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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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Commission file number 1-9678
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ARCO Chemical Company
(Exact name of registrant as specified in its charter)
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Delaware 51-0104393
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3801 West Chester Pike
Newtown Square, Pennsylvania 19073-2387
(Address of principal executive offices) (Zip Code)
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(610) 359-2000
(Registrant's telephone number, including area code)
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Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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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 ___
Number of shares of Common Stock, $1.00 par value, outstanding as of March
31, 1995: 96,193,359.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. ARCO CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------
1995 1994
---- ----
<S> <C> <C>
Sales and other operating revenues $1,141 $ 757
Costs and other operating expenses 844 587
------ -----
Gross profit 297 170
Selling, general and administrative
expenses 64 57
Research and development 18 17
------ -----
Operating income 215 96
Interest expense (22) (21)
Other income, net 5 1
------ -----
Income before income taxes 198 76
Provision for income taxes 72 31
------ -----
Net income $ 126 $ 45
====== =====
Earnings per common share $ 1.31 $ .47
====== =====
Cash dividends paid per common
share $ .625 $.625
====== =====
</TABLE>
See accompanying notes.
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 105 $ 144
Accounts receivable 693 565
Inventories 400 397
Prepaid expenses and other current assets 40 18
------ ------
Total current assets 1,238 1,124
Investments and long-term receivables 94 97
Property, plant and equipment, net 2,279 2,221
Deferred charges and other assets (net of
accumulated amortization of $257 in 1995
and $247 in 1994) 366 295
------ ------
Total assets $3,977 $3,737
====== ======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Notes payable $ 24 $ 23
Long-term debt due within one year 17 15
Accounts payable 277 242
Taxes payable 113 66
Other accrued liabilities 203 199
------ ------
Total current liabilities 634 545
Long-term debt 906 898
Other liabilities and deferred credits 148 142
Deferred income taxes 405 369
Minority interest 118 124
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 865 864
Retained earnings 798 732
Foreign currency translation 107 70
Treasury stock, at cost (104) (107)
------ ------
Total stockholders' equity 1,766 1,659
------ ------
Total liabilities and stockholders'
equity $3,977 $3,737
====== ======
</TABLE>
See accompanying notes.
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<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1995 1994
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 126 $ 45
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 59 57
Net change in accounts receivable (101) 8
Net change in inventories, accounts
and other payables 82 21
Other (32) (28)
----- -----
Net cash provided by operating activities 134 103
----- -----
Cash flows from investment activities
Increase in deferred charges (74) -
Capital expenditures (28) (34)
Other - 21
----- -----
Net cash used in investment activities (102) (13)
----- -----
Cash flows from financing activities
Dividends paid (60) (60)
Net repayments of notes payable (1) (25)
Repayment of long-term debt (14) (12)
Other 4 2
----- -----
Net cash used in financing activities (71) (95)
----- -----
Effect of exchange rate changes on cash - -
----- -----
Net decrease in cash and cash equivalents (39) (5)
Cash and cash equivalents at beginning of year 144 42
----- -----
Cash and cash equivalents at end of period $ 105 $ 37
===== =====
</TABLE>
See accompanying notes.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. Basis of Presentation
The foregoing financial information is unaudited and has been prepared
from the records of ARCO Chemical Company (the company). In the opinion of
management, the financial information reflects all adjustments (consisting only
of items of a normal recurring nature) necessary for a fair statement of
financial position and results of operations in conformity with generally
accepted accounting principles. Certain amounts in 1994 have been reclassified
for comparative purposes. These interim financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 1994.
NOTE B. Business Segment Information
The following table sets forth certain information concerning the
company's principal geographic regions for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Total revenues
Americas $ 789 $ 539
Europe 354 211
Asia Pacific 58 54
Elimination of interregional
sales (60) (47)
------ -----
Total $1,141 $ 757
====== =====
Pretax earnings
Americas $ 180 $ 95
Europe (8) (9)
Asia Pacific 3 (4)
Corporate 38 13
Interest expense (22) (21)
Equity in net income of
Asian joint venture 3 -
Eliminations 4 2
------ -----
Total $ 198 $ 76
====== =====
</TABLE>
Interregional sales are made at prices approximating current market values.
Included in pretax earnings are royalty charges made from corporate to the
regions for the use of company technology.
