SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-29764
INTERNATIONAL SPECIALTY PRODUCTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)
300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (302) 427-5715
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of May 11, 2001, 66,130,589 shares of International Specialty Products
Inc. common stock (par value $.01 per share) were outstanding.
47201.0001
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
---------------------
APRIL 2, APRIL 1,
2000 2001
--------- ----------
Net sales........................................ $ 197,941 $ 203,197
--------- ----------
Costs and expenses:
Cost of products sold.......................... 129,434 133,263
Selling, general and administrative............ 38,862 39,977
Goodwill amortization.......................... 4,048 4,048
--------- ----------
Total costs and expenses................ 172,344 177,288
--------- ----------
Operating income................................. 25,597 25,909
Interest expense................................. (19,722) (19,051)
Gain on contract settlement ..................... 3,450 -
Other income, net................................ 2,463 28,499
--------- ----------
Income before income taxes....................... 11,788 35,357
Income taxes..................................... (4,116) (12,402)
--------- ----------
Income before cumulative effect of
accounting change.............................. 7,672 22,955
Cumulative effect of change in accounting
principle, net of income tax benefit of $216... - (440)
--------- ----------
Net income....................................... $ 7,672 $ 22,515
========= ==========
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - (CONTINUED)
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
---------------------
APRIL 2, APRIL 1,
2000 2001
--------- ----------
Earnings per common share:
Basic:
Income before cumulative effect of
accounting change................... $ .11 $ .35
Cumulative effect of accounting change - (.01)
--------- ----------
Net income............................ $ .11 $ .34
========= ==========
Diluted:
Income before cumulative effect of
accounting change................... $ .11 $ .35
Cumulative effect of accounting change - (.01)
--------- ----------
Net income............................ $ .11 $ .34
========= ==========
Weighted average number of common and common
equivalent shares outstanding:
Basic................................... 68,849 66,328
========= ==========
Diluted................................. 68,857 66,373
========= ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
APRIL 1,
DECEMBER 31, 2001
2000 (UNAUDITED)
------------ -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 18,181 $ 13,909
Investments in trading securities.............. 303,103 312,874
Investments in available-for-sale securities... 222,327 190,440
Other short-term investments................... 19,129 20,039
Accounts receivable, trade, net................ 89,173 93,236
Accounts receivable, other..................... 19,596 20,666
Receivable from related parties, net........... 11,624 17,355
Inventories.................................... 150,948 160,234
Other current assets........................... 36,928 39,277
---------- ----------
Total Current Assets......................... 871,009 868,030
Property, plant and equipment, net............... 562,973 557,454
Goodwill, net.................................... 494,386 490,338
Other assets..................................... 31,916 29,075
---------- ----------
Total Assets..................................... $1,960,284 $1,944,897
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 143,682 $ 135,571
Current maturities of long-term debt........... 224,419 463,264
Accounts payable............................... 58,238 55,668
Accrued liabilities............................ 91,309 88,288
Income taxes................................... 13,610 14,571
---------- ----------
Total Current Liabilities.................... 531,258 757,362
---------- ----------
Long-term debt less current maturities........... 524,780 324,885
---------- ----------
Deferred income taxes............................ 151,181 136,036
---------- ----------
Other liabilities................................ 61,730 62,324
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized:
no shares issued............................. - -
Common stock, $.01 par value per share;
300,000,000 shares authorized: 69,546,456
shares issued ............................... 695 695
Additional paid-in capital..................... 485,629 485,771
Unearned compensation - restricted stock awards (1,287) (1,179)
Treasury stock, at cost - 3,135,192 and
3,265,282 shares, respectively............... (19,631) (20,654)
Retained earnings.............................. 213,928 236,443
Accumulated other comprehensive income(loss)... 12,001 (36,786)
---------- ----------
Total Stockholders' Equity................... 691,335 664,290
---------- ----------
Total Liabilities and Stockholders' Equity....... $1,960,284 $1,944,897
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
