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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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AMENDMENT NO. 1
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission file number: 1-12091
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MILLENNIUM CHEMICALS INC.
(Exact name of registrant as specified in its charter)
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Delaware 22-3436215
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Half Mile Road
Red Bank, NJ 07701
(Address of principal executive offices)
732-933-5000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value New York Stock Exchange
$0.01 per share
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 is required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 62,914,879 shares of
Common Stock, par value $.01 per share, as of April 30, 2002, excluding
14,981,707 shares held by the registrant, its subsidiaries and certain Company
trusts, which are not entitled to vote.
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EXPLANATORY NOTE
Millennium Chemicals Inc. (the "Company") is filing this amendment to
its Form 10-Q for the quarterly period ended March 31, 2002 to revise Note 13 -
Supplemental Financial Information - to the Company's consolidated financial
statements included on pages 15 through 18 of such Form 10-Q. The
Supplemental Financial Information in this amendment has been revised to
disclose the financial position, results of operations and cash flows of
(i) the Company, (ii) Millennium America Inc., an indirect, wholly owned
subsidiary of the Company ("Millennium America"), and (iii) all subsidiaries
of the Company other than Millennium America, to reflect Millennium America's
and the Company's shareholders' equity as if each of those companies and
their respective subsidiaries were reported on a consolidated basis. The
information included in the columns headed "Millennium Chemicals Inc. and
Subsidiaries" is unchanged. Item 1, as amended, is hereby provided in its
entirety. There are no changes to the Form 10-Q as originally filed, other than
these changes to Note 13.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Current assets
Cash and cash equivalents ................................................. $ 71 $ 114
Trade receivables, net .................................................... 211 215
Inventories ............................................................... 329 370
Other current assets ...................................................... 80 61
------ ------
Total current assets .................................................... 691 760
Property, plant and equipment, net ........................................... 866 880
Investment in Equistar ....................................................... 610 677
Deferred income taxes ........................................................ 96 72
Other assets ................................................................. 244 237
Goodwill ..................................................................... 103 378
------ ------
Total assets ............................................................ $2,610 $3,004
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable ............................................................. $ 5 $ 4
Current maturities of long-term debt ...................................... 13 11
Trade accounts payable .................................................... 164 222
Income taxes payable ...................................................... 5 7
Accrued expenses and other liabilities .................................... 136 139
------ ------
Total current liabilities ............................................... 323 383
Long-term debt ............................................................... 1,175 1,172
Other liabilities ............................................................ 550 550
------ ------
Total liabilities ....................................................... 2,048 2,105
------ ------
Commitments and contingencies (Note 10)
Minority interest ............................................................ 22 21
Shareholders' equity
Preferred stock (par value $.01 per share, authorized 25,000,000 shares,
none issued and outstanding) ............................................ -- --
Common stock (par value $.01 per share, authorized 225,000,000 shares;
issued 77,896,586 shares at March 31, 2002 and December 31, 2001) ....... 1 1
Paid in capital ........................................................... 1,299 1,299
Retained deficit .......................................................... (365) (20)
Cumulative other comprehensive loss ....................................... (131) (136)
Treasury stock, at cost (14,996,416 and 14,594,614 shares at March 31, 2002
and December 31, 2001, respectively) .................................... (281) (283)
Deferred compensation ..................................................... 17 17
------ ------
Total shareholders' equity .............................................. 540 878
------ -----
Total liabilities and shareholders' equity ............................ $2,610 $3,004
====== ======
See Notes to Consolidated Financial Statements.
2
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions, except share data)
Three Months Ended
March 31,
--------------------
2002 2001
---- ----
Net sales ....................................................... $ 351 $ 444
Operating costs and expenses
Cost of products sold ........................................ 292 343
Depreciation and amortization ................................ 25 28
Selling, development and administrative expense .............. 23 43
Reorganization and other charges ............................. -- 5
------ ------
Operating income ........................................... 11 25
Interest expense ................................................ (22) (22)
Interest income ................................................. 1 1
Equity in loss of Equistar ...................................... (39) (24)
Other expense, net .............................................. (1) --
------ ------
Loss before income taxes, minority interest and cumulative effect
of accounting change ......................................... (50) (20)
Benefit from income taxes ....................................... 20 6
------ ------
Loss before minority interest and cumulative effect of accounting
change ....................................................... (30) (14)
Minority interest ............................................... (1) (1)
------ ------
Loss before cumulative effect of accounting change .............. (31) (15)
Cumulative effect of accounting change .......................... (305) --
------ ------
Net loss ........................................................ $ (336) $ (15)
====== ======
Basic and diluted loss per share:
Before cumulative effect of accounting change ............... $(0.49) $(0.24)
From cumulative effect of accounting change ................. (4.80) --
------ ------
After cumulative effect of accounting change ................ $(5.29) $(0.24)
====== ======
See Notes to Consolidated Financial Statements.
