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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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)
20 Wight Avenue, Suite 100
Hunt Valley, MD 21030
(Address of principal executive offices)
410-229-4400
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant is required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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: 65,379,892 shares of Common
Stock, par value $.01 per share, as of July 31, 2004, excluding 12,516,694
shares held by the registrant, its subsidiaries and certain Company trusts that
are not entitled to vote.
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MILLENNIUM CHEMICALS INC.
TABLE OF CONTENTS
Page
----
Part I FINANCIAL INFORMATION
Item 1 Financial Statements ................................... 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 28
Item 3 Quantitative and Qualitative Disclosures about Market
Risk ................................................ 43
Item 4 Controls and Procedures ................................ 43
Part II OTHER INFORMATION
Item 1 Legal Proceedings ...................................... 45
Item 6 Exhibits and Reports on Form 8-K ....................... 45
Signature ..................................................... 46
In this Quarterly Report on Form 10-Q (the "Quarterly Report"), the terms
"our", "we", and "the Company" refer to Millennium Chemicals Inc. and its
consolidated subsidiaries, except as the context otherwise requires.
Non-GAAP Financial Measures
Financial measures based on accounting principles generally accepted in the
United States of America ("GAAP") are commonly referred to as GAAP financial
measures. A non-GAAP financial measure is generally defined by the Securities
and Exchange Commission as one that purports to measure historical or future
financial performance, financial position, or cash flows, but excludes or
includes amounts that would not be so adjusted in the most comparable GAAP
measure. From time to time the Company discloses non-GAAP financial measures,
primarily EBITDA. EBITDA represents income from operations before interest,
taxes, depreciation and amortization, other income items, equity earnings, and
the cumulative effect of accounting changes. EBITDA is a key measure used by the
banking and investing communities in their evaluation of economic performance.
Accordingly, management believes that disclosure of EBITDA provides useful
information to investors because it is frequently cited by financial analysts in
evaluating companies' performance. EBITDA is not a measure of operating
performance computed in accordance with GAAP and should not be considered as a
substitute for GAAP measures. Additionally, these measures may not be comparable
to similarly named measures of other companies.
The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding designated items. Management believes that
excluding these items generally helps investors to compare operating performance
between two periods. Such adjusted data are not reported without an explanation
of the items that are excluded.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MILLENNIUM CHEMICALS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Millions, except share data)
June 30, December 31,
2004 2003
-------- -------------
(Restated --
See Note 17)
ASSETS
Current assets
Cash and cash equivalents .................................................... $ 191 $ 209
Trade receivables, net ....................................................... 342 277
Inventories .................................................................. 372 457
Other current assets ......................................................... 69 65
------ ------
Total current assets ...................................................... 974 1,008
Property, plant and equipment, net .............................................. 725 766
Investment in Equistar .......................................................... 483 469
Other assets .................................................................... 45 51
Goodwill ........................................................................ 104 104
------ ------
Total assets .............................................................. $2,331 $2,398
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Notes payable ................................................................ $ 3 $ --
Current maturities of long-term debt ......................................... 5 6
Trade accounts payable ....................................................... 264 236
Income taxes payable ......................................................... 6 5
Accrued expenses and other liabilities ....................................... 116 124
------ ------
Total current liabilities ................................................. 394 371
Long-term debt .................................................................. 1,400 1,461
Deferred income taxes ........................................................... 270 272
Other liabilities ............................................................... 314 325
------ ------
Total liabilities ......................................................... 2,378 2,429
------ ------
Commitments and contingencies (Note 13)
Minority interest ............................................................... 29 27
Shareholders' deficit
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 June 30, 2004 and December 31, 2003) .......... 1 1
Paid in capital .............................................................. 1,286 1,292
Accumulated deficit .......................................................... (979) (962)
Accumulated other comprehensive loss ......................................... (152) (141)
Treasury stock, at cost (12,755,355 and 13,905,687 shares at June 30, 2004
and December 31, 2003, respectively) ...................................... (238) (260)
Unearned restricted shares ................................................... (1) (1)
Deferred compensation ........................................................ 7 13
------ ------
Total shareholders' deficit ............................................... (76) (58)
------ ------
Total liabilities and shareholders' deficit ........................... $2,331 $2,398
====== ======
See Notes to Consolidated Financial Statements (Unaudited).