3
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
QUARTER ENDED
-------------------
APRIL 2, APRIL 1,
2000 2001
-------- ---------
(THOUSANDS)
Cash and cash equivalents, beginning of period........... $ 23,309 $ 18,181
-------- --------
Cash provided by operating activities:
Net income............................................. 7,672 22,515
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle - 440
Depreciation....................................... 12,432 12,959
Goodwill amortization.............................. 4,048 4,048
Deferred income taxes.............................. (1,242) 7,701
Unrealized gains on trading securities and other
short-term investments........................... (14,840) (20,612)
Increase in working capital items...................... (12,124) (23,869)
Purchases of trading securities........................ (18,906) (143,546)
Proceeds from sales of trading securities.............. 34,564 153,241
Increase in net receivable from related parties........ (2,404) (5,731)
Change in cumulative translation adjustment............ (6,282) (5,093)
Other, net............................................. 2,878 5,585
-------- --------
Net cash provided by operating activities................ 5,796 7,638
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures................................... (11,284) (9,872)
Purchases of available-for-sale securities............. (94,678) (45,754)
Proceeds from sales of available-for-sale securities... 64,398 12,291
Proceeds from sales of other short-term investments.... - 236
-------- --------
Net cash used in investing activities.................... (41,564) (43,099)
-------- --------
Cash provided by (used in) financing activities:
Proceeds (repayments) from sale of accounts receivable. (5,675) 1,475
Increase (decrease) in short-term debt................. 41,566 (8,111)
Increase in borrowings under revolving credit facility. 21,100 67,100
Repayments of long-term debt........................... (110) (28,180)
Repurchases of common stock............................ - (1,219)
Other, net............................................. 530 124
-------- --------
Net cash provided by financing activities................ 57,411 31,189
-------- --------
Net change in cash and cash equivalents.................. 21,643 (4,272)
-------- --------
Cash and cash equivalents, end of period................. $ 44,952 $ 13,909
======== ========
4
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)-- (CONTINUED)
QUARTER ENDED
-------------------
APRIL 2, APRIL 1,
2000 2001
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 17,007 $ 16,228
Income taxes..................................... 4,722 3,125
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for International Specialty Products
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company at April 1,
2001, and the results of operations and cash flows for the periods ended April
2, 2000 and April 1, 2001. All adjustments are of a normal recurring nature.
These financial statements should be read in conjunction with the annual
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000 (the "Form 10-K").
NOTE 1. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement.
The Company adopted SFAS No. 133 as of January 1, 2001. Accounting for
interest rate swaps and foreign exchange forward contracts held by the Company
is affected by implementation of this standard. The earnings impact of the
transition adjustments related to the initial adoption of the standard was an
after-tax loss of $0.4 million, which was recorded in the first quarter of 2001
as the cumulative effect of a change in accounting principle.
NOTE 2. HEDGING AND DERIVATIVES
The Company maintains a $400 million bank revolving credit facility, with
the majority of outstanding borrowings against this facility indexed to LIBOR.
The Company has designated interest rate swaps, with a notional amount of $100
million, as a hedge of its exposure to changes in LIBOR. The interest rate swaps
are structured to receive interest based on LIBOR and pay interest on a fixed
rate basis. A cash flow hedging relationship has been established whereby the
interest rate swaps hedge the risk of changes in LIBOR related to forecasted
borrowings against the bank credit facility. The interest rate swaps hedge
forecasted exposure to changes in LIBOR through July 2002.
During the first quarter of 2001, a $0.1 million charge related to the
reduction in the fair market value of the interest rate swaps was reclassified
and charged against interest expense. As of April 1, 2001, the reclassification
charge to earnings related to interest accruals over the next twelve months is
estimated to be $1.7 million.
Derivatives held by the Company not designated as hedging instruments
include total return equity swaps and forward foreign exchange instruments. The
total return equity swaps are held for investment income purposes. Foreign
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange forward contracts are held to offset exposure to changes in exchange
rates affecting intercompany loans.