3
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
Three Months Ended
March 31,
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2002 2001
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Cash flows from operating activities
Net loss ............................................................ $(336) $ (15)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Cumulative effect of accounting change ........................... 305 --
Depreciation and amortization .................................... 25 28
Deferred income tax benefit ...................................... (24) (3)
Equity in loss of Equistar ....................................... 39 24
Minority interest ................................................ 1 1
Other, net ....................................................... (1) (1)
Changes in assets and liabilities
Increase in trade receivables ..................................... (39) (1)
Decrease in inventories ........................................... 42 6
(Increase) decrease in other current assets ....................... (16) 3
Increase in other assets .......................................... (2) (8)
Decrease in trade accounts payable ................................ (58) (14)
Decrease in accrued expenses and other liabilities and income taxes
payable ......................................................... (1) --
Decrease in other liabilities ..................................... (11) (14)
----- -----
Cash (used in) provided by operating activities ..................... (76) 6
----- -----
Cash flows from investing activities
Capital expenditures ................................................ (13) (28)
Proceeds from sales of property, plant & equipment .................. -- 2
Proceeds from securitization of trade receivables, net of expenses .. 43 --
----- -----
Cash provided by (used in) investing activities ................... 30 (26)
----- -----
Cash flows from financing activities
Dividends to shareholders ........................................... (9) (9)
Proceeds from long-term debt ........................................ 97 25
Repayment of long-term debt ......................................... (87) (54)
Increase in notes payable ........................................... 1 11
----- -----
Cash provided by (used in) financing activities ................... 2 (27)
----- -----
Effect of exchange rate changes on cash ................................ 1 (2)
----- -----
Decrease in cash and cash equivalents .................................. (43) (49)
Cash and cash equivalents at beginning of year ......................... 114 107
----- -----
Cash and cash equivalents at end of period ............................. $ 71 $ 58
===== =====
See Notes to Consolidated Financial Statements.
4
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
Note 1 - Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the accompanying unaudited interim consolidated financial statements
do not include all of the disclosures normally required by generally accepted
accounting principles for complete financial statements. The accompanying
consolidated financial statements should be read in conjunction with the
financial statements and disclosures included in the Company's most recent
Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion
of management, the accompanying consolidated financial statements contain all
adjustments necessary to present fairly the financial position and results of
operations for the interim periods.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Minority interest represents the minority
ownership of the Company's Brazilian subsidiary. All significant intercompany
accounts and transactions have been eliminated. The Company's 29.5% investment
in Equistar, a joint venture between the Company, Lyondell Chemical Company
("Lyondell") and Occidental Petroleum Corporation ("Occidental"), is accounted
for by the equity method; accordingly, the Company's share of Equistar's pre-tax
net loss is included in the Company's net loss. Certain prior year balances have
been reclassified to conform to the current year presentation including segment
analysis presented in Note 11.
Note 2 - Recent Accounting Developments
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Intangible Assets" ("SFAS No. 142"). Under this new standard, all goodwill,
including goodwill acquired before initial application of the standard, is not
amortized but must be tested for impairment at least annually at the reporting
unit level, as defined in the standard. The Company and Equistar adopted this
standard on January 1, 2002. Accordingly, the Company reported a charge for the
cumulative effect of this accounting change of $275 in the first quarter of 2002
to write off certain of its goodwill related to its Acetyls business based upon
the Company's estimate of fair value for this business using various valuation
methods considering expected future profitability and cash flows. Additionally,
Equistar reported an impairment of its goodwill in the first quarter of 2002.
The write-off at Equistar required an adjustment of $30 to reduce the carrying
value of the Company's investment in Equistar to its approximate proportional
share of Equistar's Partners' capital, which the Company also reported as a
charge for the cumulative effect of this accounting change. Amortization expense
for the three months ended March 31, 2001 for goodwill that was recorded on the
Company's balance sheet was $3. Additionally, the Company's share of
amortization expense reported by Equistar for the three months ended March 31,
2001 for its goodwill, included in Equity in loss of Equistar, was $2. Following
is a reconciliation of the reported net loss to net loss adjusted for goodwill
amortization and the cumulative effect of the accounting change and related per
share amounts:
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
------------------------ --------------------
Amount Per Share Amount Per Share
------ --------- ------ ---------
Reported net loss............................................ $(336) $(5.29) $(15) $(0.24)
Goodwill amortization........................................ - - 3 0.05
Equistar goodwill amortization included
in Equity in loss of Equistar............................ - - 2 0.03
----- ------ ---- ------
Adjusted loss before cumulative effect of accounting change (336) (5.29) (10) (0.16)
Cumulative effect of accounting change....................... 305 4.80 - -
----- ------ ---- ------
Adjusted net loss............................................ $ (31) $(0.49) $(10) $(0.16)
===== ====== ==== ======
5
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 2 - Recent Accounting Developments - Continued
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets. This standard
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and the associated asset
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. Accretion expense and depreciation expense related to the liability and
capitalized asset retirement costs, respectively, would be recorded in
subsequent periods. Although earlier application is permitted, the Company must
adopt this standard on January 1, 2003 and currently is evaluating the potential
impact on its consolidated financial position and results of operations.
