed from Olin Corporation - 75.0
Long-term debt borrowings 210.8 -
Long-term debt (repayments) (73.6) (0.4)
Short-term borrowings (repayments) (20.8) 27.7
Dividends paid (13.4) (9.2)
Purchases of Arch common stock (9.5) -
Transfers to Olin Corporation - (58.1)
Other financing activities 0.4 0.3
------- -------
Net financing activities 93.9 35.3
------- -------
Effect of exchange rate changes on cash and cash equivalents (2.5) 1.0
------- -------
Net increase in cash and cash equivalents 11.4 12.1
Cash and cash equivalents, beginning of year 12.1 7.1
------- -------
Cash and cash equivalents, end of period $ 23.5 $ 19.2
======= =======
Supplemental cash flow information:
Taxes paid $ 8.2 $ 13.2
======= =======
Interest paid $ 8.0 $ 3.5
======= =======
</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
The condensed financial statements included herein have been prepared by
Arch Chemicals, Inc. ("Arch" or 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, 1999. In addition, these condensed financial
statements should be read in conjunction with the Form 8-K/A, filed by the
Company on November 2, 2000, in connection with the acquisition of Hickson
International PLC ("Hickson"), which contains pro forma financial information.
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, 2000, are not necessarily indicative
of the results to be expected for the entire fiscal year. Results for the three
and nine months ended September 30, 2000 include the results of Superior Pool
Products, Inc. ("SPPI") until the date of sale (July 31, 2000) and the results
of Hickson from the date of acquisition (August 22, 2000). SPPI's results are
included in the water chemicals segment. Hickson's results are included in the
performance chemicals segment.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 2000 presentation.
Inventories
September 30, December 31,
2000 1999
---------------- ---------------
Raw materials and supplies $ 60.9 $ 54.9
Work in process 22.3 13.4
Finished goods 114.5 129.0
---------------- ---------------
Inventories, gross 197.7 197.3
LIFO reserve (50.3) (50.0)
---------------- ---------------
Inventory, net $147.4 $147.3
================ ===============
Inventories are valued principally by the dollar value last-in, first-out
(LIFO) method of inventory accounting. Elements of costs in inventories include
raw materials, direct labor and manufacturing overhead. Inventories under the
LIFO method are based on an annual determination of quantities and costs as of
the year end; therefore, the condensed financial statements at September 30,
2000 reflect certain estimates relating to inventory quantities and costs at
December 31, 2000.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options.
5
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
A reconciliation of basic and diluted weighted average common shares
outstanding is as follows (in millions):
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
----------------------- ---------------------
Basic 22.2 23.0 22.3 23.0
Common equivalent shares
from stock options using
the treasury stock method -- 0.1 -- 0.1
----------------------- ---------------------
Diluted 22.2 23.1 22.3 23.1
======================= =====================
Comprehensive Income (Loss)
The Company's accumulated other comprehensive income (loss) 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 of foreign
subsidiaries. Comprehensive income (loss) for the three and nine months ended
September 30, 2000 and 1999 was $(3.1) and $26.3, and $5.2 and $28.8,
respectively.
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.
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
----------------------- --------------------
Sales:
Microelectronic Chemicals $ 57.3 $ 55.2 $ 167.1 $ 160.8
Water Chemicals 46.8 63.2 268.5 284.6
Performance Chemicals 96.2 83.2 258.6 249.4
-------- -------- -------- --------
Total Sales $ 200.3 $ 201.6 $ 694.2 $ 694.8
======== ======== ======== ========
Operating Income (Loss):
Microelectronic Chemicals $ 2.4 $ (1.5) $ 3.7 $ (2.8)
Water Chemicals (4.4) (0.8) 31.4 33.3
Performance Chemicals 10.9 9.2(a) 29.2 31.5(a)
-------- -------- -------- --------
Total Operating Income $ 8.9 $ 6.9 $ 64.3 $ 62.0
======== ======== ======== ========
Capital Spending:
Microelectronic Chemicals $ 3.9 $ 4.7 $ 12.2 $ 9.3
Water Chemicals 5.6 4.8 9.8 6.9
Performance Chemicals 7.6 8.2 21.2 17.9
-------- -------- -------- --------
Total Capital Spending $ 17.1 $ 17.7 $ 43.2 $ 34.1
======== ======== ======== ========
(a) Includes $2.3 million of nonrecurring expenses related to an arbitration
award and expenses related to the decision to delay the construction of a
facility in China.