NOTE 3. COMPREHENSIVE INCOME
Quarter Ended
--------------------
April 2, April 1,
2000 2001
--------- ---------
(Thousands)
Net income........................................ $ 7,672 $ 22,515
-------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains (losses) arising
during the period, net of income tax
(provision) benefit of $(20,419)
and $22,867 .................................. 40,238 (42,307)
Less: reclassification adjustment
for gains (losses) included in net income,
net of income tax (provision) benefit of
$1,436 and $(283).............................. (3,000) 524
--------- ---------
Total change for the period..................... 43,238 (42,831)
--------- ---------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of tax effect of $495 - (914)
Less: reclassification adjustment for losses
included in net income, net of tax effect
of $28........................................ - (51)
--------- ---------
Total change for the period..................... - (863)
Foreign currency translation adjustment......... (6,282) (5,093)
--------- ---------
Total other comprehensive income (loss)........... 36,956
(48,787)
--------- ---------
Comprehensive income (loss)....................... $ 44,628 $ (26,272)
========= =========
Changes in the components of "Accumulated other comprehensive income
(loss)" for the quarter ended April 1, 2001 are as follows:
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized Unrealized Cumulative
Gains (Losses) Losses on Foreign Accumulated
On Available- Derivative Currency Other
for-Sale Hedging Translation Comprehensive
Securities Instruments Adjustment Income (Loss)
---------- ---------- ---------- -----------
(Thousands)
Balance, December 31, 2000.. $ 34,020 $ - $ (22,019) $ 12,001
Change for the period....... (42,831) (863) (5,093) (48,787)
------------ ----------- ---------- ---------
Balance, April 1, 2001...... $ (8,811) $ (863) $ (27,112) $ (36,786)
============ =========== ========== =========
NOTE 4. BUSINESS SEGMENT INFORMATION
Quarter Ended
---------------------
April 2, April 1,
2000 2001
--------- ---------
(Thousands)
Net sales:
Personal Care....................................... $ 48,606 $ 56,243
Pharmaceutical, Food and Beverage................... 59,844 57,399
Performance Chemicals, Fine Chemicals and
Industrial........................................ 70,930 71,123
--------- ---------
Total Specialty Chemicals......................... 179,380 184,765
Mineral Products (1)................................ 18,561 18,432
--------- ---------
Net sales............................................. $ 197,941 $ 203,197
========= =========
Operating income(2):
Personal Care ...................................... $ 8,591 $ 12,171
Pharmaceutical, Food and Beverage................... 12,685 12,839
Performance Chemicals, Fine Chemicals and
Industrial........................................ 1,715 (64)
--------- ---------
Total Specialty Chemicals......................... 22,991 24,946
Mineral Products.................................... 2,629 574
--------- ---------
Total segment operating income...................... 25,620 25,520
Unallocated corporate office........................ (23) 389
--------- ---------
Total operating income................................ 25,597 25,909
Interest expense and other, net....................... (13,809) 9,448
--------- ---------
Income before income taxes............................ $ 11,788 $ 35,357
========= =========
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $16.3 and $15.2 million for the first quarter of
2000 and 2001, respectively.
(2) Operating income for the first quarter of 2000 for the three Specialty
Chemicals business segments have been reclassified to conform to the 2001
presentation, based on a reallocation of certain manufacturing costs.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INVENTORIES
Inventories comprise the following:
December 31, April 1,
2000 2001`
------------ ----------
(Thousands)
Finished goods................ $ 93,356 $ 97,237
Work-in-process............... 29,022 33,845
Raw materials and supplies.... 28,570 29,152
-------- ---------
Inventories................... $150,948 $ 160,234
======== =========
At December 31, 2000 and April 1, 2001, $38.7 and $49.0 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, they would have been
$0.1 million lower at December 31, 2000 and $5.7 million higher at April 1,
2001. The change in the LIFO reserve in the first quarter of 2001 was
attributable to a revaluation of FIFO standard costs effective January 1, 2001.
NOTE 6. LONG-TERM DEBT
In January 2001, the Company repaid the $28.1 million mortgage on its
headquarters property. Current maturities of long-term debt at April 1, 2001
include $199.9 million of 9 3/4% Senior Notes due February 2002 and $263.1
million of borrowings outstanding under the Company's bank credit agreement
based on the expiration of the bank credit agreement in July 2001.