Note 3 - Significant Transactions
In March 2002, the Company transferred its interest in certain European
trade receivables to an unaffiliated third party as the basis for issuing
commercial paper, totaling approximately $51, and received proceeds of $43
upon completion of a securitization transaction under a revolving arrangement
with a one year term, which is treated, in part, as a sale under generally
accepted accounting principles. Accordingly, the transferred trade receivables
that qualify as a sale, approximately $43, were removed from the Company's
Consolidated Balance Sheet. The Company continues to carry its retained
interests in a portion of the transferred assets that do not qualify as a sale,
approximately $8, in Trade receivables, net in its Consolidated Balance Sheet at
amounts that approximate net realizable value based upon the Company's
historical collection rate for these trade receivables. The loss on sale
associated with this transaction was not significant. Administration and
servicing of the trade receivables under the transaction remains with the
Company. Servicing liabilities associated with the transaction are not
significant. Proceeds from this transaction were used to pay down debt.
Note 4 - Inventories
Inventories are stated at the lower of cost or market value. For certain
United States operations representing 22% and 27% of consolidated inventories at
March 31, 2002 and December 31, 2001, respectively, cost is determined under the
last-in, first-out ("LIFO") method. The first-in, first-out ("FIFO") method, or
methods that approximate FIFO, are used by all other subsidiaries.
March 31, December 31,
2002 2001
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Inventories
Finished products...................... $183 $204
In-process products.................... 25 21
Raw materials.......................... 70 93
Other inventories...................... 51 52
---- ----
$329 $370
==== ====
Note 5 - Reorganization and Other Charges
During the first quarter of 2001, the Company announced the closure of
its facilities in Cincinnati, Ohio and recorded reorganization and other charges
of $5 in the Acetyls segment. These charges included $3 of severance and other
termination benefits related to the termination of about 35 employees involved
in technical, marketing and administrative activities, as well as $2 related to
the write-down of assets, lease termination costs and other charges associated
with the Cincinnati facility. The office in Cincinnati was closed during the
second quarter of 2001.
6
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 6 - Earnings per Share
The weighted-average number of equivalent shares of common stock
outstanding used in computing earnings per share is as follows:
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Weighted average common stock outstanding - basic and diluted....... 63,476,591 63,509,577
========== ==========
The calculation of diluted earnings per share for the three months ended
March 31, 2002 does not include 91,740 options to purchase common stock, 78,944
restricted shares issued under a Company incentive plan, and 220,995 shares held
by certain of the Company's employee benefit plan trusts. The calculation of
diluted earnings per share for the three months ended March 31, 2001 does not
include 3,125 options to purchase common stock and 330,938 restricted shares
issued under a Company incentive plan. The effect of including these options and
shares would be antidilutive.
Note 7 - Comprehensive Loss
The following table sets forth the components of other comprehensive loss
and total comprehensive loss:
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Net loss............................................................ $(336) $(15)
Other comprehensive income (loss)
Net gains (losses) on derivative financial instruments........... 5 (6)
Minimum pension liability adjustment............................ 1 -
Currency translation adjustment................................. (1) (28)
----- ----
$(331) $(49)
Total comprehensive loss............................................ ===== ====
Note 8 - Long-Term Debt and Credit Arrangements
In 2001, Millennium America Inc. ("Millennium America"), a wholly owned
indirect subsidiary of the Company, entered into a five-year Credit Agreement
(the "Credit Agreement") and issued $275 of seven-year 9.25% Senior Notes due
June 15, 2008 (the "9.25% Senior Notes"). The Credit Agreement includes a
revolving credit portion with total availability of $175 (the "Revolving
Loans"), and a term loan portion (the "Term Loans"). The Company and Millennium
America guarantee the obligations under the Credit Agreement.
The Revolving Loans are available in US dollars, pounds sterling and
euros. The Revolving Loans may be borrowed, repaid and reborrowed from time to
time. The Revolving Loans include a $50 letter of credit subfacility and a
swingline facility in the amount of $25. The Term Loans may be prepaid in part
or in total at the option of the Company at any time, but amounts prepaid may
not be reborrowed. The interest rates on the Revolving Loans and the Term Loans
are floating rates based upon margins over LIBOR, NIBOR, or the Administrative
Agent's prime lending rate, as the case may be. Such margins, as well as the
facility fee, are based on the Company's Leverage Ratio, as defined.
7
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 8 - Long-Term Debt and Credit Arrangements - Continued
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. The financial
covenants in the Credit Agreement include a Leverage Ratio and an Interest
Coverage Ratio. The Leverage Ratio is the ratio of total indebtedness to
cumulative EBITDA for the prior four fiscal quarters, each as defined. The
Interest Coverage Ratio is the ratio of cumulative EBITDA for the prior four
fiscal quarters to Net Interest Expense, for the same period, each as defined.
In the fourth quarter of 2001, the Company requested and obtained an amendment
to these and certain other covenants given the difficult business environment at
the time, which continued in early 2002. The Company is required to maintain a
Leverage Ratio of no more than 6.75 to 1.00 for the first and second quarters of
2002, 6.50 to 1.00 for the third quarter of 2002 and 6.00 to 1.00 for the fourth
quarter of 2002 and an Interest Coverage Ratio of no less than 2.00 to 1.00 for
all quarters of 2002. The Company was in compliance with these amended covenants
at March 31, 2002. Economic and business conditions are expected to improve
during the remainder of 2002. However, if such conditions do not improve
adequately and the Company operates at levels similar to those of the first
quarter of 2002, the Company may be required to request either a waiver of, or
an amendment to, one or both of these financial covenants in any subsequent
quarter. The Company believes it would be able to obtain such waiver or
amendment if required. This situation is monitored frequently in order to
assess the likelihood of such compliance. The covenants in the Credit Agreement
also limit, among other things, the ability of the Company and/or certain
subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii)
create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay
dividends on, or purchase, the Company's stock; (v) make restricted payments;
(vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage
in mergers or acquisitions; (ix) engage in domestic accounts receivable
securitization transactions; (x) increase the amount of the $750 indemnity by
Millennium America related to certain Equistar long-term debt (as described
below in this note); and (xi) enter into restrictive agreements. In the event
the Company sells certain assets as specified in the Credit Agreement, the
Term Loans must be prepaid with a portion of the net cash proceeds of such sale.
