<PAGE>
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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 September 30, 1997
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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
September 30, 1997: 97,076,543.
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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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and other operating revenues $ 1,004 $ 1,035 $ 2,989 $ 2,976
Costs and other operating expenses 772 800 2,411 2,273
------- ------- ------- -------
Gross profit 232 235 578 703
Selling, general and administrative
expenses 63 67 198 200
Research and development 20 22 61 61
Restructuring and other charges 175 -- 175 --
------- ------- ------- -------
Operating (loss) income (26) 146 144 442
Interest expense 19 22 61 65
Other expense (income), net 12 (8) 14 (26)
------- ------- ------- -------
(Loss) income before income taxes (57) 132 69 403
Income tax (benefit) provision (20) 35 23 119
------- ------- ------- -------
Net (loss) income $ (37) $ 97 $ 46 $ 284
======= ======= ======= =======
(Loss) earnings per common share $ (.38) $ 1.00 $ .47 $ 2.94
======= ======= ======= =======
Cash dividends paid per common share $ .70 $ .70 $ 2.10 $ 2.10
======= ======= ======= =======
</TABLE>
See accompanying notes.
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 54 $ 70
Accounts receivable 588 629
Inventories 523 536
Prepaid expenses and other current assets 39 37
------- -------
Total current assets 1,204 1,272
Investments and long-term receivables 69 71
Property, plant and equipment, net 2,523 2,622
Deferred charges and other assets (net of
accumulated amortization of $116 in 1997
and $312 in 1996) 364 429
------- -------
Total assets $ 4,160 $ 4,394
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 156 $ 150
Long-term debt due within one year 24 25
Accounts payable 259 349
Taxes payable 6 19
Other accrued liabilities 305 229
------- -------
Total current liabilities 750 772
------- -------
Long-term debt 802 844
Other liabilities and deferred credits 213 171
Deferred income taxes 378 408
Minority interest 218 185
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 879 875
Retained earnings 904 1,062
Foreign currency translation (6) 64
Treasury stock, at cost (78) (87)
------- -------
Total stockholders' equity 1,799 2,014
------- -------
Total liabilities and stockholders' equity $ 4,160 $ 4,394
======= =======
</TABLE>
See accompanying notes.
- 2 -
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 46 $ 284
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 172 165
Restructuring and other charges 175 --
Changes in working capital accounts (73) 10
Other 26 (20)
----- -----
Net cash provided by operating activities 346 439
----- -----
Cash flows from investing activities
Capital expenditures (188) (158)
Proceeds from short-term investments -- 25
Other 37 31
----- -----
Net cash used in investing activities (151) (102)
----- -----
Cash flows from financing activities
Dividends paid (203) (203)
Repayment of long-term debt (173) (17)
Proceeds from issuance of long-term debt 158 --
Other 12 13
----- -----
Net cash used in financing activities (206) (207)
----- -----
Effect of exchange rate changes on cash (5) (3)
----- -----
Net (decrease) increase in cash and cash equivalents (16) 127
Cash and cash equivalents at beginning of year 70 235
----- -----
Cash and cash equivalents at end of period $ 54 $ 362
===== =====
</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, except for the restructuring and other
charges) necessary for a fair statement of financial position and results of
operations in conformity with generally accepted accounting principles. Certain
amounts in 1996 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, 1996.
NOTE B. Geographic Information
The Company is an international manufacturer of intermediate chemicals
and specialty chemical products which it markets principally 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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions of Dollars)
<S> <C> <C> <C> <C>
Total revenues (by destination)
United States $ 501 $ 563 $ 1,512 $ 1,580
Europe 257 266 776 812
Other foreign 246 206 701 584
------- ------- ------- -------
Total $ 1,004 $ 1,035 $ 2,989 $ 2,976
======= ======= ======= =======
Total revenues (by origin)
United States $ 607 $ 629 $ 1,828 $ 1,759
Europe 288 313 857 961
Other foreign 109 93 304 256
------- ------- ------- -------
Total $ 1,004 $ 1,035 $ 2,989 $ 2,976
======= ======= ======= =======
Pretax (loss) earnings
United States $ (7) $ 120 $ 189 $ 383
Europe (18) 28 (48) 89
Other foreign (13) 6 (11) (4)
Interest expense (19) (22) (61) (65)
------- ------- ------- -------
Total $ (57) $ 132 $ 69 $ 403
======= ======= ======= =======
</TABLE>
Pretax earnings include royalty charges made to foreign operations for
the use of Company technology. The loss in 1997 reflects restructuring and other
charges in the United States, Europe, and other foreign of $124 million, $40
million, and $11 million, respectively.