6
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
U.S. Government Contracts
The Company had entered into a contract with the United States Department
of the Air Force to supply hydrazine-based propellant. It was a one-year
contract with four one-year renewal options beginning January 1, 1995, which
expired on December 31, 1999. The Company is currently in the process of
renegotiating this contract and has received an extension of the contract until
December 31, 2000. The new contract is expected to be a three-year contract with
two one-year renewal options. Negotiations are expected to be completed during
the last quarter of 2000.
Joint Venture
In April 2000, Arch formed a joint venture with Wacker Silicones
Corporation to produce and market chemical mechanical planarization slurry
products used in the advanced computer chip manufacturing process. The joint
venture, called Planar Solutions LLC, is expected to provide opportunities in
this high growth area of the semiconductor industry. The Company contributed
cash of approximately $3.4 million and intellectual property to the venture. No
future cash contributions are anticipated at this time. The venture is not
expected to have a material effect on the Company's results of operations in
2000.
Commitments and Contingencies
As a result of the spin-off from Olin Corporation 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, 2000.
See the Company's most recent Form 10-K, and the Form 8-K/A filed by the
Company on November 2, 2000 in connection with the acquisition of Hickson, for
additional information on the above items.
Acquisition
In July 2000, Arch Chemicals UK Holdings Limited ("Arch UK"), a newly
formed, wholly-owned, indirect subsidiary of the Company made a formal cash
offer (the "Offer") for all of the issued shares of UK-based Hickson. The offer,
which was unanimously recommended by Hickson's Board of Directors, was for
(pound)0.55 (US $0.82) in cash for each Hickson share. On August 3, 2000, the
Offer was declared unconditional as to acceptances. On August 22, 2000, Arch UK
declared the offer wholly unconditional (the "Acquisition Date"). To date, Arch
UK has received and paid valid acceptances for Hickson shares totaling
175,064,729, representing approximately 99.4% of the issued share capital of
Hickson. Arch UK has begun the compulsory acquisition process under UK law to
acquire all remaining issued Hickson shares not tendered in the Offer. The total
purchase price, including estimated expenses and net debt assumed ($59 million),
was approximately $215 million. The acquisition of Hickson was accounted for as
a purchase, and accordingly, the results of Hickson have been included in the
consolidated financial statements since the Acquisition Date.
7
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
The Company financed the acquisition, including certain assumed debt
required to be repaid, from a new $225 million revolving credit facility.
Expenses associated with the purchase of derivative instruments to mitigate the
risk of foreign currency fluctuations related to the purchase price and the
effect of the assumption of certain foreign-denominated debt on the transaction
are classified as "Acquisition-related Costs" in the Company's statement of
operations. In connection with the Hickson acquisition, the Company intends to
dispose of Hickson's organics division within one year, and, accordingly, those
assets are classified in the balance sheet as "Assets Held for Sale." See the
Form 8-K/A filed by the Company on November 2, 2000 for additional information
regarding the acquisition of Hickson.
The following table presents pro forma financial information in connection
with the acquisition of Hickson as if it had occurred on January 1, 1999. This
pro forma financial information, which has been prepared on the basis of
preliminary estimates, gives effect to the allocation of the purchase price to
the assets acquired and the liabilities assumed, based on their respective fair
values. The final determination of these fair values could result in purchase
accounting adjustments, which may impact the Company's results of operations and
financial position.
The pro forma information below reflects pro forma adjustments based upon
currently available information and certain estimates and assumptions, and
therefore the actual results may differ from the pro forma results. However,
management believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transaction as contemplated, and that
the pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the pro forma financial information. This information should
be read in conjunction with the Form 8-K/A, filed by the Company on November 2,
2000, in connection with the Hickson acquisition, which contains unaudited pro
forma combined condensed financial statements.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the acquisition had been
completed at the dates indicated. The information does not necessarily indicate
the future operating results or financial position of the Company.