The obligations under the Credit Agreement are collateralized by: (1) a pledge
of 100% of the stock of the Company's existing and future domestic subsidiaries
and 65% of the stock of certain of the Company's existing and future foreign
subsidiaries, in both cases other than subsidiaries that hold immaterial assets
(as defined in the Credit Agreement), (2) all the equity interests held by the
Company's subsidiaries in Equistar and the La Porte Methanol Company (which
pledges are limited to the right to receive distributions made by Equistar and
the La Porte Methanol Company, respectively), and (3) all present and future
accounts receivable, intercompany indebtedness and inventory of the Company's
domestic subsidiaries, other than subsidiaries that hold immaterial assets.
The Company had $37 outstanding (outstanding borrowings of $30 and
outstanding letters of credit of $7) and $44 outstanding (outstanding borrowings
of $35 and outstanding letters of credit of $9) of the maximum available credit
line of $175 under the revolving credit portion of the Credit Agreement at March
31, 2002 and April 30, 2002, respectively and $115 outstanding under the term
loan portion of the Credit Agreement at March 31, 2002 and April 30, 2002,
respectively. In addition to letters of credit outstanding under the Credit
Agreement, the Company had outstanding letters of credit under other
arrangements of $16 and $17 at March 31, 2002 and April 30, 2002, respectively.
The Company had unused availability under short-term uncommitted lines of
credit, other than the Credit Agreement, of $45 and $46 at March 31, 2002 and
April 30, 2002, respectively.
Millennium America also has outstanding $500 aggregate principal amount
of 7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes") and $250
aggregate principal amount of 7.625% Senior Debentures due November 15, 2026
(the "7.625% Senior Debentures") that are guaranteed by the Company. The
indenture under which the Senior Notes and Senior Debentures were issued
contains certain covenants that limit, among other things: (i) the ability of
Millennium America and its Restricted Subsidiaries (as defined) to grant liens
or enter into sale/leaseback transactions; (ii) the ability of the Restricted
Subsidiaries to incur additional indebtedness; and, (iii) the ability of
Millennium America and the Company to merge, consolidate or transfer
substantially all of their respective assets. This indenture allows the Company
to grant security on loans of up to 15% of Consolidated Net Tangible Assets, as
defined, of Millennium America. Any reduction in Consolidated Net Tangible
Assets below $1.933 billion would reduce the Company's availability under the
revolving credit portion of the Credit Agreement.
The 9.25% Senior Notes were issued by Millennium America and are
guaranteed by the Company. The indenture under which the 9.25% Senior Notes were
issued contains certain covenants that limit, among other things, the ability of
the Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) pay dividends or
make distributions; (iv) repurchase capital stock;
8
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 8 - Long-Term Debt and Credit Arrangements - Continued
(v) make other restricted payments including, without limitation, investments;
(vi) create liens; (vii) redeem debt that is junior in right of payment to the
9.25% Senior Notes; (viii) sell or otherwise dispose of assets, including
capital stock of subsidiaries; (ix) enter into arrangements that restrict
dividends from subsidiaries; (x) enter into mergers or consolidations; (xi)
enter into transactions with affiliates; and, (xii) enter into sale/leaseback
transactions. However, if the 9.25% Senior Notes receive credit ratings from
both Standard & Poor's ("S&P") and Moody's Investor Services, Inc. ("Moody's")
as specified in the indenture and meet certain other requirements, certain of
these covenants will no longer apply. The indenture governing the Company's
9.25% Senior Notes includes a Consolidated Coverage Ratio, defined as the ratio
of the aggregate amount of EBITDA, as defined, for the four most recent fiscal
quarters to Consolidated Interest Expense, as defined, for the four most recent
fiscal quarters. If this ratio were to cease to be greater than 2.00 to 1.00,
there would be certain restrictions on the Company's ability to incur additional
indebtedness and the Company's ability to pay dividends, repurchase capital
stock or make certain other restricted payments would be limited.
At March 31, 2002, the Company was in compliance with all covenants in
the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625%
Senior Debentures.
Millennium America has entered into an indemnity agreement with Equistar
pursuant to which Millennium America may be required to contribute to Equistar
an amount equal to up to the lesser of $750 or the sum of the principal amount
outstanding under the term loan portion of Equistar's credit facility (not to
exceed $275) and Equistar's 10.125% Senior Notes due 2008 (not to exceed $475),
in each case together with interest. However, pursuant to the terms of this
indemnity agreement, Millennium is only required to pay this amount to Equistar
if the lenders under such credit facility or the holders of such Senior Notes
have not been able to obtain payment after pursuing and exhausting all their
remedies against Equistar, including the liquidation of Equistar's assets. The
indemnity expressly does not create any right in favor of such lenders or such
holders or any person other than Millennium America, Equistar and the partners
in Equistar. The indemnity may be amended or terminated at any time by the
agreement of the partners in Equistar without the consent of the lenders under
such credit facility or the holders of such Senior Notes. The indemnity
agreement replaced a prior guarantee by Millennium America of up to $750 of
Equistar's debt.