NOTE 7. RESTRUCTURING RESERVES
In December 2000, the Company shut down its Seadrift, Texas butanediol
manufacturing facility and shut down production of butanediol at its Texas City,
Texas manufacturing facility in the first quarter of 2001. Accordingly, the
Company recorded a one-time restructuring charge against operating income in
2000 of $2.5 million, including an accrual of $2.1 million for cash costs to be
incurred in 2001 for severance costs and for decommissioning and remediation
costs. In the first quarter of 2001, $0.6 million of costs were charged against
this reserve, primarily for severance costs, leaving a reserve balance of $1.5
million as of the end of the first quarter of 2001.
In connection with the relocation of certain of the Company's production
lines for Personal Care products to the Company's Freetown, Massachusetts
facility, the Company shut down substantially all of its manufacturing operation
in Belleville, New Jersey in the first quarter of 2001. Accordingly, the Company
recorded a restructuring charge against operating income in 2000 of $11.9
million, which included a $10.4 million write-off of production assets. The
total charge included an accrual of $1.5 million for cash costs to be incurred
in 2001, mainly for severance and for other shutdown-related costs. In the first
quarter of 2001, $0.3 million of costs were charged against this reserve,
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
principally for severance costs, leaving a reserve balance of $1.2 million as of
the end of the first quarter of 2001.
NOTE 8. CONTINGENCIES
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, liquidity, results
of operations, cash flows or financial position of the Company. However, adverse
decisions or events, particularly as to the liability and the financial
responsibility of the Company's insurers and of the other parties involved at
each site and their insurers, could cause the Company to increase its estimate
of its liability in respect of such matters. It is not currently possible to
estimate the amount or range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 19 to Consolidated Financial Statements contained in the Form 10-K.
Tax Claim Against G-I Holdings Inc.
The Company was a party to tax sharing agreements with members of the
consolidated group (the "G-I Holdings Group") that included GAF Corporation and
G-I Holdings Inc. ("G-I Holdings") in 1990 and, accordingly, would be severally
liable for any tax liability of the G-I Holdings Group in respect of such year.
Effective as of January 1, 1997, neither the Company nor any of its subsidiaries
are members of the G-I Holdings Group.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which a predecessor of G-I Holdings
held an interest. The claim of the IRS for interest and penalties, after taking
into account the effect on the use of net operating losses and foreign tax
credits, could result in G-I Holdings incurring liabilities significantly in
excess of the deferred tax liability of $131.4 million that it recorded in 1990
in connection with this matter. G-I Holdings has advised the Company that it
believes that it will prevail in this matter, although there can be no assurance
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in this regard. The Company believes that the ultimate disposition of this
matter will not have a material adverse effect on its business, financial
position or results of operations. The Company, together with G-I Holdings and
several current and former subsidiaries of G-I Holdings, would be severally
liable for such taxes, interest and penalties should G-I Holdings be unable to
satisfy such liability. In January 2001, G-I Holdings filed a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its
asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber. For additional information relating to G-I Holdings, reference is made to
Notes 8, 16 and 19 to Consolidated Financial Statements contained in the Form
10-K.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations - First Quarter 2001 Compared With
First Quarter 2000
The Company recorded first quarter 2001 net income of $22.5 million ($.34
diluted earnings per share) compared with $7.7 million ($.11 diluted earnings
per share) in the first quarter of 2000. The results for the first quarter of
2001 include an after-tax charge of $0.4 million ($.01 diluted earnings per
share), representing the cumulative effect of adopting Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Excluding the effect of such charge and a one-time gain of $3.5
million in the first quarter of 2000 from a contract settlement, net income for
the first quarter of 2001 was $23.0 million ($.35 diluted earnings per share)
versus $5.4 million ($.08 diluted earnings per share) in the same period last
year. On a comparable basis, the improved results were attributable to higher
investment income, lower interest expense and higher operating income.
Net sales for the first quarter of 2001 were $203.2 million compared with
$197.9 million for the same period in 2000. The increase in sales resulted
primarily from higher unit volumes in the Personal Care, Pharmaceutical and
Performance Chemicals businesses and improved pricing in the Industrial
business, partially offset by lower unit volumes in the Industrial and Alginates
businesses and by the adverse effect of the stronger U.S. dollar in Europe.
