SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
Commission File Number 1-4654
WITCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1870000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One American Lane, Greenwich, Connecticut 06831-2559
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 552-2000
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 [ ]
The number of shares of common stock outstanding is as follows:
Class Outstanding at October 31, 1995
----- -------------------------------
Common Stock - $5 par value 56,433,979
<PAGE>
WITCO CORPORATION
FORM 10-Q
September 30, 1995
CONTENTS PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30, 1995
and December 31, 1994 2
Condensed consolidated statements of income for the three
and nine months ended September 30, 1995 and 1994 3
Condensed consolidated statements of cash flows for the
nine months ended September 30, 1995 and 1994 4
Notes to condensed consolidated financial statements 5
Independent accountants' report on review of interim
financial information 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
PART I.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Per Share Data)
September 30, December 31,
1995 1994 (a)
--------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 307,084 $ 197,173
Accounts and notes receivable-net 361,937 395,547
Inventories
Raw materials and supplies $ 79,740 $ 96,939
Finished goods 146,046 225,786 161,433 258,372
------- -------
Prepaid and other current assets 42,845 45,737
---------- ----------
TOTAL CURRENT ASSETS 937,652 896,829
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT -
less accumulated depreciation
of $567,749 and $696,043 573,619 719,966
INTANGIBLE ASSETS - less accumulated
amortization of $55,212 and $43,760 194,561 191,422
OTHER ASSETS 111,675 111,128
NET ASSETS OF DISCONTINUED OPERATIONS 167,079 --
---------- ----------
TOTAL ASSETS $1,984,586 $1,919,345
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and loans payable $ 7,104 $ 1,795
Accounts payable and other current liabilities 300,821 343,414
---------- ----------
TOTAL CURRENT LIABILITIES 307,925 345,209
---------- ----------
LONG-TERM DEBT 345,365 346,545
DEFERRED FEDERAL AND FOREIGN INCOME TAXES 66,246 81,354
DEFERRED CREDITS AND OTHER LIABILITIES 216,643 206,231
SHAREHOLDERS' EQUITY
$2.65 Cumulative Convertible Preferred Stock,
par value $1 per share
Authorized - 14 shares
Issued and outstanding - 7 shares 7 7
Common Stock, par value $5 per share
Authorized - 100,000 shares
Issued - 56,434 and 56,312 shares 282,170 281,561
Capital in excess of par value 131,080 127,643
Equity adjustments:
Foreign currency translation 22,276 (1,481)
Pensions (2,063) (2,446)
Retained earnings 614,937 537,199
Less cost of 165 shares of common
stock in treasury -- (2,477)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,048,407 940,006
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,984,586 $1,919,345
========== ==========
</TABLE>
(a) The balance sheet at December 31, 1994, has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
1995 1994 1995 1994
----------- --------- ----------- --------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 441,902 $ 457,388 $1,449,085 $1,389,804
Interest 5,074 2,500 11,204 7,149
--------- ---------- ---------- ----------
446,976 459,888 1,460,289 1,396,953
--------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of goods sold (exclusive of depreciation
and amortization) 347,442 357,071 1,134,166 1,070,459
Selling and administrative expenses 45,351 44,927 139,665 141,322
Depreciation and amortization 22,523 21,572 70,909 66,822
Interest 9,402 7,125 26,146 21,965
Other income - net (8,502) (4,083) (94,702) (9,300)
--------- ---------- ---------- ----------
416,216 426,612 1,276,184 1,291,268
--------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE FEDERAL AND FOREIGN
INCOME TAXES 30,760 33,276 184,105 105,685
FEDERAL AND FOREIGN INCOME TAXES 11,316 10,620 65,370 35,917
--------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 19,444 22,656 118,735 69,768
INCOME FROM DISCONTINUED OPERATIONS -
(NET OF INCOME TAXES OF $2,657, $2,379,
$3,751 AND $6,386) 4,466 4,342 6,304 11,653
--------- ---------- ---------- ----------
NET INCOME $ 23,910 $ 26,998 $ 125,039 $ 81,421
========= ========== ========== ==========
PER COMMON SHARE: PRIMARY
Income From Continuing Operations $.34 $.40 $2.10 $1.25
Income from Discontinued Operations -
net of income taxes .08 .08 .11 .21
---- ---- ----- -----
Net Income $.42 $.48 $2.21 $1.46
==== ==== ===== =====
PER COMMON SHARE: FULLY DILUTED
Income from Continuing Operations $.34 $.40 $2.08 $1.25
Income from Discontinued Operations -
net of income taxes .08 .08 .11 .21
---- ---- ----- -----
Net Income $.42 $.48 $2.19 $1.46
==== ==== ===== =====
Dividends declared $.28 $.28 $.84 $.78
==== ==== ===== =====
Weighted average number of common shares
and equivalents - primary 56,861 56,383 56,542 56,389
====== ====== ====== ======
</TABLE>
See accompanying notes.
