<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 June 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 July 31, 2000, there were 22,129,905 outstanding shares of the
registrant's common stock.
<PAGE>
ARCH CHEMICALS, INC.
INDEX
-----
<TABLE>
<CAPTION>
Page Numbers
------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
---------------------
Item 1. Financial Statements........................................... 2
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.......................................... 2
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2000 and 1999.............. 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999........................ 4
Notes to Condensed Consolidated Financial Statements........... 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 9 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
PART II. OTHER INFORMATION:
-----------------
Item 4. Submission of Matters to a Vote of Security Holders............ 18
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
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 6.3 $ 12.1
Accounts receivable, net 227.4 168.6
Inventories, net 131.3 147.3
Other current assets 26.4 26.7
---------- -----------
Total current assets 391.4 354.7
Investments and advances - affiliated companies at equity 27.4 20.8
Property, plant and equipment, net 324.2 326.7
Goodwill 36.1 37.1
Other assets 19.3 20.2
---------- -----------
Total assets $ 798.4 $ 759.5
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings $ 50.3 $ 21.0
Accounts payable 108.2 108.1
Accrued liabilities 59.7 57.1
---------- -----------
Total current liabilities 218.2 186.2
Long-term debt 75.1 76.8
Other liabilities 41.9 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) 47.9 23.8
Accumulated other comprehensive loss (30.1) (26.5)
---------- -----------
Total shareholders' equity 463.2 451.8
---------- -----------
Total liabilities and shareholders' equity $ 798.4 $ 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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 273.2 $ 268.2 $ 493.9 $ 493.2
Operating expenses:
Cost of goods sold 194.6 190.4 352.2 348.1
Selling and administration 43.2 41.2 82.2 83.8
Research and development 3.7 4.4 7.7 8.9
---------- ---------- ---------- ---------
31.7 32.2 51.8 52.4
---------- ---------- ---------- ---------
Equity in earnings of affiliated companies 1.7 1.4 3.6 2.7
Interest expense 3.0 1.6 5.6 2.6
Interest income 0.1 0.1 0.2 0.4
---------- ---------- ---------- ---------
Income before taxes 30.5 32.1 50.0 52.9
Income tax provision 10.4 11.2 17.0 18.5
---------- ---------- ---------- ---------
Net income $ 20.1 $ 20.9 $ 33.0 $ 34.4
========== ========== ========== =========
Net income per common share:
Basic $ 0.91 $ 0.91 $ 1.48 $ 1.49
========== ========== ========== =========
Diluted $ 0.91 $ 0.90 $ 1.48 $ 1.49
========== ========== ========== =========
Weighted average common shares outstanding:
Basic 22.2 23.0 22.3 23.0
========== ========== ========== =========
Diluted 22.2 23.2 22.4 23.1
========== ========== ========== =========
Dividends declared per share $ 0.20 $ 0.20 $ 0.40 $ 0.20
========== ========== ========== =========
</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>
Six Months
Ended June 30,
--------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
--------------------
Net income $ 33.0 $ 34.4
Adjustments to reconcile net income to net cash and
cash equivalents provided (used) by operating activities:
Equity in earnings of affiliates (3.6) (2.7)
Depreciation and amortization 25.4 26.1
Deferred taxes - 0.3
Changes in assets and liabilities:
Receivables (58.2) (90.0)
Inventories 15.8 20.3
Other current assets 0.3 (4.0)
Accounts payable and accrued liabilities (1.1) 9.4
Noncurrent liabilities - (0.7)
Other operating activities (3.2) 0.1
------------ ---------
Net operating activities 8.4 (6.8)
------------ ---------
Investing activities
--------------------
Capital expenditures (26.1) (16.4)
Disposition of property, plant and equipment 6.3 -
Investments and advances - affiliated companies at equity (3.4) -
Other investing activities (0.3) (0.9)
------------ ---------
Net investing activities (23.5) (17.3)
------------ ---------
Financing activities
--------------------
Long-term debt assumed from Olin Corporation - 75.0
Long-term debt repayments (1.7) (0.2)
Short-term borrowings 29.2 8.8
Dividends paid (8.9) (4.6)
Purchases of Arch common stock (9.5) -
Transfers to Olin Corporation - (58.1)
Other financing activities 0.4 0.3
------------ ---------
Net financing activities 9.5 21.2
------------ ---------
Effect of exchange rate changes on cash and cash equivalents (0.2) 0.9
------------ ---------
Net decrease in cash and cash equivalents (5.8) (2.0)
Cash and cash equivalents, beginning of year 12.1 7.1
------------ ---------
Cash and cash equivalents, end of period $ 6.3 $ 5.1
============ =========
Supplemental cash flow information:
Taxes paid $ 11.8 $ 9.5
============ =========
Interest paid $ 4.2 $ 1.9
============ =========
</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. (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. 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 six months ended June
30, 2000, are not necessarily indicative of the results to be expected for the
entire fiscal year.