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<PAGE>
NOTE C. Inventories
Inventories at March 31, 1995 and December 31, 1994 comprised the
following categories:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Finished goods $ 264 $ 272
Work-in-process 35 35
Raw materials 59 49
Materials and supplies 42 41
----- -----
Total $ 400 $ 397
===== =====
</TABLE>
NOTE D. Property, Plant and Equipment, Net
Property, plant and equipment, at cost, and related accumulated
depreciation at March 31, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Property, plant and equipment $3,675 $3,524
Less: accumulated depreciation 1,396 1,303
------ ------
Total $2,279 $2,221
====== ======
</TABLE>
NOTE E. Contingencies
The company and its subsidiaries are involved in a number of
lawsuits, all of which have arisen in the ordinary course of the company's
business. The company is unable to predict the outcome of these matters, but
does not believe, based upon currently available facts, that the ultimate
resolution of such matters will have a material adverse effect on the
consolidated financial statements of the company.
The company is subject to other loss contingencies pursuant to
federal, state, local, and foreign environmental laws and regulations. These
contingencies include possible obligations to remove or mitigate the effect on
the environment of the disposal or release of certain chemical substances at
various sites. The company continues to estimate the amount of these costs and
periodically establishes reserves based on the progress made in determining the
magnitude, method and timing of the remedial actions that may be required by
government authorities, and an evaluation of the company's potential liability
in relation to the liability and financial resources of the other potentially
responsible parties.
At March 31, 1995, the company's environmental reserve totaled $49
million, which reflects the company's latest assessment of potential future
costs associated with existing sites. A significant portion of the reserve is
related to the company's Beaver Valley (Pennsylvania) facility. The
company and the Pennsylvania Department of Environmental Resources have agreed
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upon a work plan for testing and remedial process design with regard to
conditions at the Beaver Valley plant. The reserve reflects an agreement
between the company and another responsible party whereby that party has agreed
to pay for approximately 50 percent of the cost of the remediation at the
Beaver Valley plant. The remainder of the reserve is related to six other
sites for amounts ranging from $1 million to $7 million per site.
Substantially all amounts accrued are expected to be paid out over the next
five to ten years.
The company is currently performing environmental site assessments,
remedial investigations/feasibility studies, and remediation activities at a
number of sites under these laws. The company may in the future be involved in
additional environmental assessments and cleanups. As the scope of the
company's environmental contingencies becomes more clearly defined, it is
possible that amounts in excess of those already reserved may be necessary.
Management believes, based upon its past experience and best
assessment of future events, that these environmental liabilities and costs
will be determined and incurred over an extended period of time, allowing the
company to fund such liabilities and costs through its operating cash flow, and
therefore that the impact of such liabilities and costs would not be material
in relation to the company's consolidated financial position as of March 31,
1995. Depending on the amounts of future operating results, the environmental
liabilities to be recorded in a given annual or quarterly period may
potentially result in charges that are material to the results of operations
for that period.
The company and Atlantic Richfield Company (ARCO) are parties to an
agreement whereby the company has indemnified ARCO against certain claims or
liabilities that ARCO may incur relating to ARCO's former ownership and
operation of the oxygenates and polystyrenics businesses of the company,
including liabilities under laws relating to the protection of the environment
and the workplace and liabilities arising out of certain litigation. ARCO has
indemnified the company with respect to claims or liabilities and other matters
of litigation not related to the assets or businesses reflected in the
consolidated financial statements. ARCO has also indemnified the company for
certain federal, foreign, state, and local taxes that might be assessed upon
audit of the operations of the company included in its consolidated financial
statements for periods prior to July 1, 1987.
NOTE F. Earnings Per Common Share
Earnings per common share for the three months ended March 31, 1995
and 1994 are computed based on 96,141,312 and 96,033,180 weighted average number
of shares outstanding, respectively. The effect of stock options issued under
the 1987 Executive Long-Term Incentive Plan and the 1990 Long-Term Incentive
Plan on the computation of primary and fully diluted earnings per common share
was not material and had no effect on the reported earnings per common share.