- 4 -
<PAGE>
NOTE C. Inventories
Inventories at September 30, 1997 and December 31, 1996 comprised the
following categories:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Millions of Dollars)
<S> <C> <C>
Finished goods $365 $392
Work-in-process 37 38
Raw materials 79 62
Materials and supplies 42 44
---- ----
Total $523 $536
==== ====
</TABLE>
NOTE D. Property, Plant and Equipment, Net
Property, plant and equipment, at cost, and related accumulated
depreciation at September 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Millions of Dollars)
<S> <C> <C>
Property, plant and equipment $4,114 $4,152
Less: accumulated depreciation 1,591 1,530
------ ------
Total $2,523 $2,622
====== ======
</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 September 30, 1997, the Company's environmental reserve totaled $46
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 Beaver Valley plant site, located in Monaca,
Pennsylvania.
- 5 -
<PAGE>
The Company sold the Beaver Valley plant assets to NOVA Chemicals Inc. (NOVA) on
September 30, 1996, but currently retains ownership of the land at the Beaver
Valley plant site as well as responsibility for remediation of the land,
substantial portions of which are leased to NOVA. On October 20, 1997, the
Company and the Pennsylvania Department of Environmental Protection (PADEP)
entered into a consent agreement that acknowledged the completion of remedial
investigations and conditionally approved the proposed remediation methods at
the Beaver Valley plant site, all pursuant to a 1994 work plan previously agreed
to by the Company and PADEP. Final approval of the remediation methods is
subject to PADEP's approval of risk assessment studies to be submitted by the
Company in the near future. The Company also has an agreement with another
responsible party whereby that party has agreed to pay for approximately 50
percent of the Beaver Valley plant site remediation costs.
The remainder of the reserve is related to four other plant sites and
one federal Superfund site for amounts ranging from $2 million to $13 million
per site. The Company is involved in administrative proceedings or lawsuits
relating to eight other Superfund sites. However, the Company 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 completed RI/FS or preliminary assessments at most of its sites.
However, 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 other principal responsible party (PRP) at the
Beaver Valley site have reached an agreement with the U.S. government whereby
the government will pay 28.5 percent of the costs incurred by the Company and
the other PRP for remediation of substantial portions of the Beaver Valley site.
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.
- 6 -
<PAGE>
NOTE F. Earnings Per Common Share
Earnings per common share for the three- and nine-month periods ended
September 30, 1997 are computed based on 97.0 million and 96.9 million weighted
average shares outstanding, respectively. Earnings per common share for the
three- and nine-month periods ended September 30, 1996 are computed based on
96.7 million and 96.6 million weighted average 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," establishing standards for computing and presenting earnings per share
(EPS). SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all prior-period EPS
data presented. Earlier application is not permitted. The implementation of SFAS
No. 128 is not expected to have a material effect on the reported EPS of the
Company.
NOTE G. Supplemental Cash Flow Information
Following is supplemental cash flow information for the nine months
ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Millions of Dollars)
<S> <C> <C>
Changes in working capital-increase (decrease) in cash:
Accounts receivable $ 13 $ 14
Inventories 2 (11)
Prepaid expense and other current assets (11) (23)
Accounts payable (73) 34
Taxes payable (12) 3
Other accrued liabilities 8 (7)
---- ----
Changes in working capital accounts $(73) $ 10
==== ====
The above changes exclude the effects of the 1997 restructuring and other
charges, the 1996 sale of the plastics business, and foreign exchange rate
changes.
Short-term investments: $ -- $ 139
Gross proceeds from maturities
Gross purchases -- (114)
----- -----
Net proceeds $ -- $ 25
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 59 $ 66
===== =====
Income taxes $ 39 $ 129
===== =====
Noncash investing activities:
Noncash aspects of asset sale
Net assets sold $ -- $ 160
Receivable from the sale of assets -- (160)
</TABLE>
- 7 -
<PAGE>
The assets and liabilities sold to NOVA were removed from the Company's
September 30, 1996 balance sheet and a corresponding receivable from the sale of
assets was recorded. Cash proceeds from the sale were received on October 1,
1996.