Reclassifications of prior-year data have been made, where appropriate, to
conform to the 2000 presentation.
Inventories
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials and supplies $ 48.1 $ 54.9
Work in process 19.7 13.4
Finished goods 114.8 129.0
--------- ------------
Inventories, gross 182.6 197.3
LIFO reserve (51.3) (50.0)
--------- ------------
Inventory, net $131.3 $147.3
========= ============
</TABLE>
Inventories are valued principally by the dollar value last-in, first-out
(LIFO) method of inventory accounting. Elements of costs in inventories include
raw materials, direct labor and manufacturing overhead. Inventories under the
LIFO method are based on an annual determination of quantities and costs as of
the year-end; therefore, the condensed financial statements at June 30, 2000
reflect certain estimates relating to inventory quantities and costs at December
31, 2000.
Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options.
5
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
A reconciliation of basic and diluted weighted average common shares
outstanding is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------------------- ----------------------
<S> <C> <C> <C> <C>
Basic 22.2 23.0 22.3 23.0
Common equivalent shares
from stock options using
the treasury stock method -- 0.2 0.1 0.1
----------------------- ----------------------
Diluted 22.2 23.2 22.4 23.1
======================= ======================
</TABLE>
Comprehensive Income (Loss)
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 six months ended June 30, 2000 and 1999 was $18.1 and
$29.4, and $19.9 and $23.6, 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.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------------------- ----------------------
<S> <C> <C> <C> <C>
Sales:
Microelectronic Chemicals $ 55.4 $ 53.4 $109.8 $105.6
Water Chemicals 133.5 128.4 221.7 221.4
Performance Chemicals 84.3 86.4 162.4 166.2
----------------------- ----------------------
Total Sales $273.2 $268.2 $493.9 $493.2
======================= ======================
Operating Income (Loss):
Microelectronic Chemicals $ 0.8 $ (0.4) $ 1.3 $ (1.3)
Water Chemicals 22.6 21.6 35.8 34.1
Performance Chemicals 10.0 12.4 18.3 22.3
----------------------- ----------------------
Total Operating Income $ 33.4 $ 33.6 $ 55.4 $ 55.1
======================= ======================
Capital Spending:
Microelectronic Chemicals $ 4.3 $ 2.0 $ 8.3 $ 4.6
Water Chemicals 2.6 1.1 4.2 2.1
Performance Chemicals 7.9 7.2 13.6 9.7
----------------------- ----------------------
Total Capital Spending $ 14.8 $ 10.3 $ 26.1 $ 16.4
======================= ======================
</TABLE>
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 second half 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 six months ended June 30, 2000.
See the Company's most recent Form 10-K for additional information on the
above items.
Subsequent Events
In July 2000, the Company made a formal cash tender offer for all of the
issued shares of UK-based Hickson International PLC ("Hickson"). The offer,
which was unanimously recommended by Hickson's Board of Directors, was for
(Pounds)0.55 (US $0.82) in cash for each Hickson share. As of the date of the
offer, Hickson had approximately 180 million shares outstanding on a fully
diluted basis giving the transaction a total equity value of approximately
(Pounds)99 million (approximately US $150 million). The Company will also
assume Hickson's net debt of approximately (Pounds)33 million (approximately US
$50 million). The acquisition of Hickson will be accounted for as a purchase.