Nine Months
Ended September 30,
2000 1999
--------------------------
Sales $846.0 $860.7
Net income $ 39.4 $ 40.4
Diluted income per share $ 1.77 $ 1.75
Disposition
On July 31, 2000, the Company completed the sale to SCP Pool Corporation of
Covington, LA of the assets of its subsidiary, SPPI, a distributor of swimming
pool equipment, parts and supplies. Net proceeds from the sale were
approximately $21 million and a pretax gain of approximately $11 million was
recorded. Net proceeds from the sale were used to reduce existing debt levels.
Sales and operating income for the nine months ended September 30, 2000 and 1999
include $54.1 million and $2.5 million, and $67.3 million and $2.8 million,
respectively, related to SPPI.
Restructuring Charge
During the third quarter of 2000, the Company recorded a $7.5 million
restructuring charge related to severance and employee benefit costs in
connection with headcount reductions (approximately 70 individuals) associated
with the reorganization of certain businesses, as well as corporate and
centralized services personnel. As
8
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
of September 30, 2000, $0.1 million had been charged against the reserve. At
September 30, 2000, $7.4 million was included in "Accrued Liabilities" in the
Company's consolidated balance sheet, and 17 employees had been terminated.
Assets Held for Sale
The Company's intention is to divest of the Hickson organics division
within twelve months of acquisition. Accordingly, the Company has accounted for
the organics division in accordance with EITF 87-11, "Allocation of Purchase
Price to Assets to be Sold." As such, the fair value of the net assets of this
division has been classified as "Assets Held for Sale" in the Company's
consolidated balance sheet at September 30, 2000. This valuation includes an
estimate of the cash flows, including estimated net sales proceeds, and an
allocation of interest expense during the holding period. The Company expects a
transaction to be completed no later than the third quarter of 2001. The net
earnings (losses) related to the organics division during the holding period are
not included in the consolidated statements of income as of September 30, 2000,
but have been recorded as an adjustment to the net asset value in accordance
with EITF 87-11.
Pending Acquisition
In July 2000, the Company entered into an agreement to purchase the
personal care intermediates business of Brooks Industries for approximately $37
million in cash, to be funded from the Company's Credit Facility. The
transaction will be accounted for as a purchase and is targeted to close during
the fourth quarter of 2000.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
--------
In analyzing the results of operations for the Company and its segments, the
following matters should be considered. Results for the three and nine months
ended September 30, 2000 include the results of Superior Pool Products, Inc.
("SPPI") until the date of sale (July 31, 2000) and the results of Hickson
International PLC ("Hickson") from the date of acquisition (August 22, 2000).
SPPI's results are included in the water chemicals segment. Hickson's results
are included in the performance chemicals segment. 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.
As a result of the acquisition of Hickson and the recent reorganization, the
Company intends on reporting its results for the year ended 2000 according to
the following segments: Microelectronics, Water, Treatment, Performance, and
Other.
Hickson manufactures and supplies specialty chemical products and services
to customers worldwide. Hickson's operations consist of three businesses -- wood
protection, furniture coatings and organic chemicals. The wood protection
business specializes as a global leader in the protective treatment of wood
against decay, insect attack and fire damage and is a leader in the application
of biocides to this sector. The furniture coatings business specializes in
furniture coatings primarily in European markets and utilizes urethane
formulations in over 50% of the products. The organic chemicals business
comprises contract manufacturing for the agricultural herbicide market and the
production of fine chemicals. Hickson's organic chemicals business is not
strategic to Arch and, accordingly, the Company intends to sell the organics
chemicals business within one year.
This acquisition is expected to strengthen the Company's already
significant position in the high-growth biocides and performance urethanes
marketplaces and expand the Company's international operations. Hickson's wood
protection and furniture coatings businesses combined generated $227 million in
sales in 1999 with an operating margin of approximately 11%.