NOTE H. Restructuring and Other Charges
During the third quarter 1997, the Company recorded a pretax charge of
$175 million related to a previously announced restructuring program, which
included a review of all operations and assets. Activities related to the
restructuring program are expected to continue through the end of 1998. The
restructuring charge included $75 million of personnel-related costs and $23
million of exit costs. Other charges included $77 million related to the review
of assets.
Personnel costs included severance, pension enhancements, and other
ancillary costs for the reduction of approximately 630 employees worldwide in
manufacturing, commercial, research, and administrative activities. Severance
payments and other ancillary costs, which will be paid from Company funds,
account for $62 million of the accrued liability. Certain of these payments can
be deferred at the election of employees, and the Company estimates that such
payments will take place over the next two to three years. Pension enhancements
account for $13 million of the accrued liability and will be paid from the
assets of qualified pension plans, which the Company funds on a long-term basis.
Exit costs include costs of canceling long-term contracts and leases related to
certain production, sales and administrative facilities. Through September 30,
1997, neither the number of terminations nor the amount of payments was
significant.
As part of the restructuring program, the Company reviewed its
existing asset base. The charge of $77 million includes valuation adjustments of
certain assets, principally license agreements, other intangibles and
site-specific production assets, which have decreased ongoing utility in light
of the restructured operations, the Company's current strategic direction, and
the current competitive environment. At September 30, 1997, the asset valuation
adjustments, totaling $52 million, were reflected in Property, Plant and
Equipment and Deferred Charges and Other Assets on the consolidated balance
sheet. The Company also accrued a liability of $25 million for the cost of
upgrading certain domestic production facilities to comply with regulatory
standards.
- 8 -
<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 products, operating in a single industry segment. It conducts business
primarily in the Americas, Europe, and the Asia Pacific region.
Each of the Company's two principal manufacturing processes yields 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 PO and TBA. Among these are polyols, a key derivative of PO, and
methyl tertiary butyl ether (MTBE), a principal derivative of TBA. The Company
also manufactures and markets toluene diisocyanate (TDI). TDI and polyols are
combined in the manufacture of polyurethanes. MTBE is used in oxygenated fuels
and as an octane additive.
Results of Operations
Product Volumes
Sales and other operating revenues include the sales and processing
volumes of the Company's core products and co-products for the periods indicated
below. Core products include PO, PO derivatives, and TDI.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
Core products (pounds) 1,060 895 3,036 2,624
Co-products:
SM and derivatives (pounds) 607 730 1,942 2,080
TBA and derivatives (gallons) 269 303 789 835
</TABLE>
The reported SM volumes include quantities processed for PO/SM II equity
partners (SM equity volumes) under long-term processing arrangements. The SM
equity volumes averaged approximately 200 million pounds per quarter in both
1997 and 1996. The 1996 data include SM derivatives sales volumes for periods
prior to September 30, 1996 when the plastics business was sold.
- 9 -
<PAGE>
Third Quarter 1997 versus Third Quarter 1996
Net Income
The net loss of $37 million for the third quarter 1997 compares to net
income of $97 million in the third quarter 1996. The $134 million decrease
included a $116 million after-tax charge for costs associated with the Company's
restructuring program and asset reviews. The remaining $18 million decrease was
primarily due to foreign exchange-related costs.
Revenues
Revenues of $1,004 million in the third quarter 1997 decreased three
percent from revenues of $1,035 million in the third quarter 1996, as lower
average sales prices were only partially offset by the effect of higher sales
volumes. The lower average 1997 sales prices were due to a combination of lower
market prices, product mix and foreign exchange rates. Prices for PO derivatives
and TDI were generally lower due to stronger price competition in their
respective markets and the effect of a stronger U.S. dollar on foreign sales.
These were only partly offset by higher prices for PO. Lower 1997 prices for
co-products, MTBE and SM, reflected expiration of a significant portion of the
Company's long-term, fixed-fee MTBE contracts, lower SM market prices, and
replacement of divested plastics business sales with SM processing fees.
Volumes for core products increased 18 percent in the third quarter
1997 versus the prior year period. TDI volumes were higher due to the Olin
acquisition and the increased availability of TDI from a plant in France. The
French plant operated at lower rates in the 1996 period. PO and derivatives
volumes benefited from improved demand and temporary industry supply shortages
for certain products. SM and derivatives volumes decreased 17 percent. The loss
of SM derivatives volumes through the sale of the plastics business was
essentially offset by increased SM volumes processed for the buyer of the
plastics business. However, other SM volumes declined due to a weaker export
market in 1997. TBA and derivatives volumes decreased 11 percent, reflecting
lower MTBE volumes in 1997 compared to the 1996 period when MTBE volumes were
unusually high as customers replenished low inventories.