The Company will finance the acquisition from a new committed $225 million
revolving credit facility. The Company has purchased derivative instruments to
mitigate the foreign currency effect on the transaction. Gains or losses on
such derivative instruments will be recognized in the Company's statement of
operations on a periodic basis. The cost of such derivative instruments will be
amortized over the life of the
7
<PAGE>
ARCH CHEMICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
($ in millions, except share amounts)
instruments. On August 3, 2000, the Company announced that the offer had been
declared unconditional as to acceptances. Pending satisfaction or waiver of
certain other conditions, including clearance by U.K. regulatory authorities,
the Company expects the tendered shares will be purchased in September 2000.
Also 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.
On July 31, 2000, the Company completed the sale to SCP Pool Corporation of
Covington, LA of the assets of its subsidiary, Superior Pool Products, Inc., a
distributor of swimming pool equipment, parts and supplies. Gross proceeds from
the sale are expected to be approximately $21 million, subject to post-closing
adjustments. The expected gain on the transaction will be recorded during the
third quarter of 2000. Net proceeds from the sale are expected to be used to
reduce existing debt levels.
8
<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. 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 Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
------ ------ ------ ------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Sales $ 273.2 $ 268.2 $ 493.9 $ 493.2
Gross Margin 78.6 77.8 141.7 145.1
Selling and Administration 43.2 41.2 82.2 83.8
Research and Development 3.7 4.4 7.7 8.9
Equity in Earnings of Affiliated Companies 1.7 1.4 3.6 2.7
Interest Expense 3.0 1.6 5.6 2.6
Net Income $ 20.1 $ 20.9 $ 33.0 $ 34.4
Income Per Share:
Basic $ 0.91 $ 0.91 $ 1.48 $ 1.49
Diluted $ 0.91 $ 0.90 $ 1.48 $ 1.49
Weighted Average Common Stock Outstanding:
Basic 22.2 23.0 22.3 23.0
Diluted 22.2 23.2 22.4 23.1
</TABLE>
Three Months Ended June 30, 2000 Compared to 1999
Sales increased 2%. The increase in sales was due to a 3% increase in
volumes and a 1% decrease in pricing. The increase in volumes was related to the
water chemicals and microelectronic chemicals segments. The decrease in pricing
was related to all three segments.
Gross margin percentage was 28.8% and 29.0% for 2000 and 1999,
respectively. The decrease in gross margin was primarily due to higher propylene
raw material prices in the performance chemicals segment.
Selling and administration expenses as a percentage of sales increased to
15.8% in 2000 from 15.4% in 1999. The increase is primarily a result of higher
selling and sales promotional expenditures, partially offset by lower
advertising expenses.
Research and development expenses as a percentage of sales decreased to 1%
in 2000 from 2% in 1999. The amount of expenses decreased $0.7 million primarily
as a result of lower expenditures associated with the photopolymers business and
the absence of research and development expenses associated with certain copper
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
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 $0.3 million due to
the favorable performance of the Company's Fuji Photo Film joint venture,
partially offset by Planar losses.
Interest expense was $3.0 million in 2000 compared to $1.6 million in 1999.
The increase was due to higher interest rates and higher average borrowings
primarily attributable to higher working capital and the share repurchase
program.
The effective tax rate for the second quarter was 34% in 2000 and 35% in
1999. The effective tax rate for the second quarter of 2000 is consistent with
the Company's full-year 1999 effective tax rate of 34%.
Six Months Ended June 30, 2000 Compared to 1999
Sales were comparable, as both pricing and volumes were fairly consistent.
Gross margin percentage was 28.7% and 29.4% for 2000 and 1999,
respectively. The decrease in gross margin was primarily due to higher propylene
raw material prices and higher natural gas costs in the performance chemicals
segment.