3
<PAGE>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1995 1994
----------- -----------
(In Thousands)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 74,450 $ 87,052
---------- ----------
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (73,615) (82,653)
Proceeds from dispositions 146,026 24,194
Other investing activities (5,187) 2,384
---------- ----------
Net Cash Provided by (Used in) Investing Activities 67,224 (56,075)
---------- ----------
FINANCING ACTIVITIES
Dividends paid (47,220) (39,294)
Other financing activities 6,528 (1,080)
---------- ----------
Net Cash Used in Financing Activities (40,692) (40,374)
---------- ----------
Effects of Exchange Rate Changes on Cash and Cash Equivalents 8,929 8,665
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 109,911 (732)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 197,173 183,050
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 307,084 $ 182,318
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A - Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. Operating results for the three and nine month
periods ended September 30, 1995, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the company's annual report on Form 10-K for the year ended
December 31, 1994.
The condensed consolidated financial statements at September 30, 1995, and for
the three and nine month periods ended September 30, 1995 and 1994, have been
reviewed in accordance with standards established by the American Institute of
Certified Public Accountants, by independent accountants, Ernst & Young LLP, and
their report is included herein.
NOTE B - Accounting Change
Effective January 1, 1995, the company changed its method of inventory valuation
under dollar value LIFO from LIFO double extension to LIFO link chain.
Management believes that the LIFO link chain method is preferable because it is
the predominate method used in the industry and will mitigate the impact of
volume fluctuations on results of operations. The change in accounting method
had no material effect on income for the three and nine month periods ended
September 30, 1995. It is not possible to determine the effect of the change on
retained earnings as of January 1, 1995 or income as previously reported for the
three and nine month periods ended September 30, 1994.
NOTE C - Shareholder Rights Plan
On March 2, 1995, the Board of Directors unanimously approved a Shareholder
Rights Plan. The Plan has been implemented by the issuance of one preferred
stock purchase right for each share of common stock outstanding at the close of
business on March 2, 1995, or issued thereafter until the rights become
exercisable. Each right will entitle the holder in certain events to purchase
one-one thousandth of a share of participating preferred stock at a purchase
price of $110. Each one-one thousandth of a share of participating preferred
stock is intended to represent the economic equivalent of one share of common
stock. Under the Shareholder Rights Plan, 300,000 shares of Series A
participating cumulative preferred stock without par value have been authorized.
The rights currently are not exercisable. If a person or group acquires more
than 15% of the outstanding common stock, or at the Board's election if a tender
offer for more than 15% of the outstanding common stock is commenced, or if such
person or group acquires the company in a merger or other business combination,
each right (other than those held by the acquiring person) will entitle the
holder to purchase stock of the company or stock or other property of the
acquiring person having a value of twice the purchase price. The rights will
expire on March 2, 2005, unless earlier redeemed by the company in whole, but
not in part, at a price of $.01 per right.
NOTE D - Subsequent Event
On October 19, 1995, the company acquired OSi Specialties Holding Company and
its wholly owned subsidiary, OSi Specialties, Inc., from an investor group led
by DLJ Merchant Banking Partners, L.P. in a cash transaction which values 100
percent of OSi's equity at $486 million. OSi manufactures a full line of
silicone surfactants, amine catalysts, organofunctional silanes and specialty
fluids at key manufacturing facilities in the United States, Belgium, Italy and
Brazil. The acquisition was financed with cash-on-hand, and short-term bank
loans of $375 million under a credit agreement totalling $675 million with a
consortium of banks. The acquisition will be accounted for as a purchase.
5
<PAGE>
NOTE D - Subsequent Event (con't)
In addition, the company has offered to purchase for cash any and all of OSi's
11 1/2% Senior Secured Discount Debentures due 2004 and any and all of OSi
Specialties 9 1/4% Senior Subordinated Notes due 2003 for $875.26 per $1,000 in
principal amount of the Debentures and $1,121.83 per $1,000 in principal amount
of the Notes, plus accrued interest and unpaid interest to the payment date. A
100% acceptance of this offering would equate to a total cost of approximately
$280 million. In conjunction with the Offer to Purchase, the company is
soliciting consents to eliminate substantially all the restrictive covenants
contained in each indenture. The company will fund the acquisition of the
Debentures and Notes with additional short-term bank loans available under the
$675 million credit agreement.
The company intends to replace all or part of these short-term bank loans with
long-term financing in the public markets.
NOTE E - Discontinued Operations
On September 11, 1995, the company announced its intention to divest its
Lubricants Group. The Board of Directors has approved a plan and retained an
investment banking firm to assist in the disposal of these operations with a
target date of mid 1996. These operations are reflected as discontinued
operations for all periods presented in the company's income statements and as
net assets of discontinued operations in the September 30, 1995 balance sheet.