Operating income for the first quarter of 2001 was $25.9 million compared
with $25.6 million for the first quarter of 2000. The increase was primarily
attributable to an improvement in operating income in the Personal Care business
segment as a result of higher unit volumes and an improved product mix, and, to
a lesser extent, higher unit volumes in the Pharmaceutical business, partially
offset by lower volumes in the Alginates business, higher energy costs in the
Mineral Products business segment, unfavorable results in the Fine Chemicals
business and by the adverse effect of the stronger U.S. dollar in Europe.
Interest expense for the first quarter of 2001 was $19.1 million versus
$19.7 million for the same period last year. The decrease was due mainly to
lower average interest rates and, to a lesser extent, lower average borrowings.
Other income, net, for the quarter was $28.5 million compared with $2.5 million
in last year's first quarter, with the improvement due to higher investment
income.
Business Segment Review
A discussion of operating results for each of the Company's business
segments follows. The Company operates its Specialty Chemicals business through
three reportable business segments, in addition to the Mineral Products segment.
12
Personal Care
Sales in the first quarter of 2001 were $56.2 million compared with
$48.6 million for the same period last year, while operating income for the
first quarter of 2001 increased to $12.2 million from $8.6 million in last
year's quarter. The 16% increase in sales and 42% improvement in operating
income resulted from higher unit volumes and an improved product mix, primarily
in the North American and European hair care markets, partially offset by the
adverse effect of the stronger U.S. dollar in Europe.
Pharmaceutical, Food and Beverage ("PFB")
Sales for the PFB segment were $57.4 million for the first quarter of
2001 compared with $59.8 million for the first quarter of 2000, while operating
income increased to $12.8 million versus $12.7 million last year. Sales for the
Pharmaceutical and Beverage business increased by 4.5% in the first quarter of
2001, primarily reflecting higher Pharmaceutical unit volumes in the antiseptics
market in Europe and Asia-Pacific and in the excipients market in Asia-Pacific.
Sales for the Alginates business decreased by 24% due to lower unit volumes in
non-food paper and pharmaceutical accounts.
Operating income for the Pharmaceutical and Beverage business increased 19%
in the first quarter of 2001 compared with the same period in 2000, while the
operating margin improved from 24% in the first quarter of 2000 to 27% in this
year's quarter. The improvement reflected the higher unit volumes and lower
administrative expenses. Operating income for the Alginates business decreased
by 61% in the first quarter of 2001 due to an unfavorable product mix, the lower
unit volumes and, to a lesser extent, higher distribution expenses.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first quarter of 2001 were $71.1 million compared with
$70.9 million in the first quarter of 2000. The higher sales were primarily
attributable to an 11% sales increase for the Performance Chemicals business,
reflecting volume increases in Europe, Asia-Pacific and North America, and
improved pricing in the Industrial business, partially offset by lower
Industrial unit volumes and the unfavorable impact ($2.2 million) of the
stronger U.S. dollar in Europe.
Operating results for the Performance Chemicals, Fine Chemicals and
Industrial segment reflected a loss of $0.1 million for the first quarter of
2001 versus operating income of $1.7 million for the same period last year.
Operating income for the Performance Chemicals business remained level with the
first quarter of 2000 due to lower gross margins, as the effect of unit volume
increases were offset by an unfavorable product mix in Europe and by the impact
of the stronger U.S. dollar. The operating loss for the Industrial business
increased by $1.0 million over last year's quarter as a result of unfavorable
manufacturing costs and lower unit volumes and, to a lesser extent, the
unfavorable impact of the stronger U.S. dollar, partially offset by improved
13
pricing. The Fine Chemicals business experienced a slight operating loss in the
first quarter of 2001 as a result of lower unit volumes, an unfavorable product
mix and increased operating expenses.
Mineral Products
Sales for the Mineral Products segment for the first quarter of 2001
were $18.4 million compared with $18.6 million for the first quarter of 2000.