Selling and administration expenses as a percentage of sales decreased to
16.6% in 2000 from 17.0% in 1999. The decrease is primarily a result of cost-
saving initiatives and lower employee benefit related costs which more than
offset higher selling and sales promotional expenditures.
Research and development expenses as a percentage of sales were 2% in 2000
and 1999. The amount of expenses decreased $1.2 million compared to the prior
year primarily as a result of lower expenditures associated with the
photopolymers business and 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.
Equity in earnings of affiliated companies increased $0.9 million due to
the favorable performance of the Company's Fuji Photo Film joint venture,
partially offset by Planar losses.
Interest expense was $5.6 million in 2000 compared to $2.6 million in 1999.
The increase was due to higher interest rates and higher average borrowings
primarily attributable to higher working capital and the share repurchase
program.
The effective tax rate for the first half of 2000 was 34% and 35% in 1999.
The effective tax rate for the first six months of 2000 is consistent with the
Company's full-year 1999 effective tax rate of 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
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
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 six months ended June 30, 2000 and 1999, include $2.3
million and $4.7 million, respectively, related to the amortization of deferred
income under the supply agreement. The Company is working to replace the loss of
the income that will result upon the expiration of the contract through a
combination of the commercialization of new products and expansion into new
markets, and acquisitions such as the pending acquisitions of Hickson
International PLC ("Hickson") and Brooks Industries' personal care intermediates
("PCI") business (see "Recent Developments"), as well as the acquisition of the
hydroquinone di (beta-hydroxyethyl) ether ("HQEE") product line purchased from
Eastman Chemicals in September 1999. In addition, cost reduction programs will
continue to be implemented.
For the full fiscal year, the Company's 2000 sales and operating income are
expected to be higher than 1999. Diluted income per share for the full fiscal
year is now expected to be 4% to 7% higher than 1999 (excluding the effects of
acquisitions or dispositions) due in part to a lack of recovery in the hydrazine
hydrates market in Asia, higher utility costs and a delay in the timing of
satellite launches until 2001.
Microelectronic Chemicals
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $55.4 $53.4 $109.8 $105.6
Operating Income (Loss) 0.8 (0.4) 1.3 (1.3)
Three Months Ended June 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. The segment reported
improved operating performance in 2000 compared to 1999. Excluding the impact of
the process chemicals product line, sales increased 6% and operating income
improved 11%. 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. The increase in operating income was due to the
higher sales and overall favorable joint venture performance, partially offset
by higher costs associated with a new supply agreement.
Process chemicals reported sales of $16.8 million and incurred an operating
loss of $2.3 million, compared to sales of $17.0 million and an operating loss
of $3.2 million in 1999.
Six Months Ended June 30, 2000 Compared to 1999
Sales increased 4%. The increase in sales was due to an 8% increase in
volumes, partially offset by a 4% decrease in pricing. Excluding the impact of
the process chemicals product line, sales increased 8% and operating income
improved 48%. 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 overall favorable joint venture
performance, partially offset by higher costs associated with a new supply
agreement.
Process chemicals reported sales of $32.7 million and incurred an operating
loss of $4.9 million, compared to sales of $34.1 million and an operating loss
of $5.5 million in 1999. The Company's initiatives to improve process chemicals
performance in the near-term have been successful as evidenced by the reduced
operating
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
loss. However, the Company is continuing to pursue various strategic options. In
addition to a consolidating transaction, those options include downsizing the
business and reconfiguring manufacturing and product sourcing requirements.
Water Chemicals
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $133.5 $128.4 $221.7 $221.4
Operating Income 22.6 21.6 35.8 34.1
Three Months Ended June 30, 2000 Compared to 1999
Sales increased 4% and operating income improved 5%. Excluding the results
of Superior Pool Products, Inc. ("SPPI"), which was sold on July 31, 2000, sales
and operating income were $104.8 million and $20.4 million compared to $101.9
million and $19.7 million, respectively, in 1999. On a similar basis, operating
margin improved to 19.5% from 19.3% in 1999. Higher volumes of calcium
hypochlorite (both HTH(R) and bulk/export) and higher branded Trichlor (Pace(R))
volumes accounted for the sales increase. The improvement in operating results
was primarily attributable to the higher sales and lower advertising expenses,
partially offset by higher manufacturing costs.