Cash flow from these operations for the nine months ended September 30, 1995 is
approximately $3,712,000. Total revenues for the nine month periods ended
September 30, 1995 and 1994 were $281,939,000 and $293,384,000, respectively.
A summary of net assets of discontinued operations as of September 30, 1995 are
as follows:
Accounts and notes receivable - net $ 61,821
Inventories 36,257
Property, plant, and equipment - net 112,546
Accounts payable and other current liabilities (34,311)
Other assets and liabilities - net (9,234)
--------
Net assets of discontinued operations $167,079
========
NOTE F - Other Matters
The statements of income for the three and nine month periods ended September
30, 1995, include income of $4,700,000, or $.08 per common share, and
$27,732,000, or $.48 per common share, respectively, as a result of settlements
with certain of the company's insurance carriers, net of related legal and other
costs. The settlements ended litigation with those carriers concerning whether
policies they had issued covered certain environmental costs. The pre-tax income
of $7,230,000 for the three month period, and $42,664,000 for the nine month
period, are included in the caption "Other income-net".
The statement of income for the nine month period ended September 30, 1995,
includes a gain of $27,073,000, or $.48 per common share, from the sale of the
company's Carbon Black business. The pre-tax gain of $41,651,000 is included in
the caption "Other income-net".
The statement of income for the nine month period ended September 30, 1995,
includes a gain of $6,196,000, or $.11 per common share, from the sale of the
company's Battery Parts business. The pre-tax gain of $9,532,000 is included in
the caption "Other income-net".
6
<PAGE>
NOTE F- Other Matters (con't)
The statement of income for the nine month period ended September 30, 1994,
includes a gain of $3,133,000, or $.06 per common share, from the sale of the
metal finishing and metalworking businesses of the company's Allied-Kelite
subsidiary. The pre-tax gain of $4,820,000 is included in the caption "Other
income-net".
NOTE G - Litigation and Environmental
The company has been notified, or is named as a potentially responsible party
("PRP") or a defendant in a number of governmental (federal, state, and local)
and private actions associated with environmental matters, such as those
relating to hazardous wastes. These actions seek remediation costs, penalties
and/or damages for personal injury or damage to property or natural resources.
As of September 30, 1995, the company had been identified as a PRP in connection
with 42 sites which are subject to the federal Superfund Program under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). The company has also been identified as a PRP in connection with 23
sites where state agencies have taken the lead role in overseeing site
investigation or cleanup. With 11 exceptions, all the CERCLA and state
controlled sites in which the company is involved are multi-party sites, and, in
most cases, there are numerous other potentially responsible parties in addition
to the company. CERCLA authorizes the federal government to remediate a
Superfund site itself and to assess the costs against the responsible parties,
or to order the responsible parties to remediate the site.
The company evaluates and reviews environmental reserves for future remediation
and other costs on a quarterly basis to determine appropriate reserve amounts.
Inherent in this process are considerable uncertainties which affect the
company's ability to estimate the ultimate costs of remediation efforts. Such
uncertainties include the nature and extent of contamination at each site,
evolving governmental standards regarding remediation requirements, changes in
environmental regulations, widely varying costs of alternative cleanup methods,
the number and financial condition of other potentially responsible parties at
multi-party sites, innovations in remediation and restoration technology, and
the identification of additional environmental sites.
At September 30, 1995, the company's reserves for environmental remediation and
compliance costs amounted to $85,843,000 reflecting Witco's estimate of the
costs which will be incurred over an extended period of time in respect of these
matters which are reasonably estimable.
The company has numerous insurance policies which it believes provide coverage
at various levels for environmental liabilities. The company is currently in
litigation with many of its insurers concerning the applicability and amount of
insurance coverage for environmental costs under certain of these policies.
Except for amounts reflected in executed settlement agreements, no provision for
recovery under any of these policies is included in the company's financial
statements.
The company is a defendant in three similar actions pending in California state
courts, which arise out of the company's involvement in the polybutylene resin
manufacturing business in the 1970's: East Bay Municipal Utility District v.
Mobil Oil Co., et al.; filed in November 1993, and pending in Superior Court for
the County of San Mateo, City of Santa Maria v. Shell Oil Co., et al.; filed in
May 1994, and pending in Superior Court for the County of San Luis Obispo, and
Nipomo Community Services District v. Shell Oil Co., et al.; filed in May 1995,
and pending in Superior Court for the County of San Luis Obispo. The actions
generally allege that the company and several other defendants negligently
misrepresented the performance of polybutylene pipe and fittings installed in
water distribution systems. Other allegations include breach of warranty, fraud,
strict liability, and breach of the California Unfair Practices Act.
The company is not a party to any legal proceedings, including environmental
matters, which it believes will have a material adverse effect on its
consolidated financial position.
