<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 March 31, 1996
---------------
Commission file number 1-9678
---------------
ARCO Chemical Company
(Exact name of registrant as specified in its charter)
---------------
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)
---------------
(610) 359-2000
(Registrant's telephone number, including area code)
---------------
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
---------------
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, 1996: 96,589,314.
<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,
------------------
<S> <C> <C>
1996 1995
----- ------
Sales and other operating revenues $ 982 $1,141
Costs and other operating expenses 730 844
----- ------
Gross profit 252 297
Selling, general and administrative
expenses 63 64
Research and development 18 18
----- ------
Operating income 171 215
Interest expense (22) (22)
Other income, net 9 5
----- ------
Income before income taxes 158 198
Provision for income taxes 52 72
----- ------
Net income $ 106 $ 126
===== ======
Earnings per common share $1.10 $ 1.31
===== ======
Cash dividends paid per common
share $.700 $ .625
===== ======
</TABLE>
See accompanying notes.
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 268 $ 235
Short-term investments 114 25
Accounts receivable 586 631
Inventories 480 472
Prepaid expenses and other current assets 34 19
-------- --------
Total current assets 1,482 1,382
Investments and long-term receivables 80 90
Property, plant and equipment, net 2,261 2,293
Deferred charges and other assets (net of
accumulated amortization of $286 in 1996
and $285 in 1995) 359 370
-------- --------
Total assets $ 4,182 $ 4,135
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Long-term debt due within one year $ 24 $ 25
Accounts payable 267 253
Taxes payable 125 94
Other accrued liabilities 195 217
-------- --------
Total current liabilities 611 589
-------- --------
Long-term debt 880 887
Other liabilities and deferred credits 165 158
Deferred income taxes 409 409
Minority interest 126 123
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 871 869
Retained earnings 1,023 985
Foreign currency translation 88 110
Treasury stock, at cost (91) (95)
-------- --------
Total stockholders' equity 1,991 1,969
-------- --------
Total liabilities and stockholders'
equity $ 4,182 $ 4,135
======== ========
</TABLE>
See accompanying notes.
- 2 -
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 106 $ 126
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 54 59
Net change in accounts receivable, inventories,
accounts and other payables 63 (19)
Other (17) (32)
----- -----
Net cash provided by operating activities 206 134
----- -----
Cash flows from investment activities
Purchases of short-term investments (89) -
Capital expenditures (40) (28)
Proceeds from asset sales 21 -
Increase in deferred charges (1) (74)
----- -----
Net cash used in investment activities (109) (102)
----- -----
Cash flows from financing activities
Dividends paid (68) (60)
Repayment of long-term debt - (14)
Other 6 3
----- -----
Net cash used in financing activities (62) (71)
----- -----
Effect of exchange rate changes on cash (2) -
----- -----
Net increase (decrease) in cash and cash equivalents 33 (39)
Cash and cash equivalents at beginning of year 235 144
----- -----
Cash and cash equivalents at end of period $ 268 $ 105
===== =====
</TABLE>
See accompanying notes.
- 3 -
<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 1995 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, 1995.
NOTE B. Geographic Information
The Company is an international manufacturer of intermediate chemicals
and specialty chemical products which it principally markets to other
industrial concerns. The Company operates in one industry segment. The
geographic distribution of the Company's markets is indicated by the table
below. Total revenues are summarized geographically by destination (customer
location) and by origin (point of sale); intercompany sales between geographic
areas are excluded.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
(Millions of Dollars)
Total revenues (by destination)
United States $ 516 $ 634
Europe 281 254
Other foreign 185 253
----- ------
Total $ 982 $1,141
===== ======
Total revenues (by origin)
United States $ 561 $ 720
Europe 337 341
Other foreign 84 80
----- ------
Total $ 982 $1,141
===== ======
Pretax earnings
United States $ 139 $ 218
Europe 40 (8)
Other foreign (2) 6
Interest expense (22) (22)
Eliminations 3 4
----- ------
Total $ 158 $ 198
===== ======
</TABLE>
Included in pretax earnings are royalty charges made to foreign
operations for the use of Company technology. Eliminations principally include
intercompany profit.