The indemnity will remain in effect indefinitely but at any time after
December 31, 2004 Millennium America may, without the consent of the other
partners in Equistar, elect to terminate the indemnity if certain conditions are
met including financial ratios and covenants relating to Equistar. In addition,
Millennium America may, without the consent of the other partners in Equistar,
elect to terminate the indemnity in the event the Company sells its interests in
the subsidiaries that directly hold the partnership interests of Equistar or if
those subsidiaries sell their interests in Equistar, provided a financial
condition relating to Equistar is met.
Note 9 - Derivative Instruments and Hedging Activities
The Company is exposed to market risk, such as changes in currency
exchange rates, interest rates and commodity pricing. To manage the volatility
relating to these exposures, the Company selectively enters into derivative
transactions pursuant to the Company's policies for hedging practices.
Designation is performed on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments are offset in
part or in whole by corresponding changes in the fair value or cash flows of the
underlying exposures being hedged. The Company does not hold or issue derivative
financial instruments for speculative or trading purposes.
Foreign Currency Exposure Management: The Company manufactures and sells
its products in a number of countries throughout the world and, as a result, is
exposed to movements in foreign currency exchange rates. The primary purpose of
the Company's foreign currency hedging activities is to manage the volatility
associated with foreign currency purchases and foreign currency sales. The
Company utilizes forward exchange contracts with various terms. As of March 31,
2002, these contracts had expiration dates no later than December 2002.
The Company utilizes forward exchange contracts with contract terms
normally lasting less than three months to protect against the adverse effect
that exchange rate fluctuations may have on foreign currency denominated trade
receivables and trade payables. These derivatives have not been designated as
hedges for accounting purposes. The gains and losses on both the derivatives and
the foreign currency denominated trade receivables and payables are
9
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 9 - Derivative Instruments and Hedging Activities - Continued
recorded in current earnings. Net gains included in earnings, which offset a
similar amount of losses from foreign currency denominated trade receivables and
payables, were $2 in the three months ended March 31, 2002.
In addition, the Company utilizes forward exchange contracts that qualify
as cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales and inventory purchases. Gains and losses on
these instruments are deferred in other comprehensive income ("OCI") until the
underlying transaction is recognized in earnings. The earnings impact is
reported either in Net sales or Cost of products sold to match the underlying
transaction being hedged. During the three months ended March 31, 2002, net
gains on forward exchange contracts designated as cash flow hedges reclassified
to earnings to match the gain or loss on the underlying transaction being hedged
were not significant. Hedge ineffectiveness had no significant impact on
earnings for the first quarter of 2002. No forward exchange contract cash flow
hedges were discontinued during the first quarter of 2002. The Company estimates
that approximately $3 of net gains on foreign currency cash flow hedges included
in OCI at March 31, 2002 will be reclassified to earnings during the next twelve
months.
Commodity Price Risk Management: Raw materials used by the Company are
subject to price volatility caused by demand and supply conditions and other
unpredictable factors. The Company selectively uses commodity swap arrangements
to manage the volatility related to anticipated purchases of natural gas with
various terms. As of March 31, 2002, these swaps had expiration dates no later
than January 2004. These market instruments are designated as cash flow hedges.
The mark-to-market gain or loss on qualifying hedges is included in OCI to the
extent effective, and reclassified into Cost of products sold in the period
during which the hedged transaction affects earnings. The mark-to-market gains
or losses on ineffective portions of hedges are recognized in Cost of products
sold immediately. During the three months ended March 31, 2002, net losses on
commodity swaps designated as cash flow hedges of $2 were reclassified to Cost
of products sold to match the gain on the underlying transaction being hedged.
Hedge ineffectiveness had no significant impact on earnings for the first
quarter of 2002. No commodity swap cash flow hedges were discontinued in the
first quarter of 2002. The Company estimates that approximately $4 of net losses
on commodity swaps included in OCI at March 31, 2002 will be reclassified to
earnings during the next twelve months.
Interest Rate Risk Management: The Company selectively uses derivative
instruments to manage its ratio of debt bearing fixed interest rates to debt
bearing variable interest rates. During the three months ended March 31, 2002,
the Company entered into interest-rate swap agreements, designated as fair value
hedges, to synthetically convert $300 notional amount of its fixed-rate debt
into variable-rate debt. The gains and losses on both the interest rate swaps
and the hedged portion of the underlying debt are recorded in Interest expense.
All existing fair value hedges are completely effective; therefore, there is no
impact to earnings due to hedge ineffectiveness.
Note 10 - Commitments and Contingencies
Legal and Environmental: The Company and various of its subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. These include proceedings alleging injurious exposure of the
plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries, cases alleging
historic premises-based exposure to asbestos-containing materials at various
worksites and, as set forth in more detail below, cases alleging personal
injury, property damage and remediation costs associated with use of lead in
paint. Typically, such proceedings involve claims made by many plaintiffs
against many defendants in the chemical industry. In addition, certain
subsidiaries of the Company have been named as defendants, potentially
responsible parties ("PRPs") or both in a number of environmental proceedings,
or have other environmental remediation obligations.