Six Months Ended June 30, 2000 Compared to 1999
Sales were comparable and operating income increased 5%. Excluding the
results of SPPI, sales and operating income were $176.2 million and $33.4
million compared to $179.7 million and $32.2 million, respectively, in 1999. On
a similar basis, operating margin improved to 19.0% from 17.9% in 1999. The
sales decrease is primarily due to lower bulk and export volumes as a result of
early buy-in for the 2000 season that occurred in the fourth quarter of 1999,
partially offset by higher volumes of branded calcium hypochlorite (HTH(R)) and
higher branded Trichlor (Pace(R)) volumes. The improvement in operating results
was primarily attributable to lower manufacturing costs and operating expenses.
Performance Chemicals
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
Results of Operations
Sales $84.3 $86.4 $162.4 $166.2
Operating Income 10.0 12.4 18.3 22.3
Three Months Ended June 30, 2000 Compared to 1999
Sales and operating income decreased 2% and 19%, respectively.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Performance urethanes and organics' sales were lower as a result of lower
volumes of both performance polyols, due to weak demand, and glycol products due
to competition, as well as lower sales in Latin American markets, offset
somewhat by higher sales from the HQEE acquisition. Operating income was lower
as a result of the decrease in sales and higher propylene raw material prices
compared to the prior year.
Biocides' sales were 10% higher due to strong volumes in most markets.
Operating income increased significantly as a result of the higher sales,
partially offset by increased operating expenses and manufacturing costs.
Hydrazine sales were 30% lower as a result of lower hydrazine hydrate
volumes and pricing, and lower propellant and UltraPureTM volumes due to the
timing of government orders and satellite launches. Operating income was
comparable as the lower sales were offset by favorable manufacturing costs due
to the decision to delay the plant turnaround until 2001.
Sulfuric acid sales were consistent with the prior year. Operating income
was lower primarily as a result of lower pricing and higher natural gas costs.
Six Months Ended June 30, 2000 Compared to 1999
Sales and operating income decreased 2% and 18%, respectively.
Performance urethanes and organics' sales decreased due to lower volumes in
all product areas due to weak demand and competition, offset somewhat by higher
sales from the HQEE acquisition and higher pricing for certain products.
Operating income was lower as a result of the decrease in sales and higher
propylene raw material prices and natural gas costs compared to the prior year.
Biocides' sales were 9% higher due to increased sales in all 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, partially offset by increased operating
expenses.
Hydrazine sales decreased 24% 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 and Ultra PureTM volumes due to the
timing of government orders and satellite launches. 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 decreased 3% due to lower pricing offset somewhat by
higher volumes. Operating income was lower primarily as a result of the lower
sales and 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 six months ended June 30, 2000 and
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
1999, include $2.3 million and $4.7 million, respectively, related to the
amortization of deferred income under the supply agreement. The Company is
working to replace the loss of the income that will result upon the expiration
of the contract through a combination of the commercialization of new products
and expansion into new markets, and acquisitions such as the pending
acquisitions of Hickson and Brooks Industries' PCI business (see "Recent
Developments"), as well as the acquisition of the HQEE product line purchased
from Eastman Chemicals in September 1999. In addition, cost reduction programs
will continue to be implemented.
Liquidity, Investment Activity and Other Financial Data
-------------------------------------------------------
Cash Flow Data
Six Months
Ended June 30,
2000 1999
---- ----
($ in millions)
Provided By (Used For)
Net Operating Activities $ 8.4 $ (6.8)
Capital Expenditures (26.1) (16.4)
Net Investing Activities (23.5) (17.3)
Net Financing Activities 9.5 21.2
Six Months Ended June 30, 2000 Compared to 1999
For the six months ended June 30, 2000, the increase in cash flow provided
by net operating activities was primarily attributable to lower working capital,
principally related to improved collections of accounts receivable.