Results of Operations
---------------------
Consolidated
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales $200.3 $201.6 $694.2 $694.8
Gross Margin 51.2 50.6 192.9 195.7
Selling and Administration 40.2 40.1 122.4 123.9
Research and Development 4.4 4.9 12.1 13.8
Equity in (Earnings) of Affiliated Companies (2.3) (1.3) (5.9) (4.0)
Special Items:
Acquisition Related Costs 2.2 -- 2.2 --
Restructuring Charge 7.5 -- 7.5 --
Other (Gains) Losses (10.6) -- (10.6) --
Interest Expense 3.1 1.5 8.7 4.1
Net Income $ 4.6 $ 4.1 $ 37.6 $ 38.5
Income Per Share:
Basic $ 0.21 $ 0.18 $ 1.69 $ 1.67
Diluted $ 0.21 $ 0.18 $ 1.68 $ 1.67
Weighted Average Common Stock Outstanding:
Basic 22.2 23.0 22.3 23.0
Diluted 22.2 23.1 22.3 23.1
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Three Months Ended September 30, 2000 Compared to 1999
Sales were comparable to prior year. The increase in sales associated with
the acquisition of Hickson was offset by the reduction in sales due to the
divestiture of SPPI.
Gross margin percentage was 25.6% and 25.1% for 2000 and 1999,
respectively.
Selling and administration expenses as a percentage of sales were
comparable (20.1% in 2000 from 19.9% in 1999). The net increase in expenditures
is due to the inclusion of Hickson, partially offset by the absence of expenses
related to, an arbitration settlement, the decision to delay construction of a
facility in China, and certain severance costs recorded in 1999, as well as
expenditures associated with SPPI.
Research and development expenses as a percentage of sales were 2% in 2000
and 1999. The amount of expenses decreased $0.5 million primarily due to the
absence of research and development expenses associated with certain copper
slurry technology related to the Company's Planar Solutions LLC joint venture
("Planar"), which are now being reflected in equity in earnings of affiliates.
Equity in earnings of affiliated companies increased $1.0 million due to
the favorable performance of the Company's Fuji Photo Film and Nordesclor joint
ventures, and the inclusion of profits from Hickson-Koppers (Hickson's timber
protection joint venture in Australia), partially offset by Planar losses.
Acquisition related costs of $2.2 million represent expenses associated
with the purchase of derivative instruments used to mitigate the risk of foreign
currency fluctuations related to the purchase price and assumption of certain
foreign-denominated debt in connection with the Hickson acquisition.
Restructuring costs totaling $7.5 million relate to severance and employee
benefit costs in connection with headcount reductions (approximately 70
employees) associated with the reorganization of certain businesses, as well as
corporate and centralized services personnel. The Company expects to realize
future annual savings of approximately $7 million related to these workforce
reductions.
Other (gains) and losses consist principally of the gain in connection with
the sale of SPPI.
Interest expense was $3.1 million in 2000 compared to $1.5 million in 1999.
The increase was primarily due to higher debt levels directly related to the
Hickson acquisition, partially offset by proceeds from the sale of SPPI, and
overall higher interest rates.
The effective tax rate for the third quarter was 34% in 2000 and 25% in
1999. The effective tax rate for the third quarter of 2000 is consistent with
the Company's full-year 1999 effective tax rate of 34%. During the third quarter
of 1999, the full-year effective tax rate was reduced from 35% to 34% due to a
change in estimated foreign taxes, which resulted in a lower effective tax rate
for the quarter.
Nine Months Ended September 30, 2000 Compared to 1999
Sales were comparable, as both overall pricing and volumes were fairly
consistent.
Gross margin percentage was 27.8% and 28.2% for 2000 and 1999,
respectively. The decrease in gross margin was primarily due to higher raw
material prices.
Selling and administration expenses as a percentage of sales decreased to
17.6% in 2000 from 17.8% in 1999. Lower employee benefit related costs, and the
absence of expenses related to, an arbitration settlement, the decision to delay
construction of a facility in China, and certain severance costs recorded in
1999, as well as expenditures associated with SPPI, more than offset higher
expenditures attributable to the acquisition of Hickson.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Research and development expenses as a percentage of sales were 2% in 2000
and 1999. The amount of expenses decreased $1.7 million compared to the prior
year primarily due to the absence of research and development expenses
associated with certain copper slurry technology related to Planar, which are
now being reflected in equity in earnings of affiliates, and slightly lower
expenditures associated with the photopolymers business.
Equity in earnings of affiliated companies increased $1.9 million primarily
due to the favorable performance of the Company's Fuji Photo Film joint venture,
partially offset by Planar losses.