7
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Witco Corporation
We have reviewed the accompanying condensed consolidated balance sheet of Witco
Corporation and Subsidiary Companies as of September 30, 1995, and the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 1995 and 1994, and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1995 and
1994. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Witco Corporation and Subsidiary
Companies as of December 31, 1994, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated January 26, 1995, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1994, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Stamford, Connecticut
November 10, 1995
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND FINANCIAL RESOURCES
Cash and cash equivalents have increased since year end primarily as a result of
the completion of the divestiture of the company's Diversified Products Segment
for $146 million and favorable exchange rate fluctuations, which added $8.9
million. Proceeds of $20 million were also received from a structured settlement
agreement in connection with insurance coverage of certain environmental costs.
In addition, accounts receivable increased $51.3 million, primarily the result
of higher net sales.
On October 19, 1995, the company acquired OSi Specialties Holding Company for
approximately $486 million. To finance the acquisition, the company will utilize
existing cash-on-hand, and short-term financing of $375 million under a one year
credit agreement totalling $675 million with a consortium of banks. On November
6, 1995, the company commenced offers to purchase for cash any and all of the
outstanding 11 1/2% debentures and 9 1/4% notes of OSi and its primary operating
subsidiaries. If the company acquires all of the debentures and notes in the
offering, the total cost will be approximately $280 million. The company will
fund the acquisition of the debentures and notes through additional borrowings
under the credit agreement. Refer to Note D to the Condensed Consolidated
Financial Statements for further information.
CAPITAL INVESTMENTS AND COMMITMENTS
Capital expenditures during the first nine months of 1995 amounted to $73.6
million, as compared to $82.7 million during the same period of 1994. The
company anticipates that capital expenditures for 1995 will approximate $100
million.
The company also acquired through its 53.5% owned subsidiary in the United
Kingdom, Baxenden Chemicals Ltd., the prepolymers business of Akcros Chemicals.
The purchase included technology, tradenames, manufacturing equipment and
inventory. Baxenden is a major European producer of polyurethane prepolymers and
specialty isocyanates used in the manufacture of coatings, adhesives, sealants
and textile treatments.
The acquisition of OSi will not only add strategic research and development
capabilities along with a full line of silicone surfactants, amine catalysts,
organofunctional silanes and specialty fluids, but provides the base for
acceleration of growth of the company's existing products in Asia, South America
and Eastern Europe. During 1996, the company will be committed to the successful
integration of this acquisition.
CONTINGENCIES
The company has been notified, or is a named or a potentially responsible party
in a number of governmental (federal, state, and local) and private actions
associated with environmental matters, such as those relating to hazardous
wastes, including certain sites which are on the United States EPA National
Priorities List. These actions seek cleanup costs, penalties and/or damages for
personal injury or damage to property or natural resources.
The company is not a party to any legal proceedings or environmental matters
which it believes will have a material adverse effect on its consolidated
financial position. It is possible, however, that future results of operations
and cash flows, for any particular quarterly or annual period, could be
materially affected by such legal proceedings or environmental matters. However,
the company does not expect the results of such proceedings or environmental
matters to materially affect its competitive position.
DISCONTINUED OPERATIONS
On September 11, 1995, the company announced its intention to divest its
Lubricants Group. As of September 30, 1995, the company restated its income
statements and the September 30, 1995 balance sheet to reflect the
classification of its Lubricants Group as discontinued operations. See Note E to
the Condensed Consolidated Financial Statements for further information.
9
<PAGE>
RESULTS OF CONTINUING OPERATIONS
Third quarter sales of $441.9 million were 3 percent behind the same quarter of
1994. The absence of the Diversified Product Segment caused sales to decline
$28.8 million. This decline was partially offset by improved Chemical Segment
sales which rose $13.7 million due primarily to favorable foreign currency
exchange rates, coupled with increased sales prices.
Net Income of $19.4 million for the current quarter included a non-recurring
gain of $4.7 million from settlements with certain of the company's insurers,
net of related legal and other costs, ending litigation with those carriers
concerning coverage of certain environmental costs. Excluding the non-recurring
gain, third quarter 1995 net income was $7.9 million below the $22.7 million
recorded during the same quarter of 1994. The company continues to experience an
erosion in gross profit margins resulting from higher raw material costs which
cannot be fully passed through in increased sales prices. Lower margins,
combined with a decline in net sales, accounted for approximately half of the
shortfall in earnings, before the non-recurring gain. The balance of the decline
results from the reduction in "Other income - net", excluding the non-recurring
gain, on the Condensed Consolidated Statements of Income, and an increase in the
effective tax rate attributable to the mix of subsidiary pre-tax earnings
together with a prior year release of income tax reserves that were no longer
needed. The decrease in other income resulted from recording in 1994 a gain on
an insurance settlement and a reduction of various reserves that were adjusted
based upon favorable experience. Although offsetting, both interest income and
interest expense rose sharply during the current quarter compared to the third
quarter of 1994. The investment at higher interest rates of additional funds
that became available from the completion of the divestiture of the Diversified
Products Segment generated greater interest income, while unfavorable
international interest rates caused interest expense to rise.