Together with other alleged past manufacturers of lead-based paint and
lead pigments for use in paint, a current subsidiary, as well as alleged
predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, school districts, individuals and one state, and seek
recovery under a variety of theories, including negligence, failure to warn,
breach of warranty, conspiracy, market share liability, fraud, misrepresentation
and nuisance. These legal proceedings are in various pre-trial stages. The
Company is vigorously defending all lead-related legal proceedings.
10
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 10 -Commitments and Contingencies - Continued
Celanese AG ("Celanese") filed suit against Millennium Petrochemicals
Inc., a wholly owned operating subsidiary of the Company, on September 30, 1999
in the United States District Court for the Southern District of Texas alleging
infringement of a Celanese patent relating to acetic acid production technology.
In the suit, Celanese seeks monetary damages and injunctive relief, including
royalties. The Company believes it has substantial defenses to this lawsuit and
is vigorously defending it.
On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit in the
United States District Court for the District of Minnesota, against Millennium
Inorganic Chemicals Inc., a wholly owned operating subsidiary of the Company,
alleging breach of contract and other related causes of action arising out of a
contract between the two parties for the supply of packaging equipment. The
Company believes it has substantial defenses to these allegations and has filed
a counterclaim against Slidell.
With respect to the legal proceedings referred to above, the Company
believes that it has valid defenses and intends to defend them vigorously.
However, litigation is subject to uncertainties and the Company is unable to
guarantee the outcome of these proceedings.
Certain Company subsidiaries have been named as defendants, PRPs, or
both, in a number of environmental proceedings associated with waste disposal
sites and facilities currently or previously owned, operated or used by the
Company's subsidiaries or their predecessors, some of which are on the Superfund
National Priorities List of the United States Environmental Protection Agency
("EPA") or similar state lists. The Company has estimated its individual
exposure at these sites to be between twenty-five thousand dollars and $29. One
potentially significant site at which a Company subsidiary is a PRP concerns
alleged polychlorinated biphenyl contamination of a section of the Kalamazoo
River in Michigan. In October 2000, the Kalamazoo River Study Group, of which
the Company's subsidiary is a member, submitted to the State of Michigan a Draft
Remedial Investigation and Draft Feasibility Study that evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
cost for all parties of approximately $73. The Company has accrued for its
estimated share of costs for this matter. The EPA has now taken over from the
State as lead agency at the site. Neither the EPA nor the State of Michigan
has commented on the draft study.
The Company believes that the reasonably probable and estimable range of
potential liability for all legal and environmental proceedings, collectively,
but which primarily relates to environmental remediation activities and other
environmental proceedings, is between $80 and $90 and has accrued $83 as of
March 31, 2002. The Company expects that cash expenditures related to these
potential liabilities will not be concentrated in any single year and, based on
information currently available, the Company does not expect the outcome of
these proceedings, either individually or in the aggregate, will have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
Note 11 - Operations by Business Segment
The Company's principal operations are managed and grouped as three
separate business segments: Titanium Dioxide ("TiO[u]2") and Related Products;
Acetyls; and, Specialty Chemicals. Operating income and expense not identified
to the three separate business segments, consisting primarily of
employee-related costs for certain former employees, the mining operations of
the Company's Brazilian subsidiary for the recovery of non-TiO[u]2-related
materials and certain other expenses unrelated to the three separate business
segments, are reflected as Other. The following is a summary of the Company's
operations by business segment:
11
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Dollars in millions, except share data)
Note 11 - Operations by Business Segment - Continued
Three Months Ended
March 31,
--------------------
2002 2001
----- ----
Net sales
Titanium Dioxide and Related Products................... $260 $317
Acetyls................................................. 65 99
Specialty Chemicals..................................... 24 26
Other................................................... 2 2
---- ----
Total................................................. $351 $444
==== ====
Operating income (loss)
Titanium Dioxide and Related Products................... $ 10 $ 28
Acetyls................................................. (7) (8)
Specialty Chemicals..................................... 4 4
Other................................................... 4 1
---- ----
Total................................................. $ 11 $ 25(1)
==== ====
Depreciation and amortization
Titanium Dioxide and Related Products................... $ 20 $ 21
Acetyls................................................. 3 5
Specialty Chemicals..................................... 2 2
---- ----
Total................................................. $ 25 $ 28
==== ====
Capital expenditures
Titanium Dioxide and Related Products................... $ 12 $ 23
Acetyls................................................. - 2
Specialty Chemicals..................................... 1 1
Other................................................... - 2
---- ----
Total................................................. $ 13 $ 28
==== ====
--------------
(1) Includes non-recurring reorganization and other charges of $5.