- 4 -
<PAGE>
NOTE C. Inventories
Inventories at March 31, 1996 and December 31, 1995 comprised the
following categories:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Millions of Dollars)
<S> <C> <C>
Finished goods $348 $338
Work-in-process 29 38
Raw materials 58 51
Materials and supplies 45 45
----- -----
Total $480 $472
===== =====
</TABLE>
NOTE D. Property, Plant and Equipment, Net
Property, plant and equipment, at cost, and related accumulated
depreciation at March 31, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Millions of Dollars)
<S> <C> <C>
Property, plant and equipment $3,806 $3,812
Less: accumulated depreciation 1,545 1,519
------ ------
Total $2,261 $2,293
====== ======
</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 effects on
the environment of the past disposal or release of certain chemical substances
at various sites (remediation costs). The Company continues to evaluate the
amount of these remediation costs and periodically adjusts its reserve for
remediation costs and its estimate of additional environmental loss
contingencies based on 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 any other potentially responsible parties.
At March 31, 1996, the Company's environmental reserve totaled $57
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
reserve is related to the Company's Beaver Valley (Pennsylvania) facility. The
reserve gives recognition to a work plan, between the Company and the
Pennsylvania
- 5 -
<PAGE>
Department of Environmental Protection, for testing, risk assessment, remedial
process design and remediation of conditions at the Beaver Valley plant. The
reserve also reflects an agreement between the Company and another responsible
party whereby that party has agreed to pay for approximately 50 percent of the
costs associated with the Beaver Valley plant work plan. The remainder of the
reserve is related to four other plant sites and two federal Superfund sites
for amounts ranging from $1 million to $15 million per site. The Company is
involved in administrative proceedings or lawsuits relating to seven other
Superfund sites. However, it estimates, based on currently available
information, that potential loss contingencies associated with these sites,
individually and in the aggregate, are not significant. Substantially all
amounts reserved are expected to be paid out over the next five to ten years.
The Company relies upon remedial investigation/feasibility studies
(RI/FS) at each site as a basis for estimating remediation costs at the site.
The Company has substantially completed RI/FS at most of its sites; however,
two plant facilities are currently undergoing either RI/FS or preliminary
assessments. In addition, selection of the remediation method and the cleanup
standard to be applied are, in most cases, subject to approval by the
appropriate government authority. Accordingly, the Company may have possible
loss contingencies in excess of the amounts reserved to the extent the scope of
remediation required, the final remediation method selected and the cleanup
standard applied vary from the assumptions used in estimating the reserve. The
Company estimates that the upper range of these possible loss contingencies
should not exceed the amount accrued by more than $65 million.
The extent of loss related to environmental matters ultimately depends
upon a number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts reserved or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.
The Company and the 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 the July 1, 1987 formation of the Company.
NOTE F. Earnings Per Common Share
Earnings per common share for the three months ended March 31, 1996 and
1995 are computed based on 96,537,737 and 96,141,312 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.
- 6 -
<PAGE>
NOTE G. Supplemental Cash Flow Information
Following is supplemental cash flow information for the three months
ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
(Millions of Dollars)
<S> <C> <C>
Short-term investments:
Gross proceeds from sales $ 25 $ -
Gross purchases (114) -
----- -----
Net purchases $ (89) $ -
===== =====
Notes payable:
Gross proceeds from issuances $ - $ 449
Gross repayments - (450)
----- -----
Net repayments $ - $ (1)
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 16 $ 18
===== =====
Income taxes $ 11 $ 15
===== =====
</TABLE>
- 7 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company manufactures and markets intermediate chemicals and
specialty chemical products, operating in a single industry segment. It
conducts business primarily in the Western Hemisphere, Europe, and the Asia
Pacific region.
The Company's principal manufacturing processes each yield its key
product, propylene oxide (PO), and one of two co-products, styrene monomer (SM)
or tertiary butyl alcohol (TBA). The Company also manufactures numerous
derivatives of these products, including methyl tertiary butyl ether (MTBE),
the principal derivative of TBA used as an oxygenate and an octane enhancer in
gasoline, and polyols, a key derivative of PO. The Company also sells toluene
di-isocyanate (TDI) obtained under long-term supply agreements with a third
party. TDI and polyols are combined to manufacture polyurethanes.
Net income for the first quarter 1996 was $106 million compared with
$126 million in the first quarter 1995. The $20 million decrease in 1996 net
income reflected weaker first quarter 1996 demand, which contributed to
significantly lower margins for SM as well as lower volumes for most products.
These factors, combined with lower MTBE margins, more than offset benefits from
higher PO and derivatives margins.
RESULTS OF OPERATIONS
Product Volumes
Sales and other operating revenues include the sales and processing
volumes of PO, TBA, SM and their derivatives for the first quarter 1996 and
1995 as set forth below.