3
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net sales ........................................................... $ 488 $ 416 $ 953 $ 831
Operating costs and expenses
Cost of products sold ............................................ 413 326 801 657
Depreciation and amortization .................................... 24 28 48 55
Selling, development and administrative expense .................. 33 37 66 67
Asset impairment charges ......................................... 5 -- 8 --
Combination costs ................................................ 1 -- 4 --
Reorganization and office closure costs .......................... 1 1 2 1
------ ------ ------ ------
Operating income .............................................. 11 24 24 51
Interest expense .................................................... (25) (24) (52) (47)
Interest income ..................................................... 1 1 3 2
Earnings (loss) on Equistar investment .............................. 12 (14) 14 (57)
Other expense, net .................................................. (1) (1) (2) (1)
------ ------ ------ ------
Loss before income taxes, minority interest and cumulative effect
of accounting change ............................................. (2) (14) (13) (52)
(Provision for) benefit from income taxes ........................... (3) 6 (1) 21
------ ------ ------ ------
Loss before minority interest and cumulative effect of accounting
change ........................................................... (5) (8) (14) (31)
Minority interest ................................................... (2) (1) (3) (4)
------ ------ ------ ------
Loss before cumulative effect of accounting change .................. (7) (9) (17) (35)
Cumulative effect of accounting change .............................. -- -- -- (1)
------ ------ ------ ------
Net loss ............................................................ $ (7) $ (9) $ (17) $ (36)
====== ====== ====== ======
Basic and diluted loss per share:
Before cumulative effect of accounting change .................... $(0.11) $(0.14) $(0.26) $(0.54)
From cumulative effect of accounting change ...................... -- -- -- (0.02)
------ ------ ------ ------
After cumulative effect of accounting change ..................... $(0.11) $(0.14) $(0.26) $(0.56)
====== ====== ====== ======
See Notes to Consolidated Financial Statements (Unaudited).
4
MILLENNIUM CHEMICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Millions)
Six Months Ended
June 30,
----------------
2004 2003
------ -------
Cash flows from operating activities:
Net loss .......................................................... $(17) $ (36)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change ......................... -- 1
Asset impairment charges ....................................... 8 --
Depreciation and amortization .................................. 48 55
Deferred income tax benefit .................................... (4) (32)
(Earnings) loss on Equistar investment ......................... (14) 57
Minority interest .............................................. 3 4
Other, net ..................................................... (3) 1
Changes in assets and liabilities:
Increase in trade receivables ............................... (66) (5)
Decrease (increase) in inventories .......................... 80 (14)
(Increase) decrease in other current assets ................. (6) 13
Decrease in other assets .................................... -- 1
Increase (decrease) in trade accounts payable ............... 31 (49)
Decrease in accrued expenses and other liabilities and
income taxes payable ..................................... 1 (23)
Decrease in other liabilities ............................... (16) (15)
---- -----
Cash provided by (used in) operating activities ................ 45 (42)
---- -----
Cash flows from investing activities:
Capital expenditures .............................................. (23) (19)
---- -----
Cash used in investing activities .............................. (23) (19)
---- -----
Cash flows from financing activities:
Dividends to shareholders ......................................... -- (17)
Proceeds from long-term debt, net of financing costs .............. 16 279
Repayment of long-term debt ....................................... (72) (173)
Increase (decrease) in notes payable .............................. 3 (5)
Proceeds from exercise of stock options ........................... 9 --
---- -----
Cash (used in) provided by financing activities ................ (44) 84
---- -----
Effect of exchange rate changes on cash .............................. 4 7
---- -----
(Decrease) increase in cash and cash equivalents ..................... (18) 30
Cash and cash equivalents at beginning of year ....................... 209 125
---- -----
Cash and cash equivalents at end of period ........................... $191 $ 155
==== =====
See Notes to Consolidated Financial Statements (Unaudited).
5
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 accounting principles
generally accepted in the United States of America for complete financial
statements. The accompanying unaudited consolidated financial statements should
be read in conjunction with the financial statements and disclosures included in
the Annual Report on Form 10-K of Millennium Chemicals Inc. (the "Company") for
the year ended December 31, 2003, as amended by Amendment No. 2 on Form 10-K/A
filed with the Securities and Exchange Commission on August 9, 2004. In the
opinion of management, all adjustments considered necessary to present fairly
the financial position and results of operations for the interim periods are
included in the accompanying unaudited consolidated financial statements.
The unaudited 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 and the La Porte
Methanol Company. All significant intercompany accounts and transactions have
been eliminated. The Company's 29.5% investment in Equistar Chemicals, LP
("Equistar"), a joint venture between the Company and Lyondell Chemical Company
("Lyondell"), is accounted for by the equity method; accordingly, the Company's
share of Equistar's pre-tax net income or loss is included in net income or
loss.
Note 2 - Agreement for a Stock-for-Stock Business Combination
On March 29, 2004, Lyondell and the Company announced that their respective
Boards of Directors had approved, and the companies had executed, an agreement
and plan of merger. The proposed transaction is intended to qualify as a
reorganization for U.S. federal income tax purposes, in which Millennium
shareholders generally will not recognize gain or loss, other than any gain or
loss recognized on the receipt of cash for fractional shares.