Interest expense was $8.7 million in 2000 compared to $4.1 million in 1999.
The increase was due to higher overall interest rates and higher average
borrowings primarily attributable to higher working capital earlier in the year,
the share repurchase program and the Hickson acquisition, partially offset by
the proceeds from the sale of SPPI.
The effective tax rate for the first nine months of 2000 and 1999 was 34%.
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, 2000 and 1999, include
$2.4 million and $7.1 million, respectively, related to the amortization of
deferred income under the supply agreement. The Company is working to replace
the loss of the income that will result upon the expiration of the contract
through a combination of the commercialization of new products and expansion
into new markets, and acquisitions such as the acquisition of Hickson and the
pending acquisition of Brooks Industries' personal care intermediates ("PCI")
business (see "Pending Acquisition"), as well as the acquisition of the
hydroquinone di (beta-hydroxyethyl) ether ("HQEE") product line purchased from
Eastman Chemicals in September 1999. In addition, cost reduction programs will
continue to be implemented.
For the full fiscal year, excluding the gain on the sale of SPPI,
acquisition related costs and restructuring charges, the Company's 2000 sales
and operating income are expected to be higher than 1999 and diluted income per
share for the full fiscal year is now expected to be in the low end of the $1.89
to $1.95 range, which is approximately 4% higher than the $1.82 reported in
1999.
Microelectronic Chemicals
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $57.3 $55.2 $167.1 $160.8
Operating Income (Loss) 2.4 (1.5) 3.7 (2.8)
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Three Months Ended September 30, 2000 Compared to 1999
Sales increased 4%. The increase in sales was due to a 6% increase in
volumes, partially offset by a 2% decrease in pricing. The segment reported
improved operating income of approximately $4.0 million in 2000 compared to
1999. Excluding the impact of the process chemicals product line, sales
increased 5% and operating income improved significantly, with operating margins
rising to 10% compared to 4% in the prior year. The sales increase was driven
principally by higher volumes of photoresists, including Deep UV, and
ancillaries, as well as strong demand for chemical management services and thin
film equipment. The increase in operating income was due to the higher sales and
the continued strong joint venture performance of Fuji Photo Film.
Process chemicals reported sales of $17.0 million and incurred an operating
loss of $1.8 million, compared to sales of $16.7 million and an operating loss
of $3.1 million in 1999.
Nine Months Ended September 30, 2000 Compared to 1999
Sales increased 4%. The increase in sales was due to a 7% increase in
volumes, partially offset by a 3% decrease in pricing. Excluding the impact of
the process chemicals product line, sales increased 7% and operating income
improved significantly. The sales increase was driven principally by higher
volumes of photoresists, including Deep UV, and ancillaries, as well as strong
demand for chemical management services and thin film systems. The increase in
operating income was due to the higher sales and the continued strong joint
venture performance of Fuji Photo Film.
Process chemicals reported sales of $49.7 million and incurred an operating
loss of $6.7 million, compared to sales of $50.8 million and an operating loss
of $8.6 million in 1999. Although the Company's initiatives to improve process
chemicals' performance in the near-term have been successful in reducing the
operating loss significantly, Arch has planned a major restructuring of the
business to occur during the fourth quarter of 2000. This restructuring will
consolidate facilities, downsize product offerings, and focus on formulated
specialty process chemicals. The restructuring is expected to significantly
improve operating margins to approximately 10% of sales, while reducing sales by
more than 75%. As a result of the restructuring, the Company will record a
fourth quarter charge in connection with workforce reductions and asset
write-downs totaling approximately $50 million. The restructuring is expected to
be completed within three to six months.
Water Chemicals
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $46.8 $63.2 $268.5 $284.6
Operating Income (Loss) (4.4) (0.8) 31.4 33.3
Three Months Ended September 30, 2000 Compared to 1999
Water Chemicals reported sales of $46.8 million and an operating loss of
$4.4 million compared with sales and an operating loss of $63.2 million and $0.8
million, respectively, in 1999. The decrease in sales was attributable to the
divestiture of SPPI on July 31, 2000.