Sales for the first nine months of 1995 of $1,449.1 million increased $59.3
million over the same period of 1994, despite a $46.5 million decline
attributable to the Diversified Products Segment, the divestiture of which was
completed during the second quarter of 1995. Sales for the Chemical and
Petroleum segments rose 8 percent on higher sales prices and favorable foreign
currency exchange rates. While volume remained flat, sales prices were raised in
an attempt to recover the higher costs of raw materials.
Net income for the nine months ended September 30, 1995 was $118.7 million
compared to $69.8 million for the same period of 1994. The inclusion of
significant non-recurring items in both periods affect comparison. Current year
results include $33.3 million for the gain on the disposition of businesses and
$27.7 million resulting from settlements with certain of the company's insurers,
net of related legal and other costs, while 1994 results benefited from the
disposition of a business that resulted in a gain of $3.1 million. Excluding
non-recurring items, net income for the first nine months of 1995 of $57.7
million was $8.9 million lower than the corresponding nine months of 1994. Of
this decline, approximately 50 percent can be attributed to margin erosion,
partly offset by the higher reported net sales. Competitive pressures in many of
the company's key markets have made it difficult to raise sales prices to the
level necessary to recover increased raw material costs, causing gross profit
margins to lag 1 to 2 percent behind the prior year. In addition, the third
quarter decline in other income and the change in income taxes, previously
noted, contributed to the decline in current year reported net income. Interest
income and interest expense rose by offsetting amounts during the nine month
period. Additional funds invested at more favorable rates caused interest income
to rise, while interest expense increased due primarily to higher international
interest rates.
Segment net sales and operating income for the third quarter and first nine
months of 1995 and 1994 are set forth in the following table. Income and
expenses of a general nature are not allocated to industry segments in computing
operating income. These include general corporate expenses, interest income and
expense, and certain other income and expenses.
10
<PAGE>
RESULTS OF CONTINUING OPERATIONS - (con't)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------------
1995 1994 1995 1994
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales
Chemical $349.5 $335.8 $1,102.7 $1,007.2
Petroleum 95.9 96.2 295.9 285.0
Diversified products -- 28.8 61.5 107.9
Intersegment elimination (3.5) (3.4) (11.0) (10.3)
-------------- ---------------- ---------------- ----------------
Total Net Sales $441.9 $457.4 $1,449.1 $1,389.8
=============== =============== ================ ================
Operating Income
Chemical $26.9 $27.1 $ 87.0 $ 91.3
Petroleum 7.4 8.8 22.1 32.0
Diversified products -- 1.2 62.7 11.4
-------------- ---------------- ---------------- ----------------
Total Operating Income $34.3 $37.1 $171.8 $134.7
=============== =============== ================ ================
</TABLE>
The company's international operations account for a greater portion of both
sales and operating income as a result of the company's Lubricants Group,
primarily a domestic business, being reflected as a discontinued operation
(excluded from industry segment and geographic area data) and the divestiture of
the Diversified Products Segment, a domestic business.
International sales and operating income were up from the prior year, mainly as
a result of favorable foreign currency exchange rates, while domestic sales and
operating income, excluding non-recurring items, were below prior year levels.
The company's international operations were responsible for 41 percent of sales
and 50 percent of operating income, excluding the Diversified Products Segment
and non-recurring items, for the first nine months of the current year as
compared to 38 percent and 42 percent, respectively, for the corresponding
period of 1994. The geographic mix for the third quarter was comparable with the
nine months percentages for both years.
CHEMICAL SEGMENT
Segment third quarter 1995 sales of $349.5 million were $13.7 million greater
than the same quarter of 1994. Favorable international currency exchange rates
accounted for approximately two-thirds of the higher sales with the balance due
to higher sales prices, partly offset by a 2 percent decline in volume.
Third quarter 1995 operating income of $26.9 million for the Chemical Segment
was comparable to the operating income reported for the same quarter of 1994.
Current quarter earnings of the Polymer Additives Group were behind those
reported in 1994. Income was down in the group's Vinyl business as a result of a
downturn in the housing and business construction markets and lower material
margins resulting from increased raw material costs and the use of higher priced
feedstocks to produce alternatives to cadmium based stabilizers. The company
made a decision in June 1994 to deplete its remaining stock of these stabilizers
and then exit the U.S. market. The Oleo/Surfactants Group reported an increase
in operating earnings. The increase was attributable to a modest improvement in
shipment volume and cost savings initiatives, including the consolidation of
sales functions that resulted in the closure of regional sales offices, partly
offset by additional costs attributable to the purchase of intermediate products
necessitated by unplanned production outages. Resin Group current quarter
earnings were up over 1994, principally reflecting a change in product sales mix
within the Epoxy/Hardeners business to a higher concentration of specialty
products.