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<PAGE>
NOTE G. Supplemental Cash Flow Information
Following is supplemental cash flow information for the three months
ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Notes Payable:
Gross proceeds from issuances $ 449 $ 27
Gross repayments (450) (52)
----- -----
Net repayments $ (1) $ (25)
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Cash paid during the period for:
Interest (net of amount capitalized) $ 18 $ 18
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Income taxes (net of refunds) $ 15 $ -
===== =====
</TABLE>
NOTE H. Corporate Restructuring Program
In connection with the 1994 global restructuring, approximately 130
people will be leaving the company. The company accrued $30 million before tax
in the fourth quarter of 1994, consisting primarily of personnel costs (pension
enhancements, severance and other ancillary costs) associated with the
employment terminations. Of the total accrued, approximately one half of such
amount related to severance and other ancillary costs that will be paid from
company funds within the current year. Through March 31, 1995, the activity
related to the accrual was not significant.
NOTE I. Long-term Supply Arrangement
As more fully described in the December 31, 1994 consolidated
financial statements, the company entered into a long-term, toluene di-
isocyanate supply arrangement in January 1995. A substantial portion of the
initial payment of $80 million made at closing related to capacity reservation
fees and other long-term rights and costs. These are reported in the
accompanying consolidated balance sheet as "Deferred charges and other assets"
and are being amortized on a straight-line basis over the 15-year period of the
agreement, the period of expected benefit.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Volumes
Sales volumes of the company's key product, propylene oxide (PO), its
two co-products, tertiary butyl alcohol (TBA) and styrene monomer (SM), and
their derivatives for the first quarter 1995 and 1994 are set forth below.
Methyl tertiary butyl ether (MTBE) is a key derivative of TBA used in
oxygenated fuels and reformulated gasoline and as a gasoline octane additive.
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions)
<S> <C> <C>
PO and derivatives (pounds) 937 943
TBA and derivatives (gallons) 289 238
SM and derivatives (pounds) 699 620
</TABLE>
The company manufactures and markets its products in three major world regions,
the Americas, Europe, and Asia Pacific.
Results of Operations
Net Income
Net income increased 180 percent to $126 million, or $1.31 per share,
for the first quarter 1995 from $45 million, or $.47 per share, for the first
quarter 1994. The 1995 improvement primarily reflected strong worldwide SM
demand, resulting in higher SM margins and volumes, as well as higher demand
for MTBE, resulting in higher overall MTBE margins and volumes.
Revenues and Gross Profit
Revenues increased 51 percent to $1,141 million in the first quarter
1995 from $757 million in the first quarter 1994 primarily due to higher sales
prices across all product lines. Gross profit of $297 million in the first
quarter 1995 increased $127 million from $170 million in the 1994 first
quarter. Overall gross profit margins were 26.0 percent in 1995 compared to
22.5 percent in 1994. The 1995 increases in revenues and gross profit primarily
reflected higher SM sales prices, margins and volumes, higher U.S. MTBE prices
and margins, as well as higher MTBE volumes.
PO and Derivatives
PO and derivatives margins in the first quarter 1995 increased
slightly versus the prior year period as benefits from a weaker U.S. dollar and
generally higher sales prices offset increases in propylene feedstock costs. PO
and derivatives volumes in the first quarter 1995 decreased slightly versus
the first quarter 1994 as higher volumes resulting from the stronger European
economy were offset by lower U.S. volumes. U.S. volumes were affected by the
mild winter, which reduced demand for propylene glycol(PG)-based deicers, and
the startup of the Texaco PO/MTBE plant, which increased industry supplies of
PO and PG.
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<PAGE>
TBA and Derivatives
TBA and derivatives margins in the first quarter 1995 increased versus
the first quarter 1994. Higher MTBE prices and margins in the U.S. more than
offset lower margins in Europe where increases in methanol and butane feedstock
costs were only partly recovered through higher MTBE prices. TBA and
derivatives volumes increased 21 percent in the first quarter 1995 versus the
first quarter 1994 primarily due to increased U.S. demand for MTBE in
reformulated gasoline, resulting from implementation of the second phase of the
Clean Air Act.
On June 30, 1994, the Environmental Protection Agency (EPA)
promulgated regulations under the Clean Air Act requiring that 15 percent in
1995, and 30 percent thereafter, of the oxygenate content in reformulated
gasoline be supplied by oxygenates such as ethanol and ethyl tertiary butyl
ether (ETBE), which are derived from renewable feedstocks. ETBE uses ethanol as
a feedstock. In September, 1994, the U.S. Court of Appeals for the District of
Columbia granted a temporary stay of the EPA regulations. The regulations, if
implemented, may, in the long term, decrease demand for MTBE and increase
demand for other oxygenates derived from renewable feedstocks, including ETBE.