Excluding the results of SPPI, sales were comparable as higher bulk volumes
offset lower branded calcium hypochlorite volumes. The decrease in branded
calcium hypochlorite product is principally due to unseasonably cold and damp
weather in the Northeast U.S. On a similar basis, operating results were a $4.5
million loss
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
compared to $1.8 million in 1999. The decline in operating results was primarily
attributable to sales mix, higher manufacturing costs due to the timing of the
annual plant outage, and higher operating expenses associated with the marketing
of branded products, partially offset by favorable joint venture performance.
Nine Months Ended September 30, 2000 Compared to 1999
Sales and operating income each decreased by 6%.
Excluding the results of SPPI, sales and operating income were $214.4
million and $28.9 million compared to $217.3 million and $30.5 million,
respectively, in 1999. The sales decrease is primarily due to lower volumes of
branded calcium hypochlorite (HTH(R) and Sock-It(R)) due to the unseasonable
weather during the third quarter of 2000, partially offset by slightly higher
branded Trichlor (Pace(R)) volumes. The decline in operating results was
primarily attributable to the lower sales and higher manufacturing costs.
Performance Chemicals
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $96.2 $83.2 $258.6 $249.4
Operating Income 10.9 9.2 29.2 31.5
Three Months Ended September 30, 2000 Compared to 1999
Sales and operating income increased 16% and 18%, respectively. The
improvement is due to the inclusion of the sales and operating income associated
with the acquisition of Hickson's Wood Protection and Furniture Coatings
businesses which occurred on August 22, 2000. In addition, higher pricing, and
the absence of $2.3 million of nonrecurring expenses recorded in 1999, partially
offset by lower volumes and higher raw material costs, contributed to the
increase.
Performance urethanes and organics' sales were 21% higher primarily due to
the acquisition of Hickson's Furniture Coatings business. In addition, higher
pricing for specialty polyols and an increase in contract business offset lower
volumes of both specialty polyols and glycol products due to weak demand.
Operating income was higher as a result of the higher sales, partially offset by
higher raw material costs compared to the prior year.
Biocides' sales were 33% higher primarily as a result of the acquisition of
Hickson's Wood Protection business, partially offset by lower custom chemicals
and metalworking fluid sales. Operating income increased significantly as a
result of the higher sales, lower manufacturing costs, and higher pricing. In
addition, 1999 results include $2.3 million of nonrecurring expenses related to
an arbitration award and expenses related to the decision to delay construction
of a facility in China.
Hydrazine sales were 34% lower as a result of lower hydrazine hydrate
volumes, lower propellant volumes and lower UltraPureTM sales. The business
incurred an operating loss in the current quarter compared to operating income
in the prior year primarily due to the decrease in sales driven by the continued
depressed global market conditions and higher operating costs.
Sulfuric acid sales increased 12% as a result of higher volumes and
pricing. Operating income increased significantly primarily due to the higher
sales and lower distribution costs.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Nine Months Ended September 30, 2000 Compared to 1999
Sales increased 4% and operating income decreased 7%.
Performance urethanes and organics' sales increased 5% primarily due to the
acquisition of Hickson's Furniture Coatings business, as well as higher sales
due to contract business and from the HQEE acquisition, partially offset by
lower volumes in most product areas due to weak demand and competition.
Operating income was lower primarily as a result of higher propylene raw
material prices and natural gas costs compared to the prior year.
Biocides' sales were 18% higher primarily due to the acquisition of
Hickson's Wood Protection business, as well as increased sales in most markets,
principally driven by higher volumes in the anti-dandruff and marine paint
markets. Operating income increased significantly as a result of the higher
sales and lower manufacturing costs. In addition, 1999 results include $2.3
million of nonrecurring expenses related to an arbitration award and expenses
related to the decision to delay construction of a facility in China.
Hydrazine sales decreased 27% as a result of lower hydrazine hydrate
volumes and pricing due to continued weakness in the Asian markets in which the
Company operates, and lower propellant volumes and lower Ultra PureTM sales.
Operating income decreased due to the lower sales, partially offset by favorable
manufacturing costs primarily due to the decision to delay the plant turnaround
until 2001.