Capital expenditures for the six months of 2000 increased approximately $10
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.
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.
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.
On June 9, 2000, the Company paid its second quarterly dividend of $0.20 on
each share of common stock. Total dividends paid to shareholders were $8.9
million during the first six months of 2000.
The Company has 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 2001 (collectively, the "Credit Facility").
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.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
Facility fees are payable on the unused credit and range from 0.125% to 0.30%.
The Company may select various borrowing rate options, including but not limited
to, LIBOR plus 0.325% to 1.00%. At June 30, 2000, the Company had $135 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.
In addition to the existing Credit Facility, in connection with its pending
Hickson acquisition, the Company has obtained a new committed $225 million
revolving credit facility. The terms of this new credit facility are generally
consistent with the terms of the existing Credit Facility.
During the first half of 2000, Arch repurchased approximately 502,000
shares of its common stock, bringing the cumulative total shares repurchased
through June 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, at which time the Company will reevaluate the program.
On July 27, 2000, the Company declared a quarterly dividend of $0.20 on
each share of the Company's common stock. The dividend is payable on September
8, 2000, to shareholders of record at the close of business on August 10, 2000.
Recent Developments
-------------------
In July 2000, the Company made a formal cash tender 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 (Pounds)0.55 (US $0.82) in cash for
each Hickson share. As of the date of the offer, Hickson had approximately 180
million shares outstanding on a fully diluted basis giving the transaction a
total equity value of approximately (Pounds)99 million (approximately US $150
million). The Company will also assume Hickson's net debt of approximately
(Pounds)33 million (approximately US $50 million). The acquisition of Hickson,
which will be accounted for as a purchase, is expected to be immediately cash
accretive and accretive to the Company's earnings per share in the first full
year of results. In addition, the acquisition is expected to be accretive to
earnings per share for 2000 before any one-time gains or losses. One-time costs
associated with the acquisition will be more than offset by the gain related to
SPPI discussed below.
The Company has purchased derivative instruments to mitigate the foreign
currency effect on the transaction. Gains or losses on such derivative
instruments will be recognized in the Company's statement of operations on a
periodic basis. The cost of such derivative instruments will be amortized over
the life of the instruments. On August 3, 2000, the Company announced that the
offer had been declared unconditional as to acceptances. Pending satisfaction or
waiver of certain other conditions, including clearance by U.K. regulatory
authorities, the Company expects the tendered shares will be purchased in
September 2000.
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 is
comprised of contract manufacturing for the agricultural herbicide market and
the production of fine chemicals.
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
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
with an operating margin of approximately 11%. Hickson's organic chemicals
business is not strategic to Arch and, accordingly, the Company intends to sell
the organics chemicals business within one year after the successful completion
of the acquisition of Hickson.
The Company will finance the acquisition from a new committed $225 million
revolving credit facility. After giving effect to this transaction, the
Company's total debt to capital ratio is expected to be in the 35% to 40% range
initially, and is expected to be reduced upon the sale of Hickson's organics
business to approximately 30%.
Also 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.
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. Gross proceeds from the sale are expected to
be approximately $21 million, subject to post-closing adjustments. The expected
gain on the transaction will be recorded during the third quarter of 2000. Net
proceeds from the sale are expected to be used to reduce existing debt levels.
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 business and
market conditions, lack of moderate growth in the U.S. economy or even a slight
recession in 2000; 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
16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations - (Continued)
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.
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, 1999.
The purchase price associated with the Company's acquisition of Hickson, which
is to be paid in pound sterling, and the foreign denominated debt assumed in the
transaction are subject to foreign currency fluctuations. The Company has
purchased derivative instruments to mitigate such risk.