Gross Profit
Gross profit of $232 million in the third quarter 1997 declined
slightly from third quarter 1996 gross profit of $235 million, however gross
profit was 23.1 percent of sales in the third quarter 1997 compared to 22.7
percent in the 1996 period. The gross profit rate improvement primarily
reflected a more favorable product mix as most product lines had lower
year-to-year margins. The decrease in individual product margins was due to the
combined effect of flat to lower sales prices for most products and higher costs
for most feedstocks in the third quarter 1997 versus the 1996 period. The effect
of the lower product margins was offset by volume and mix effects. The Company
did not make a provision for environmental remediation costs in the 1997 third
quarter; a $4 million provision was made in the 1996 period.
Other
During the third quarter 1997, the Company recorded a pretax charge of
$175 million to cover the costs of its restructuring program, including
personnel related costs and costs related to exit activities, as well as charges
for asset valuation write downs and liabilities related to certain assets. The
restructuring program seeks to simplify the organization and streamline
operations. The restructuring efforts are expected to continue through the end
of 1998, with the cost reductions substantially in place by the end of 1998. A
key element of the program is the reduction of approximately 900 employee and
contractor positions. The
- 10 -
<PAGE>
Company has accrued $75 million for involuntary terminations covering 630
employee positions. The balance of the head count reductions has been achieved
through voluntary employee resignations and elimination of contractor positions.
The Company also accrued $23 million for exit costs related to the restructuring
and $77 million in connection with the other actions taken. See Note H of Notes
to Consolidated Financial Statements.
Other expense of $12 million in 1997 compared to income of $8 million
in 1996. The $20 million decrease is primarily due to charges associated with
changes in the Company's foreign exchange hedging program during 1997, higher
1997 unrealized foreign exchange losses as a result of weaker Asian currencies,
and lower interest income as a result of lower levels of cash and cash
equivalents in the 1997 period.
The Company expects its 1997 effective tax rate to be 34.0 percent
compared to a final 1996 effective tax rate of 28.5 percent. The lower 1996 rate
reflected utilization of capital loss carryforwards and the utilization of
foreign tax credits pursuant to the tax sharing agreement with ARCO.
Nine Months Ended September 30, 1997 versus 1996
Net Income
Net income for the nine months ended September 30, 1997 was $46
million compared with $284 million for the comparable 1996 period. The $238
million decline reflected the $116 million after-tax charge in the third quarter
1997 for the restructuring and asset review programs. The remaining $122 million
decrease primarily reflected lower margins for PO derivatives, TDI, and MTBE,
and, to a lesser extent, higher 1997 charges related to foreign exchange and
maintenance turnaround costs.
Revenues
Revenues of $2,989 million in the first nine months of 1997 were flat
compared to revenues of $2,976 million in the first nine months of 1996, as
higher net volumes were substantially offset by lower average sales prices.
Volumes for core products increased 16 percent in the first nine months of 1997
versus the prior year period. The increase reflected higher TDI volumes due to
the Olin acquisition and the increased availability of TDI from the plant in
France. Core product sales also reflected higher volumes for PO derivatives,
which benefited from improved demand and temporary supply shortages for certain
products, partly offset by lower PO volumes. SM and derivatives volumes
decreased seven percent. The loss of SM derivatives volumes through the sale of
the plastics business was essentially offset by increased SM volumes processed
for the buyer of the plastics business. However, other SM volumes declined due
to a weaker export market in 1997. TBA and derivative volumes decreased six
percent.
Average sales prices were generally lower in the 1997 period versus
1996. Contributing to the lower 1997 prices were stronger competition in PO
derivatives and TDI markets, expiration of most of the Company's long-term,
fixed-fee MTBE contracts, industry concerns over SM capacity additions in Asia,
the effect of a stronger U.S. dollar, and replacement of divested plastics
business sales with SM processing fees.
- 11 -
<PAGE>
Gross Profit
Gross profit of $578 million in the first nine months of 1997
decreased $125 million from $703 million in the 1996 period, reflecting lower
margins for most products and increased plant turnaround maintenance costs.
Gross profit was 19.3 percent of sales in the 1997 period compared to 23.6
percent in the 1996 period. The decline in gross profit margins was due to the
combined effect of lower sales prices and higher feedstock costs in the 1997
period versus the 1996 period. Maintenance costs were $15 million higher due to
an increase in the number of scheduled plant maintenance turnarounds in 1997.