Sulfuric acid sales increased 2% due to slightly higher pricing and
volumes. Operating income was comparable to prior year, as the higher sales
offset higher natural gas 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 and nine months ended September 30, 2000 and 1999, include
$2.4 million and $7.1 million, respectively, related to the amortization of
deferred income under the supply agreement. The Company is working to replace
the loss of the income that will result upon the expiration of the contract
through a combination of the commercialization of new products and expansion
into new markets, and acquisitions such as the acquisition of Hickson and the
pending acquisition of Brooks Industries' PCI business (see "Pending
Acquisition"), as well as the acquisition of the HQEE product line purchased
from Eastman Chemicals in September 1999. In addition, cost reduction programs
will continue to be implemented.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Liquidity, Investment Activity and Other Financial Data
-------------------------------------------------------
Cash Flow Data
Nine Months
Ended September 30,
2000 1999
----- ----
($ in millions)
Provided By (Used For)
Net Operating Activities from Continuing Operations $ 72.0 $ 16.7
Capital Expenditures (43.2) (34.1)
Businesses Acquired, net of cash (140.5) (8.0)
Net Investing Activities (156.5) (40.9)
Long-term Debt Borrowings 210.8 --
Net Financing Activities 93.9 35.3
Nine Months Ended September 30, 2000 Compared to 1999
For the nine months ended September 30, 2000, the increase in cash flow
provided by net operating activities from continuing operations was primarily
attributable to lower working capital, principally related to improved
collections of accounts receivable.
Capital expenditures for the first nine months of 2000 increased
approximately $9 million as compared to 1999 due to the timing of certain
capital projects in the microelectronic chemicals and performance chemicals
segments. Capital expenditures for 2000 are expected to be in the $65 million
range.
On August 22, 2000, the Company completed the acquisition of UK-based
Hickson. The total purchase price, inclusive of expenses and net of cash
acquired, was $140.5 million and was financed from a new $225 million revolving
credit facility. See below for additional information concerning this revolving
credit facility. For additional information concerning the Hickson acquisition,
including pro forma financial information, see the Form 8-K/A filed by the
Company on November 2, 2000.
On July 31, 2000, the Company completed the sale to SCP Pool Corporation of
Covington, LA of the assets of its subsidiary, SPPI, a distributor of swimming
pool equipment, parts and supplies. Net proceeds from the sale were
approximately $21 million. A gain on the transaction of approximately $11
million was recorded. Net proceeds from the sale were used to reduce existing
debt levels.
In April 2000, the Company formed Planar, a joint venture with Wacker
Silicones Corporation, to produce and market chemical mechanical planarization
slurry products used in the advanced computer chip manufacturing process. The
Company contributed cash of approximately $3.4 million and intellectual property
to the venture. No future cash contributions are anticipated at this time.
In March 2000, the Company completed the sale of its building in Cheshire,
Connecticut. Proceeds from the sale were $6.3 million. No gain or loss was
recorded on the transaction. The Company subsequently leased approximately 40%
of the facility from the new owner. This transaction is expected to generate
approximately $1 million in cost savings per year.
The Company has an unsecured $125 million revolving five-year credit
facility which expires in January 2004, an unsecured $125 million, 364-day
facility which expires in January 2001, and a $225 million revolving credit
facility which expires in March 2002 which the Company utilized to finance the
Hickson acquisition and refinance a portion of the assumed debt (collectively,
the "Credit Facilities"). The Credit Facilities contain
16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
leverage and interest coverage ratio covenants, and restrict 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 0.35%. The Company may select various borrowing rate options,
including but not limited to, LIBOR plus 0.325% to 1.15%. Included in the
outstanding borrowings under the Credit Facilities at September 30, 2000 is
approximately $48 million of debt denominated in British pounds. At September
30, 2000, the Company had $200 million of available borrowings under the Credit
Facilities. The Company believes that the Credit Facilities are adequate to
satisfy its liquidity needs for the near future.
On September 8, 2000, the Company paid its third quarterly dividend of
$0.20 on each share of common stock. Total dividends paid to shareholders were
$13.4 million during the first nine months of 2000.
During the first nine months of 2000, Arch repurchased approximately
502,000 shares of its common stock, bringing the cumulative total shares
repurchased through September 30, 2000 to over 893,000, at a total cost of
approximately $16 million. The program, originally approved by Arch's Board of
Directors in October of 1999, has been suspended pending the completion of the
Hickson acquisition, including the sale of the Organics business.