March 31, December 31,
2002 2001
-------- ------------
Goodwill
Titanium Dioxide and Related Products................... $ 55 $ 55
Acetyls................................................. 48 323
---- ----
Total............................................... $103 $378
==== ====
12
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 12 - Information on Equistar
The following is summarized financial information for Equistar:
March 31, December 31,
2002 2001
-------- --------
Current assets ..................................... $1,047 $1,226
Noncurrent assets .................................. 4,001 5,082
------ ------
Total assets .................................... $5,048 $6,308
====== ======
Current liabilities ................................ $ 527 $ 661
Noncurrent liabilities ............................. 2,463 2,410
Partners' capital .................................. 2,058 3,237
------ ------
Total liabilities and partners' capital ........ $5,048 $6,308
====== ======
Three Months Ended
March 31,
---------------------------
2002 2001
------------- ----------
Net sales.................................................. $ 1,136 $1,773
Operating loss............................................. (75) (36)
Loss before cumulative effect of accounting change......... (126) (77)
Cumulative effect of accounting change..................... (1,053) --
Net loss................................................... (1,179) (77)
The Company recorded $30 related to its share of Equistar's write-down of
goodwill during the three months ended March 31, 2002. Even though the Company's
share (i.e., 29.5%) of Equistar's write-down is higher than the amount recorded
by the Company, most of the write-down was previously taken by the Company in
1999 when it wrote down its investment in Equistar by $639.
Note 13 - Supplemental Financial Information
Millennium America, a wholly owned indirect subsidiary of the Company, is
a holding company for all of the Company's operating subsidiaries other than its
operations in the United Kingdom, France, Brazil and Australia. Millennium
America is the issuer of the 7.00% Senior Notes, the 7.625% Senior Debentures,
and the 9.25% Senior Notes, and is the principal borrower under the Credit
Agreement. Millennium America guarantees all obligations under the Credit
Agreement. The 7.00% Senior Notes, the 7.625% Senior Debentures and the 9.25%
Senior Notes, as well as outstanding amounts under the Credit Agreement, are
guaranteed by the Company. Accordingly, the following Condensed Consolidating
Balance Sheets at March 31, 2002 and December 31, 2001 and the Condensed
Consolidating Statements of Operations and Cash Flows for the three months
ended March 31, 2002 and 2001, are provided for the Company as supplemental
financial information to the Company's consolidated financial statements to
disclose the financial position, results of operations and cash flows of
(i) the Company, (ii) Millennium America, and (iii) all subsidiaries of the
Company other than Millennium America (the "Non-Guarantor Subsidiaries"). The
investment in subsidiaries is accounted for by the equity method; accordingly,
the shareholders' equity of Millennium America and the Company are presented
as if each of these companies and their respective subsidiaries were reported
on a consolidated basis.
13
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Chemicals Inc.
America Chemicals Non-Guarantor and
Inc. Inc. Subsidiaries Eliminations Subsidiaries
---- ---- ------------ ------------- ------------
March 31, 2002
--------------
ASSETS
Inventories ......................... $ -- $ -- $ 329 $ -- $ 329
Other current assets ................ 9 -- 353 -- 362
Property, plant and equipment, net .. -- -- 866 -- 866
Investment in Equistar .............. -- -- 610 -- 610
Investment in subsidiaries .......... 702 639 -- (1,341) --
Other assets ........................ 12 -- 328 -- 340
Goodwill ............................ -- -- 103 -- 103
Due from parent and affiliates, net.. 622 -- -- (622) --
------ ------ ------ ------- ------
Total assets ..................... $1,345 $ 639 $2,589 $(1,963) $2,610
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $4 $ -- $ 9 $ -- $ 13
Other current liabilities ........... 28 -- 282 -- 310
Long-term debt ...................... 1,160 -- 15 -- 1,175
Other liabilities ................... 5 -- 545 -- 550
Due to parent and affiliates, net.... -- 99 523 (622) --
------ ------ ------ ------- ------
Total liabilities ................ 1,197 99 1,374 (622) 2,048
Minority interest ................... -- -- 22 -- 22
Shareholders' equity ................ 148 540 1,193 (1,341) 540
------ ------ ------ ------- ------
Total liabilities and
shareholders' equity ........... $1,345 $ 639 $2,589 $(1,963) $2,610
====== ====== ====== ======= ======
December 31, 2001
-----------------
ASSETS
Inventories ......................... $ -- $ -- $ 370 $ -- $ 370
Other current assets ................ 6 -- 384 -- 390
Property, plant and equipment, net .. -- -- 880 -- 880
Investment in Equistar .............. -- -- 677 -- 677
Investment in subsidiaries .......... 1,061 968 -- (2,029) --
Other assets ........................ 13 -- 296 -- 309
Goodwill ............................ -- -- 378 -- 378
Due from parent and affiliates, net.. 590 -- -- (590) --
------ ------ ------ ------- ------
Total assets ..................... $1,670 $ 968 $2,985 $(2,619) $3,004
====== ====== ====== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 3 $ -- $ 8 $ -- $ 11
Other current liabilities ........... 8 -- 364 -- 372
Long-term debt ...................... 1,156 -- 16 -- 1,172
Other liabilities ................... -- 1 549 -- 550
Due to parent and affiliates, net.... -- 89 501 (590) --
------ ------ ------ ------- ------
Total liabilities ................ 1,167 90 1,438 (590) 2,105
Minority interest ................... -- -- 21 -- 21
Shareholders' equity ................ 503 878 1,526 (2,029) 878
------ ------ ------ ------- ------
Total liabilities and
shareholders' equity ........... $1,670 $ 968 $2,985 $(2,619) $3,004
====== ====== ====== ======= ======
14
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Non-Guarantor Chemicals Inc.