Segment sales for the nine months ended September 30, 1995 were $1,102.7
million, an increase of $95.5 million compared to the same period of 1994. The
weakening of the U.S. dollar against many international currencies, particularly
the German mark, added approximately $38 million to current year sales. Sales
were also favorably affected by higher selling prices and a 1 percent increase
in shipment volume.
Chemical Segment operating income for the first nine months of 1995 of $87
million was $4.3 million lower than the same period of the prior year. The group
as a whole continues to experience difficulties in fully recovering increased
raw material feedstock costs through higher sales prices due to competitive
marketplace conditions. The Oleo/Surfactants Group and Polymer Additives Group
shared equally in the segment's lower earnings, while the Resins Group continues
to report operating income that exceeds the prior year. Higher raw material
feedstock costs and extremely competitive market conditions have caused the
Oleo/Surfactants earnings to decline. Products that ultimately reach the
11
<PAGE>
CHEMICAL SEGMENT - (con't)
consumer market have been the most adversely affected, where shipment volume is
down and margins have eroded. Unexpected production outages have forced the
group to purchase intermediate products to meet customer demand, which lowered
group earnings. It is expected that production levels will return to normal
during the fourth quarter of 1995. The Polymer Additives Group's earnings
continue to reflect the effect of the slowdown in the overall construction
industry, current year increases in raw material costs and the higher prices
paid for cadmium alternative feedstocks. The group's German operations reported
an improvement in operating earnings, benefiting from a dollar that weakened
against the German mark. Resins Group operating earnings were up compared to
1994. The group benefited from a 3 percent increase in shipment volume, the
recovery of increased raw material costs through higher sales prices, and a
favorable sales mix of specialty versus commodity products.
PETROLEUM SEGMENT
Commencing with the current quarter, the Petroleum Segment consists solely of
the Petroleum Specialties Group. This was a result of the company's decision to
sell the Lubricants Group, which operating results have been reported as
discontinued operations.
Segment sales for the third quarter 1995 of $95.9 million were $.3 million lower
than the same quarter of 1994. The effect of a favorable rate of currency
exchange against the Dutch guilder was offset by a 3 percent decline in shipment
volume.
Operating income for this segment was $7.4 million for the third quarter of 1995
compared to $8.8 million for the corresponding quarter of 1994. Costs associated
with start up inefficiencies and the commencement of depreciation charges for
two major capital projects continue to hold down current year earnings.
Feedstock shortages have also affected earnings through higher costs for
alternative products and lost sales.
Compared to the same period of 1994, current year segment sales for the first
nine months of 1995 rose 4 percent to $295.9 million. The increase was primarily
attributable to a favorable foreign currency exchange rate and higher selling
prices, partly offset by a 1 percent decline in volume shipped.
Petroleum Segment operating income for the nine months ended September 30, 1995
of $22.1 million, was $9.9 million below the same nine month period of 1994.
Shortages of key raw material feedstocks at various times throughout 1995, costs
associated with the start up of the group's Extracted Sulfonic Acid Unit in the
U.S. and Calcium Sulfonates Plant in Holland, and lower shipment volume were the
major factors leading to the decline in reported earnings. The lack of available
feedstocks resulted in lost sales opportunities and higher prices paid for
substituted, sometimes lower yield, raw materials.
DIVERSIFIED PRODUCTS SEGMENT
The divestiture of the Diversified Products Segment was completed during the
second quarter of 1995. Segment operating earnings for the first nine months of
1995 and 1994 included gains of $51.2 million and $4.8 million, respectively,
from the sale of the segment's businesses.
OUTLOOK
The company continues the implementation of the strategy of becoming more
focused as a specialty chemical and petroleum product manufacturer and marketer.
The acquisition of OSi Specialties and the divestiture of the Lubricants Group
are important steps in this strategic implementation. The company has also
completed a program to cut costs in several areas, including $4.7 million in
annual salary costs. In addition, the company continues to review the
possibility of consolidating manufacturing operations through plant closures.
The primary factor which will influence the likelihood that the company can
increase earnings in the coming quarter and year is the ability of the company
to increase product margins through reducing raw material costs, increasing
product sales prices, or a combination of the two.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The company has been notified, or is named as a potentially
responsible party ("PRP") or a defendant in a number of governmental
(federal, state, and local) and private actions associated with
environmental matters, such as those relating to hazardous wastes.
These actions seek remediation costs, penalties and/or damages for
personal injury or damage to property or natural resources. As of
September 30, 1995, the company had been identified as a PRP in
connection with 42 sites which are subject to the federal Superfund
Program under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"). The company has also been
identified as a PRP in connection with 23 sites where state agencies
have taken the lead role in overseeing site investigation or
cleanup. With 11 exceptions, all the CERCLA and state controlled
sites in which the company is involved are multi-party sites, and,
in most cases, there are numerous other potentially responsible
parties in addition to the company. CERCLA authorizes the federal
government to remediate a Superfund site itself and to assess the
costs against the responsible parties, or to order the responsible
parties to remediate the site.