Other
During the third quarter 1997, the Company recorded a pretax charge of
$175 million to cover the costs of its previously announced restructuring
program, as explained in Note H of Notes to Consolidated Financial Statements.
Other expense of $14 million in the 1997 period compared to income of
$26 million in the 1996 period. The $40 million decrease reflects charges
associated with changes in the Company's foreign exchange hedging strategy in
1997, higher 1997 foreign exchange losses, lower interest income as a result of
lower levels of cash and cash equivalents in the 1997 period, and the benefit of
an insurance settlement included in the 1996 period.
Financial Condition
Liquidity and Capital Resources
As of September 30, 1997, the Company had $54 million in cash and cash
equivalents compared with $70 million at December 31, 1996. The Consolidated
Statement of Cash Flows for the nine months ended September 30, 1997 shows that
net cash flows provided by operating activities were $346 million, whereas net
cash flows used by investing and financing activities were $151 million and $206
million, respectively.
Investment activities for the first nine months 1997 included capital
expenditures of $188 million. The Company's 1997 capital spending is part of a
five-year, $2.6 billion program primarily devoted to capacity expansion and
growth. Minority interest includes equity contributions designated for specific
capital projects. At September 30, 1997, the unexpended amounts were classified
as deferred charges and other assets in the balance sheet.
During the third quarter 1997, the Company revised its hedging
strategy with respect to capital commitments related to construction of the new
PO/SM plant in Rotterdam, the Netherlands. To take advantage of the stronger
U.S. dollar, the Company effectively terminated purchased option contracts
entered into in the first quarter 1997 in the notional amount of $119 million,
and entered into forward contracts in the notional amount of $209 million.
Additionally, the Company effectively terminated purchased option contracts
entered into in 1995 in the notional amount of $99 million, and entered into
purchased option contracts in the notional amount of $81 million. Unamortized
option premiums associated with the terminated option contracts were charged to
expense in the third quarter 1997. Gains on the purchased options will be
deferred and offset against the plant's construction costs. Gains and losses on
the forward contracts will be deferred when the construction contracts are
executed, currently projected to be in the fourth quarter 1997. There were no
deferred hedging gains as of September 30, 1997.
- 12 -
<PAGE>
During July 1997, the Company negotiated a new revolving credit
facility, which comprised a $200 million credit agreement and a $300 million
credit agreement, for a total commitment of $500 million. The $200 million
credit agreement is renewable annually; the $300 million credit agreement has a
term of five years. This facility replaces the previous $300 million revolving
credit agreement. The new facility has a restrictive financial covenant that
requires the Company to maintain a minimum consolidated net worth, as defined in
the agreements, of $1.5 billion. The Company has no outstanding borrowing
against the facility, which is used to back up the Company's commercial paper
borrowing.
During the second quarter 1997, the Company filed a shelf registration
statement on Form S-3 with the Securities and Exchange Commission for up to $350
million of debt securities. In the first quarter 1997, the Company executed an
agreement to refinance two Dutch bank loans, having a combined principal balance
of 300 million Dutch guilders ($158 million) and due in 1997, with one loan due
in 2002.
The Company paid dividends totaling $203 million during the first nine
months 1997, including a dividend of $.70 per share, totaling $68 million,
during the quarter ended September 30, 1997. On October 16, 1997, the Board of
Directors declared a dividend of $.70 per share on the Company's common stock,
payable December 5, 1997.
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 February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," establishing standards for computing and presenting earnings per share
(EPS). SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all prior-period EPS
data presented. Earlier application is not permitted. The implementation of SFAS
No. 128 is not expected to have a material effect on the reported EPS of the
Company.
- 13 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the disclosure on pages 9-10 of the Company's
1996 Annual Report on Form 10- K regarding the site of the Company's former
plant located in Monaca, Pennsylvania (Beaver Valley):
Certain organic waste material is contained in the soil and ground
water at the site of the Company's former plant located in Monaca, Pennsylvania
(Beaver Valley). In 1994, the Company entered into a Consent Order and Agreement
(the First Consent Agreement) with the Pennsylvania Department of Environmental
Protection (PADEP) pursuant to which the Company and PADEP agreed upon a work
plan for testing and remedial process design with regard to the conditions at
the Beaver Valley site (Site). That work plan has been completed. On October 20,
1997, the Company entered into a second Consent Order and Agreement (the Second
Consent Agreement) with PADEP which terminates the First Consent Agreement. The
Second Consent Agreement carries forward in a limited fashion the monetary
penalties contained in the First Consent Order, which will be imposed only if
the Company fails to meet certain deadlines for submitting Risk Assessment
Studies to PADEP for review and approval. In the Second Consent Agreement, PADEP
approved the Site characterization information previously submitted by the
Company for all areas of the Site and acknowledged their completion.