17
<PAGE>
ARCH CHEMICALS, INC.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Corporation held its Annual Meeting of Shareholders on April 27,
2000. Of the 22,389,263 shares of Common Stock entitled to vote at
such meeting, at least 20,386,359 shares were present for purposes of
a quorum. At the meeting, shareholders elected to the Board of
Directors John W. Johnstone, Jr. and Jack D. Kuehler as Class I
directors each with a term expiring in 2003. Votes cast for and votes
withheld in the election of Directors were as follows:
FOR WITHHELD
--- --------
John W. Johnstone, Jr. 19,501,943 884,416
Jack D. Kuehler 19,587,176 799,183
There were no abstentions or broker nonvotes.
The shareholders also voted on and approved the Senior Management
Incentive Compensation Plan, a cash bonus plan for selected employees,
and the Arch Chemicals, Inc. 1999 Long Term Incentive Plan, a stock-
based incentive plan. The votes on the proposals to approve these
plans were as follows:
FOR AGAINST ABSTAIN
---------- --------- -------
Senior Management Incentive
Compensation Plan 17,371,677 2,230,340 784,342
Arch Chemicals, Inc.
1999 Long Term Incentive Plan 15,247,506 2,968,711 713,938
There were no broker nonvotes with respect to the proposal to approve
the Senior Management Incentive Compensation Plan and there were
1,456,204 broker nonvotes with respect to the proposal to approve the
Arch Chemicals, Inc. 1999 Long Term Incentive Plan.
The shareholders also ratified the appointment of KPMG LLP as
independent auditors for the Corporation for 2000. Voting for the
resolution ratifying the appointment were 19,830,117 shares. Voting
against were 384,684 shares. Abstaining were 171,558 shares. There
were no broker nonvotes.
18
<PAGE>
ARCH CHEMICALS, INC.
PART II. OTHER INFORMATION - Continued
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits required by Item 601 of Regulation S-K.
4. Revolving Credit Agreement, dated as of July 5, 2000 among
Arch Chemicals, Inc., Arch Chemicals UK Holdings Limited,
the Lenders Party thereto and The Chase Manhattan Bank, as
Administrative Agent, and related Assignment and
Acceptance, dated July 21, 2000, among Arch Chemicals,
Inc., Arch Chemicals UK Holdings Limited, The Chase
Manhattan Bank, as Assignor and Administrative Agent, and
Bank of America, N.A., as Assignee, and related Assignment
and Acceptance, dated July 21, 2000, among Arch Chemicals,
Inc., Arch Chemicals UK Holdings Limited, The Chase
Manhattan Bank, as Assignor and Administrative Agent, and
Wachovia Bank, N.A., as Assignee
10.1. Amendment to Information Technology Services Agreement,
dated as of February 15, 2000, by and between Arch
Chemicals, Inc. and Olin Corporation.
10.2. Arch Chemicals, Inc. Annual Incentive Plan (as amended
December 9, 1999 and April 27, 2000).
27. Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 2000.
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)
August 11, 2000 By: Louis S. Massimo
---------------------------------
Louis S. Massimo
Vice President and Chief
Financial Officer
20
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
---- -----------
4. Revolving Credit Agreement, dated as of July 5, 2000 among Arch
Chemicals, Inc., Arch Chemicals UK Holdings Limited, the Lenders Party
thereto and The Chase Manhattan Bank, as Administrative Agent, and
related Assignment and Acceptance, dated July 21, 2000, among Arch
Chemicals, Inc., Arch Chemicals UK Holdings Limited, The Chase
Manhattan Bank, as Assignor and Administrative Agent, and Bank of
America, N.A., as Assignee, and related Assignment and Acceptance,
dated July 21, 2000, among Arch Chemicals, Inc., Arch Chemicals UK
Holdings Limited, The Chase Manhattan Bank, as Assignor and
Administrative Agent, and Wachovia Bank, N.A., as Assignee
10.1 Amendment to Information Technology Services Agreement, dated as of
February 15, 2000, by and between Arch Chemicals, Inc. and Olin
Corporation.
10.2 Arch Chemicals, Inc. Annual Incentive Plan (as amended December 9,
1999 and April 27, 2000).
27 Financial Data Schedule.
21