On October 26, 2000, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on December 8,
2000, to shareholders of record at the close of business on November 10, 2000.
Pending Acquisition
-------------------
In July 2000, the Company entered into an agreement to purchase the PCI
business of Brooks Industries for approximately $37 million in cash, to be
funded from the Company's Credit Facility. Brooks' PCI business is expected to
provide Arch with a broad portfolio of standard and specialty hair and skin care
products, including lanolin, botanicals and liposomes, within the high-growth,
high-margin PCI industry. The acquisition is expected to be immediately cash
accretive and accretive to earnings per share in the first full year of results.
The transaction will be accounted for as a purchase and is targeted to close
during the fourth quarter of 2000.
New Accounting Standard
-----------------------
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.
Cautionary Statement under Federal Securities Laws
--------------------------------------------------
Except for historical information contained herein, the information set
forth in this communication 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 Arch and its various businesses operate. Words such as "anticipates,"
"believes," "estimates," "expects," "forecasts," "opines," "plans," "predicts,"
"projects," "should," "targets," "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
undertakes no 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
17
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
business and market conditions, lack of moderate growth in the U.S. or European
economies; increases in interest rates; the continued recovery of economic
conditions in Asia; customer acceptance of new products, efficacy of new
technology, changes in U.S. laws and regulations, increased competitive and/or
customer pressure; the Company's ability to maintain chemical price increases;
higher-than-expected raw material costs for certain chemical product lines;
increased foreign competition in the calcium hypochlorite markets; continued
improvement in the semiconductor industry; unfavorable court, arbitration or
jury decisions, the supply/demand balance for the Company's products, including
the impact of excess industry capacity; failure to achieve targeted cost
reduction programs; unsuccessful entry into new markets for electronic
chemicals; capital expenditures in excess of those scheduled; environmental
costs in excess of those projected; and the occurrence of unexpected
manufacturing interruptions/outages at the customer's or company plants; the
ability of the Company to sell the Organics business; and the successful
integration of Hickson's operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In connection with the acquisition of Hickson, the following quantitative and
qualitative information concerning market risk has been updated from that
reported in the Company's Form 10-K for the year ended December 31, 1999.
See the Form 8-K/A, filed by the Company on November 2, 2000, which contains
Hickson's historical financial statements.
Interest Rates
The Company is exposed to interest rate risk on its borrowings which are
primarily at various floating rates. Based upon the current levels of borrowings
under these facilities, an increase in interest rates of 100 basis points would
have an adverse effect on the Company's results of operations and cash flows of
approximately $3 million.
Foreign Currency Risk
Approximately 25 percent of the Company's sales are denominated in currencies
other than the U.S. dollar. The Company is subject to risks associated with its
foreign operations, including currency devaluations and fluctuations in currency
exchange rates. These exposures from foreign exchange fluctuations can affect
the Company's equity investments and its respective share of earnings (losses),
the Company's net investment in foreign subsidiaries, translation of the
Company's foreign operations for U.S. GAAP reporting purposes and from purchase
and sales commitments denominated in foreign currencies. The Company enters into
forward sales and purchase contracts and currency options to manage currency
risk from actual and anticipated purchase and sales commitments denominated or
expected to be denominated in a foreign currency (principally British pound,
euro, Canadian dollar and Japanese yen). It is the Company's policy to hedge
approximately 60% to 80% of these transactions. The counterparties to the
options and contracts are major financial institutions.
Holding other variables constant, if there were a 10 percent adverse change in
foreign currency exchange rates, the net effect on the Company's cash flows
would be a decrease of between $1 million to $2 million, as any increase
(decrease) in cash flows resulting from the Company's hedge contracts would be
offset by an equal increase (decrease) in cash flows on the underlying
transaction being hedged.
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) On August 31, 2000, the Company filed a report on Form 8-K dated
August 22, 2000, under Item 2, "Acquisition or Disposition of
Assets." No financial information was included in this Form 8-K.
No other Form 8-K's were filed in the third quarter.
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 13, 2000 By: Louis S. Massimo
-----------------------------
Louis S. Massimo
Vice President and Chief
Financial Officer
20
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
27 Financial Data Schedule.
21