Furthermore, PADEP conditionally approved the Company's Site-specific remedies
and found that they complied with the Land Recycling and Environmental
Remediation Standards Act. Final approval of the Site-specific remedies is
subject to PADEP's approval of Risk Assessment Studies to be submitted by the
Company. Upon approval by PADEP, the Company will commence the remediation of
the Site. Remediation is expected to last approximately two years.
The Company has an agreement with Beazer East, Inc. (Beazer), the
successor to Koppers Inc. (the previous owner of the Beaver Valley plant),
whereby Beazer agreed to pay for approximately 50 percent of the cost of the
remediation. Beazer is also a signatory to the Second Consent Agreement. The
Company and Beazer have reached an agreement with the U.S. government pursuant
to which the government will pay 28.5 percent of the costs incurred by the
Company and Beazer for remediation of substantial portions of the Beaver Valley
site.
The Company sold the Beaver Valley plant assets to NOVA Chemicals Inc.
(NOVA) on September 30, 1996, but currently retains ownership of the Beaver
Valley land, substantial portions of which are being leased to NOVA. NOVA agreed
to assume ownership of the leased portions of the Beaver Valley land after the
Company finalized the Second Consent Agreement. The process of transferring the
land to NOVA has begun. The Company will retain responsibility for the
remediation of the land as required by the Second Consent Agreement.
Item 5. Other Information
The Company's 1998 Annual Meeting of Stockholders is currently
scheduled to be held on Thursday, May 14, 1998. Stockholder proposals intended
to be presented at the 1998 Annual Meeting must be received by December 1, 1997.
Such proposals should be addressed to the Secretary, ARCO Chemical Company, 3801
West Chester Pike, Newtown Square, Pennsylvania 19073.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12 Statements re: Computation of Ratios.
27 Financial Data Schedule for the nine months ended September 30, 1997.
- 14 -
<PAGE>
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated July 21, 1997,
which announced the adoption of a restricted stock program for the compensation
of directors serving on the Company's Board of Directors, who are neither
directors, officers or employees of Atlantic Richfield Company nor officers or
employees of the Company.
- 15 -
<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/ Van Billet
----------------------------------
(Signature)
Van Billet
Vice President
and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Dated: October 31, 1997
- 16 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
12 Statement re: Computation of Ratios
27 Financial Data Schedule for the nine months ended
September 30, 1997.
<PAGE>
EXHIBIT 12
----
ARCO CHEMICAL COMPANY AND CONSOLIDATED SUBSIDIARIES
Computation of the Ratio of Earnings to Fixed Charges
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
-------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Pretax income from continuing operations ......... $322 $311 $416 $756 $487 $ 69
Add:
Interest expense .......................... 91 105 85 89 86 61
Rental expense factor ..................... 26 20 22 25 27 20
---- ---- ---- ---- ---- ----
Earnings available for fixed
charges ...................................... $439 $436 $523 $870 $600 $150
==== ==== ==== ==== ==== ====
Interest expense ................................. $ 91 $105 $ 85 $ 89 $ 86 $ 61
Add capitalized interest ......................... 37 - 3 1 3 6
Rental expense factor ............................ 26 20 22 25 27 20
---- ---- ---- ---- ---- ----
Fixed charges .................................... $154 $125 $110 $115 $116 $ 87
==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges ............... 2.9 3.5 4.8 7.6 5.2 1.7
==== ==== ==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 588
<ALLOWANCES> 0
<INVENTORY> 523
<CURRENT-ASSETS> 1,204
<PP&E> 4,114
<DEPRECIATION> 1,591
<TOTAL-ASSETS> 4,160
<CURRENT-LIABILITIES> 750
<BONDS> 802
0
0
<COMMON> 100
<OTHER-SE> 1,699
<TOTAL-LIABILITY-AND-EQUITY> 4,160
<SALES> 2,989
<TOTAL-REVENUES> 2,989
<CGS> 2,411
<TOTAL-COSTS> 2,411
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 69
<INCOME-TAX> 23
<INCOME-CONTINUING> 46
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