<TABLE>
<CAPTION>
1996 1995
---- ----
(Millions)
<S> <C> <C>
PO and derivatives (pounds) 853 937
Co-products:
SM and derivatives (pounds) 659 699
TBA and derivatives (gallons) 275 289
</TABLE>
Revenues
Revenues of $982 million in the first quarter 1996 decreased 14
percent from $1,141 million in the first quarter 1995, reflecting lower sales
prices for SM and MTBE and lower volumes for most products. SM prices declined
significantly as evidenced by SM spot market prices, which fell over 50 percent
from last year's levels. Domestic MTBE prices decreased from first quarter
1995 levels when MTBE prices were affected by the high market price of
methanol, an MTBE feedstock. Methanol prices peaked in late 1994/early 1995.
The effect of the lower SM and MTBE sales prices was greater than the benefit
from higher prices for PO derivatives. PO derivative prices were higher
primarily due to price increases implemented during mid-1995.
- 8 -
<PAGE>
Weaker worldwide demand during the first quarter 1996 contributed to
lower volumes for PO and derivatives, which decreased nine percent, and SM and
derivatives, which decreased six percent. TBA and derivatives volumes
decreased five percent as weaker PO demand resulted in lower production levels
of co-product TBA and, consequently, lower MTBE sales volumes. Short-term
operating problems at the Company's Fos-sur-Mer, France plant further limited
TBA production.
Gross Profit
Gross profit was $252 million, or 25.7 percent of sales, in the first
quarter 1996, a decrease of $45 million from $297 million, or 26.0 percent of
sales, in the 1995 first quarter. The gross profit decrease was equally
attributable to the net effect of the above-noted decrease in volumes and to
lower overall margins as lower SM and MTBE margins more than offset higher PO
and derivatives margins. Lower worldwide SM demand resulted in significantly
lower SM margins as SM prices decreased more than raw materials costs. MTBE
margins declined on lower domestic prices and the effect of the short-term
operating problems at the Fos-sur-Mer plant. PO and derivatives margins
improved primarily as a result of higher sales prices for PO derivatives and
lower raw materials costs.
Other
The Company currently estimates its 1996 effective tax rate to be 33.0
percent, compared to 36.5 percent used in the first quarter 1995. The final
1995 effective tax rate was 32.8 percent. The higher estimated tax rate used
in the first quarter 1995 was primarily due to lower estimated foreign source
earnings.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 31, 1996, the Company had $382 million in cash and cash
equivalents and short-term investments compared with $260 million at December
31, 1995. The Consolidated Statement of Cash Flows for the quarter ended March
31, 1996 shows that net cash flows provided by operating activities were $206
million, whereas net cash flows used by investment and financing activities
were $109 million and $62 million, respectively.
On April 12, 1996, the Board of Directors gave final approval for the
expansion of the PO/SM complex in Channelview, Texas, and the construction of a
new world-scale PO/SM plant in Rotterdam, the Netherlands. The Channelview
PO/SM expansion will add annual PO and SM capacity of 110 million and 248
million pounds, respectively, in early 1998. The new PO/SM plant will add
annual PO and SM capacity of 625 million and 1,400 million pounds,
respectively, in the fourth quarter 1999.
- 9 -
<PAGE>
Investment activities for the first quarter 1996 included capital
expenditures of $40 million. The Company has approved a 1996 capital budget of
$285 million, which includes initial spending for the above projects as well as
low-cost capacity increases and environmental, health and safety projects.
The Company paid dividends of $.70 per share, totalling $68 million,
in the first quarter 1996. On April 18, 1996, the Board of Directors declared a
dividend of $.70 per share on the Company's common stock, payable June 7, 1996.
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.
- 10 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No material developments.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule for the three months ended March 31, 1996.
(b) Reports on Form 8-K:
None
- 11 -
<PAGE>
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 30, 1996
- 12 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 268
<SECURITIES> 114
<RECEIVABLES> 586
<ALLOWANCES> 0
<INVENTORY> 480
<CURRENT-ASSETS> 1,482
<PP&E> 3,806
<DEPRECIATION> 1,545
<TOTAL-ASSETS> 4,182
<CURRENT-LIABILITIES> 611
<BONDS> 880
0
0
<COMMON> 100
<OTHER-SE> 1,891
<TOTAL-LIABILITY-AND-EQUITY> 4,182
<SALES> 982
<TOTAL-REVENUES> 982
<CGS> 730
<TOTAL-COSTS> 730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 158
<INCOME-TAX> 52
<INCOME-CONTINUING> 106
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