America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------- --------------- ---------------- -------------- ----------------
Three Months Ended
March 31, 2002
--------------
Net sales..................... $ - $ - $ 351 $ - $ 351
Cost of products sold......... - - 292 - 292
Depreciation and amortization. - - 25 - 25
Selling, development and
administrative expense..... - - 23 - 23
------ ------ ----- ----- ------
Operating income........... - - 11 - 11
Interest (expense) income, net (22) - 1 - (21)
Intercompany interest income
(expense), net............. 27 (1) (26) - -
Equity in loss of Equistar.... - - (39) - (39)
Equity in loss of
subsidiaries............... (345) (335) - 680 -
Other expense, net............ - - (2) - (2)
Income taxes.................. (2) - 22 - 20
Cumulative effect of
accounting change.......... - - (305) - (305)
------ ------ ------ ----- ------
Net loss................... $(342) $(336) $(338) $680 $(336)
====== ====== ====== ===== ======
Three Months Ended
March 31, 2001
--------------
Net sales..................... $ - $ - $ 444 $ - $ 444
Cost of products sold......... - - 343 - 343
Depreciation and amortization. - - 28 - 28
Selling, development and
administrative expense..... - - 43 - 43
Reorganization and other
charges.................... - - 5 - 5
------ ----- ------ ----- ------
Operating income........... - - 25 - 25
Interest expense, net......... (20) - (1) - (21)
Intercompany interest income
(expense), net............. 27 - (27) - -
Equity in loss of Equistar.... - - (24) - (24)
Equity in loss of
subsidiaries............... (28) (15) - 43 -
Other expense, net............ - - (1) - (1)
Income taxes.................. (2) - 8 - 6
------ ------ ------ ----- ------
Net loss................... $ (23) $ (15) $ (20) $ 43 $ (15)
====== ====== ====== ===== ======
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except share data)
Note 13 - Supplemental Financial Information - Continued
Millennium
Millennium Millennium Non-Guarantor Chemicals Inc.
America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------- --------------- ---------------- -------------- ----------------
Three Months Ended
March 31, 2002
--------------
Cash flows from operating activities . $ 18 $(2) $(49) $ -- $(33)
---- --- ---- ---- ----
Cash flows from investing activities
Capital expenditures ............... -- -- (13) -- (13)
---- --- ---- ---- ----
Cash used in investing
activities ...................... -- -- (13) -- (13)
---- --- ---- ---- ----
Cash flows from financing activities
Dividends to shareholders .......... -- (9) -- -- (9)
Proceeds from long-term debt ....... 95 -- 2 -- 97
Repayment of long-term debt ........ (85) -- (2) -- (87)
Intercompany ....................... (31) 11 20 -- --
Increase in notes payable .......... -- -- 1 -- 1
---- --- ---- ---- ----
Cash (used in) provided by
financing activities ............ (21) 2 21 -- 2
---- --- ---- ---- ----
Effect of exchange rate changes on
cash ................................ -- -- 1 -- 1
---- --- ---- ---- ----
Decrease in cash and cash
equivalents ......................... (3) -- (40) -- (43)
---- --- ---- ---- ----
Cash and cash equivalents at
beginning of year ................... 5 -- 109 -- 114
---- --- ---- ---- ----
Cash and cash equivalents at end of
period ............................ $ 2 $-- $ 69 $ -- $ 71
==== === ==== ==== ====
Three Months Ended
March 31, 2001
--------------
Cash flows from operating activities . $ 18 $-- $(12) $ -- $ 6
---- --- ---- ---- ----
Cash flows from investing activities
Capital expenditures ............... -- -- (28) -- (28)
Proceeds from sales of property,
plant & equipment ................. -- -- 2 -- 2
---- --- ---- ---- ----
Cash used in investing activities -- -- (26) -- (26)
---- --- ---- ---- ----
Cash flows from financing activities
Dividends to shareholders .......... -- (9) -- -- (9)
Proceeds from long-term debt ....... 25 -- -- -- 25
Repayment of long-term debt ........ (25) -- (29) -- (54)
Intercompany ....................... (37) 9 28 -- --
Increase (decrease) in notes
payable ........................... 19 -- (8) -- 11
---- --- ---- ---- ----
Cash used in financing
activities ...................... (18) -- (9) -- (27)
---- --- ---- ---- ----
Effect of exchange rate changes on
cash ................................ -- -- (2) -- (2)
---- --- ---- ---- ----
Decrease in cash and cash equivalents -- -- (49) -- (49)
---- --- ---- ---- ----
Cash and cash equivalents at
beginning of year ................... -- -- 107 -- 107
---- --- ---- ---- ----
Cash and cash equivalents at end of
period .............................. $ -- $-- $ 58 $ -- $ 58
==== === ==== ==== ====
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
MILLENNIUM CHEMICALS INC.
Date: August 14, 2002 /s/ John E. Lushefski
------------------------------------
John E. Lushefski
Senior Vice President and
Chief Financial Officer
(as duly authorized officer and
principal financial officer)
17
STATEMENT OF DIFFERENCES
Characters normally expressed as subscript shall be preceded by............[u]
The section symbol shall be expressed as...................................'SS'