The company is capable of producing both MTBE and ETBE.
The company is responding through public education and other steps to
consumer concerns about the potential health and performance effects resulting
from the widespread use of fuel oxygenates, particularly MTBE. Extensive
studies of MTBE over the past 20 years support the product's continued use in
gasoline. The EPA approves of the use of MTBE to meet Clean Air Act standards
and reduce air emissions. Nonetheless, additional studies on MTBE and
reformulated gasoline are presently being conducted.
SM and Derivatives
SM and derivatives margins improved significantly in the first quarter
1995 versus the first quarter 1994 reflecting increased worldwide SM demand and
tighter SM supplies due to planned maintenance turnarounds at other producers'
plants. SM and derivatives volumes in the first quarter 1995 increased 13
percent over the first quarter 1994 due to higher U.S. merchant and export
sales, reflecting the increased worldwide demand and tighter supply.
Other
The company expects its 1995 effective tax rate to be 36.5 percent
compared to a 40.7 percent tax rate used in the first quarter 1994 and a final
1994 effective tax rate of 35.3 percent. The higher estimated tax rate used in
the first quarter 1994 was primarily due to lower estimated foreign source
earnings.
Liquidity and Capital Resources
As of March 31, 1995, the company had $105 million in cash and cash
equivalents compared with $144 million at December 31, 1994. The Consolidated
Statement of Cash Flows for the quarter ended March 31, 1995 shows that net
cash flows provided by operating activities were $134 million, whereas net cash
flows used by investment and financing activities were $102 million and $71
million, respectively.
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<PAGE>
Investment activities for the first quarter 1995 included capital
expenditures of $28 million. The company has approved a 1995 budget for plant
and equipment of $195 million, which includes environmental, health and safety
projects as well as low-cost debottlenecks. As more fully described in the
company's consolidated financial statements for the year ended December 31,
1994, the company entered into a long-term, toluene di-isocyanate supply
arrangement in January 1995. A substantial portion of the initial $80 million
payment made at closing related to capacity reservation fees and other long-
term rights and costs. These are reported in the accompanying consolidated
balance sheet as "Deferred charges and other assets" and are being amortized on
a straight-line basis over the 15-year period of the agreement, the period of
expected benefit.
The company paid dividends of $.625 per share, totalling $60 million,
in the first quarter 1995. On April 14, 1995, the Board of Directors declared a
dividend of $.625 per share on the company's common stock, payable June 2,
1995.
It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will be met by cash generated from operating
activities and additional borrowing.
Statement of Financial Accounting Standards Not Yet Adopted
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires companies to adopt its provisions for fiscal years
beginning after December 15, 1995. The provisions of SFAS No. 121 require the
company to review its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable through future cash flows. An impairment
loss is indicated when the carrying amount exceeds such cash flows. The company
is in the process of evaluating the provisions of SFAS No. 121.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the disclosure on page 9 of the company's 1994
Form 10-K Report regarding the Turtle Bayou, Texas CERCLA Site. Upon
finalization of the consent decree, it is expected that the Order will be
rescinded with respect to the company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule for the three months ended March 31, 1995.
(b) Reports on Form 8-K:
None
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SIGNATURE
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.
ARCO CHEMICAL COMPANY
(Registrant)
/s/ John A. Shaw
-----------------------------
(Signature)
John A. Shaw
Vice President
and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Dated: April 28, 1995
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EXHIBIT INDEX
Exhibit
Number Description
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27 Financial Data Schedule for the three months
ended March 31, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 105
<SECURITIES> 0
<RECEIVABLES> 693
<ALLOWANCES> 0
<INVENTORY> 400
<CURRENT-ASSETS> 1,238
<PP&E> 3,675
<DEPRECIATION> 1,396
<TOTAL-ASSETS> 3,977
<CURRENT-LIABILITIES> 634
<BONDS> 906
<COMMON> 100
0
0
<OTHER-SE> 1,666
<TOTAL-LIABILITY-AND-EQUITY> 3,977
<SALES> 1,141
<TOTAL-REVENUES> 1,141
<CGS> 844
<TOTAL-COSTS> 844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 198
<INCOME-TAX> 72
<INCOME-CONTINUING> 126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