The lower sales were attributable to $1.1 million lower sales to Building
Materials Corporation of America, an affiliate, partially offset by $0.9 million
higher trade sales. Operating income for the first quarter of 2001 was $0.6
million compared with $2.6 million for the first quarter of 2000, reflecting
lower gross margins due to higher energy costs and unfavorable pricing, and also
higher operating expenses due mainly to an increased provision for doubtful
accounts.
Liquidity and Financial Condition
During the first quarter of 2001, the Company's net cash outflow
before financing activities was $35.5 million, including $7.6 million of cash
generated from operations, the reinvestment of $9.9 million for capital programs
and the use of $33.2 million of cash for net purchases of available-for-sale
securities and other short-term investments.
Cash generated from operations in the first quarter of 2001 reflected
a $10.9 million net cash outflow related to investments in trading securities.
Excluding this cash outflow, cash provided from operations totaled $18.6
million. Cash invested in additional working capital totaled $23.9 million
during the first quarter of 2001, mainly reflecting a $9.3 million increase in
inventories, a $6.6 million increase in receivables due to higher sales in the
first quarter of 2001 compared with the fourth quarter of 2000, and a $6.6
million net decrease in payables and accrued liabilities.
Net cash provided by financing activities during the first quarter of
2001 totaled $31.2 million, reflecting a $67.1 million increase in borrowings
under the Company's bank revolving credit facility, partially offset by
repayments of long-term debt totaling $28.2 million and an $8.1 million decrease
in short-term borrowings. In addition, financing activities included a $1.2
million cash outlay for repurchases of 161,500 shares of the Company's common
stock pursuant to the Company's repurchase program. At April 1, 2001, 225,362
shares of common stock remained to be purchased under the Company's repurchase
program.
As a result of the foregoing factors, cash and cash equivalents
decreased by $4.3 million during the first quarter of 2001 to $13.9 million,
excluding $523.4 million of trading and available-for-sale securities and other
short-term investments.
14
In December 2000, the Company shut down its Seadrift, Texas butanediol
manufacturing facility and shut down production of butanediol at its Texas City,
Texas manufacturing facility in the first quarter of 2001. Accordingly, the
Company recorded a one-time restructuring charge against operating income in
2000 of $2.5 million, including an accrual of $2.1 million for cash costs to be
incurred in 2001 for severance costs and for decommissioning and remediation
costs. In the first quarter of 2001, $0.6 million of costs were charged against
this reserve, primarily for severance costs, leaving a reserve balance of $1.5
million as of the end of the first quarter of 2001.
In connection with the relocation of certain of the Company's production
lines for Personal Care products to the Company's Freetown, Massachusetts
facility, the Company shut down substantially all of its manufacturing operation
in Belleville, New Jersey in the first quarter of 2001. Accordingly, the Company
recorded a restructuring charge against operating income in 2000 of $11.9
million, which included a $10.4 million write-off of production assets. The
total charge included an accrual of $1.5 million for cash costs to be incurred
in 2001, mainly for severance costs and for other shutdown-related costs. In the
first quarter of 2001, $0.3 million of costs were charged against this reserve,
principally for severance costs, leaving a reserve balance of $1.2 million as of
the end of the first quarter of 2001.
See Note 8 to Consolidated Financial Statements for information
regarding contingencies.
* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or
phrases of similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. The Company's
operations are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement. The forward-looking statements included herein are
made only as of the date of this Quarterly Report on Form 10-Q and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K for a discussion of
"Market-Sensitive Instruments and Risk Management." As of December 31, 2000,
equity-related financial instruments employed by the Company to reduce market
risk included long contracts valued at $40.1 million. At April 1, 2001, the
value of long contracts was $6.0 million. Such instruments are marked-to-market
each month, with unrealized gains and losses included in the results of
operations. As such, there is no economic cost to the Company at April 1, 2001
to terminate these instruments and therefore the fair market value is zero.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No Reports on Form 8-K were filed during the quarter ended April 1, 2001.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INTERNATIONAL SPECIALTY PRODUCTS INC.
DATE: May 15, 2001 BY: /s/Randall R. Lay
------------ ---------------------------------
Randall R. Lay
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18