The company evaluates and reviews environmental reserves for future
remediation and other costs on a quarterly basis to determine
appropriate reserve amounts. Inherent in this process are
considerable uncertainties which affect the company's ability to
estimate the ultimate costs of remediation efforts. Such
uncertainties include the nature and extent of contamination at each
site, evolving governmental standards regarding remediation
requirements, changes in environmental regulations, widely varying
costs of alternative cleanup methods, the number and financial
condition of other potentially responsible parties at multi-party
sites, innovations in remediation and restoration technology, and
the identification of additional environmental sites.
The company has numerous insurance policies which it believes
provide coverage at various levels for environmental liabilities.
The company is currently in litigation with many of its insurers
concerning the applicability and amount of insurance coverage for
environmental costs under certain of these policies. Except for
amounts reflected in executed settlement agreements, no provision
for recovery under any of these policies is included in the
company's financial statements.
The company is a defendant in three similar actions pending in
California state courts, which arise out of the company's
involvement in the polybutylene resin manufacturing business in the
1970's: East Bay Municipal Utility District v. Mobil Oil Co., et
al.; filed in November 1993, and pending in Superior Court for the
County of San Mateo, City of Santa Maria v. Shell Oil Co., et al.;
filed in May 1994, and pending in Superior Court for the County of
San Luis Obispo, and Nipomo Community Services District v. Shell Oil
Co., et al.; filed in May 1995, and pending in Superior Court for
the County of San Luis Obispo. The actions generally allege that the
company and several other defendants negligently misrepresented the
performance of polybutylene pipe and fittings installed in water
distribution systems. Other allegations include breach of warranty,
fraud, strict liability, and breach of the California Unfair
Practices Act.
The company is not a party to any legal proceedings, including
environmental matters, which it believes will have a material
adverse effect on its consolidated financial position.
13
<PAGE>
ITEM 5. Other Information
On October 19, 1995, the company acquired OSi Specialties Holding
Company and its wholly owned subsidiary, OSi Specialties, Inc., from
an investor group led by DLJ Merchant Banking Partners, L.P. in a
cash transaction which values 100 percent of OSi's equity at $486
million. The acquisition will be accounted for as a purchase. The
purchase price was determined by submitting a competitive bid to DLJ
along with other interested parties.
To finance the acquisition, the company will utilize cash-on-hand,
and short-term financing of $375 million under a one year credit
agreement with a syndicate of 10 banks with the Morgan Guaranty Trust
Company of New York, as agent. The credit agreement, which contains
the customary covenants inherent in such agreements, is for a total
of $675 million of which $375 million was utilized for the
acquisition.
In addition, the company has offered to purchase for cash any and all
of OSi's 11 1/2% Senior Secured Discount Debentures due 2004 and any
and all of OSi Specialties 9 1/4% Senior Subordinated Notes due 2003
for $875.26 per $1,000 in principal amount of the Debentures and
$1,121.83 per $1,000 in principal amount of the Notes, plus accrued
interest and unpaid interest to the payment date. A 100% acceptance
of this offering would equate to a total cost of approximately $280
million. In conjunction with the Offer to Purchase, the company is
soliciting consents to eliminate substantially all the restrictive
covenants contained in each indenture. The company will fund the
acquisition of the Debentures and Notes with additional short-term
bank loans available under the $675 million credit agreement.
The company intends to replace all or part of these short-term loans
with long-term financing in the public markets.
The assets of the acquired business include property, plant, and
equipment which are used to manufacture silicone surfactants, amine
catalysts, organofunctional silanes and specialty fluids. OSi has
manufacturing facilities in the United States, Europe and South
America with 1994 sales of approximately $400 million. The company
intends to continue to operate the business acquired.
It is not practical to provide the required financial statements with
this filing; therefore, such statements will be filed under cover of
Form 8-K/A as soon as practicable, but not later than January 2,
1996.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 (a) Agreement and Plan of Merger dated as of September 10,
1995 filed with Form 8-K dated September 25, 1995
2 (b) Amendment dated as of October 18, 1995 filed with Form
8-K dated October 31, 1995
4 Not applicable
10 Credit Agreement dated as of October 18, 1995 filed
with Form 8-K dated October 31, 1995
11 Statement re computation of per share earnings
15 Letter re unaudited interim financial information
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
(b) Reports on Form 8-K
The company filed two Current Reports on Form 8-K, the first
dated September 25, 1995, pertained to the agreement for the sale
to Witco of OSi Specialties Holding Company and the second dated
October 31, 1995, pertained to the closing of the acquisition.
14
<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.
WITCO CORPORATION
(Registrant)
Date: November 10, 1995 /s/ MICHAEL D. FULLWOOD
---------------------------------------
Michael D. Fullwood
Executive Vice President and
Chief Financial Officer
Date: November 10, 1995 /s/ DUSTAN E. MCCOY
---------------------------------------
Dustan E. McCoy
Vice President - General Counsel
and Corporate Secretary
16
<TABLE>
<CAPTION>
EXHIBIT 11
WITCO CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- --------------------------------
1995 1994 1995 1994
-------------- --------------- ------------- -----------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
PRIMARY
Income from Continuing Operations $ 19,444 $ 22,656 $ 118,735 $ 69,768
Interest on convertible subordinated
debentures (net of tax) -- -- -- 1,109
Dividend requirements of preferred stock (5) (5) (14) (15)
--------- --------- ---------- ---------
Total 19,439 22,651 118,721 70,862
Income from Discontinued Operations -
net of income taxes 4,466 4,342 6,304 11,653
--------- --------- ---------- ---------
Net Income $ 23,905 $ 26,993 $ 125,025 $ 82,515
========= ========= ========== =========
Weighted average shares outstanding 56,401 56,111 56,271 54,363
Assumed conversions:
Convertible subordinated debentures -- -- -- 1,692
Stock options 460 272 271 334
--------- --------- ---------- ---------
Total 56,861 56,383 56,542 56,389
========= ========= ========== =========
Per share amounts:
Income from Continuing Operations $.34 $.40 $2.10 $1.25
Income from Discontinued Operations -
net of income taxes .08 .08 .11 .21
---- ---- ----- -----
Net Income $.42 $.48 $2.21 $1.46
==== ==== ===== =====
FULLY DILUTED
Income from Continuing Operations $ 19,444 $ 22,656 $118,735 $ 69,768
Interest on dilutive debentures (net of tax) -- -- -- 1,109
--------- --------- ---------- ---------
Total 19,444 22,656 118,735 70,877
Income from Discontinued Operations -
net of income taxes 4,466 4,342 6,304 11,653
--------- --------- ---------- ---------
Net Income $ 23,910 $ 26,998 $ 125,039 $ 82,530
========= ========= ========== =========
Weighted average shares outstanding 56,401 56,111 56,271 54,363
Assumed conversions:
Convertible subordinated debentures -- -- -- 1,692
Stock options 554 272 611 334
Preferred stock 116 125 118 131
--------- --------- ---------- ---------
Total 57,071 56,508 57,000 56,520
========= ========= ========== =========
Per share amounts:
Income from Continuing Operations $.34 $.40 $2.08 $1.25
Income from Discontinued Operations -
net of income taxes .08 .08 .11 .21
---- ---- ----- -----
Net Income $.42 $.48 $2.19 $1.46
==== ==== ===== =====
</TABLE>
EXHIBIT 15
LETTER RE: UNAUDITED FINANCIAL INFORMATION
ACKNOWLEDGMENT LETTER
November 10, 1995
The Board of Directors
Witco Corporation
We are aware of the incorporation by reference in the Registration Statement
(Form S-3, No. 33-45865) and the Post-effective Amendment No. 2 to the
Registration Statement (Form S-3, No. 33-58066), each pertaining to the issuance
of debentures, the Post-effective Amendment No. 1 to the Registration Statement
(Form S-3, No. 33-58120) pertaining to the issuance of common stock, the
Post-effective Amendment No. 2 to the Registration Statement (Form S-8, No.
33-10715), Post-effective Amendment No. 1 to the Registration Statements (Form
S-8, Nos. 33-30995 and 33-45194), each pertaining to stock option plans of Witco
Corporation, the Registration Statement (Form S-8, No. 33-48806), pertaining to
an employee benefit plan of Witco Corporation, and the Registration Statement
(Form S-8, No. 33-60755), pertaining to the 1995 Stock Option Plan for Employees
of Witco Corporation and its Subsidiaries, of our report dated November 10, 1995
relating to the unaudited condensed consolidated interim financial statements of
Witco Corporation and Subsidiary Companies which is included in its Form 10-Q
for the quarter ended September 30, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not part of
the registration statements prepared or certified by accountants within the
meaning of Sections 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Stamford, Connecticut
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 307,084
<SECURITIES> 0
<RECEIVABLES> 372,241
<ALLOWANCES> 10,304
<INVENTORY> 225,786
<CURRENT-ASSETS> 937,652
<PP&E> 1,141,368
<DEPRECIATION> 567,749
<TOTAL-ASSETS> 1,984,586
<CURRENT-LIABILITIES> 307,925
<BONDS> 345,365
<COMMON> 282,170
0
7
<OTHER-SE> 766,230
<TOTAL-LIABILITY-AND-EQUITY> 1,984,586
<SALES> 1,449,085
<TOTAL-REVENUES> 1,460,289
<CGS> 1,205,075
<TOTAL-COSTS> 1,205,075
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,178
<INTEREST-EXPENSE> 26,146
<INCOME-PRETAX> 184,105
<INCOME-TAX> 65,370
<INCOME-CONTINUING> 118,735
<DISCONTINUED> 6,304
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,039
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.19
</TABLE>