The Company's shareholders will receive between 0.95 and 1.05 shares of
Lyondell common stock for each share of the Company's Common Stock, depending on
the average of the volume-weighted average price of Lyondell shares for the 20
trading days ending on the third trading day before the consummation of the
transaction. The Company's shareholders will receive 0.95 shares of Lyondell
common stock if the average price of Lyondell shares during the period is $20.50
per share or greater, and 1.05 shares if it is $16.50 per share or less. If the
average price is between these two amounts, the exchange ratio will vary
proportionately. The new shares will be entitled to receive the same cash
dividend as existing outstanding Lyondell shares. The Company's 4.00%
convertible senior debentures (the "4.00% Convertible Senior Debentures") will
become convertible into Lyondell common stock in accordance with the terms of
the convertible debenture indenture following the closing of the transaction.
The transaction is subject to approval by both companies' shareholders and
other customary conditions. The Company and Lyondell have obtained amendments to
the Company's and Lyondell's respective bank credit agreements and Lyondell's
accounts receivable sales facility to permit the transaction. Although the
Company and Lyondell originally expected the transaction to close in the third
quarter of 2004, the Company and Lyondell announced on July 29, 2004 that they
expected their respective special shareholders meetings to be held in the fourth
quarter of 2004. The Company expects the transaction to close in the fourth
quarter of 2004; however, there can be no assurance that the transaction will
close. The transaction involves the merger of Millennium Subsidiary LLC, a newly
created subsidiary of the Company, into the Company, in which the Company's
Common Stock now held by its public shareholders will be converted into common
stock of Lyondell, and the Company's preferred stock to be issued to Lyondell
immediately before the merger will be converted into common stock of the
Company, as the surviving entity in the merger. As a result of the transaction,
the Company will become a wholly-owned subsidiary of Lyondell. After the closing
of the transaction, the combined company will be called "Lyondell Chemical
Company" and will be headquartered in Houston, Texas.
For the three months and six months ended June 30, 2004, the Company
incurred approximately $1 and $4, respectively, of professional services costs
in connection with the proposed combination, which are included in Combination
costs in the accompanying unaudited Consolidated Statements of Operations.
6
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 3 - Loss per Share and Stock-Based Compensation
The weighted-average number of equivalent shares of common stock
outstanding used in computing loss per share is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted-average common stock outstanding --
basic and diluted .......................... 64,963,367 63,972,811 64,730,316 63,913,148
========== ========== ========== ==========
The calculation of diluted loss per share for the three months and six
months ended June 30, 2004 does not include 133,190 restricted shares; 239,023
and 167,503 options to purchase Common Stock, respectively; 188,565 and 192,307
shares held in trust for the Company's employee benefit plans, respectively; and
shares reserved for conversion of the Company's 4.00% Convertible Senior
Debentures, as more fully described in Note 9. The calculation of diluted loss
per share for the three months and six months ended June 30, 2003 does not
include 5,767 and 628 options to purchase Common Stock, respectively; 58,212 and
58,038 restricted shares, respectively; and 220,718 and 222,575 shares held in
trust for the Company's employee benefit plans, respectively. The effect of
including these options and shares would be antidilutive due to the reported net
losses in each of these periods.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
encourages a fair value based method of accounting for employee stock options
and similar equity instruments, which generally would result in the recording of
additional compensation expense in the Company's financial statements. SFAS No.
123, as amended, also allows the Company to continue to account for stock-based
employee compensation using the intrinsic value for equity instruments under
Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"). The Company
has elected to account for such instruments using APB Opinion No. 25 and related
interpretations, and thus has adopted the disclosure-only provisions of SFAS No.
123, as amended. Accordingly, no compensation cost has been recognized for the
stock option plans in the accompanying financial statements as all options
granted had an exercise price equal to the market value of the underlying Common
Stock on the date of grant.
Disclosure on a pro forma basis of net loss and related per-share amounts
as if the Company had applied the fair value recognition provisions of SFAS No.
123, as amended, to stock-based employee compensation is omitted because the
effect on pro forma net loss is insignificant.
Note 4 - Recent Accounting Developments
On January 1, 2003, the Company adopted 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, are recorded in subsequent
periods. The Company's asset retirement obligations arise from activities
associated with the eventual remediation of sites used for landfills and mining
and include estimated liabilities for closure, restoration, and post-closure
care. None of the Company's assets are legally restricted for purposes of
settling these obligations. As these liabilities are settled, a gain or loss is
recognized for any difference between the settlement amount and the liability
recorded. The amount of the asset retirement obligations was $12 and $13 at each
of June 30, 2004 and December 31, 2003, respectively. The Company reported an
after-tax transition charge of $1 in the first quarter of 2003 as the cumulative
effect of this accounting change. The impact of adoption was to increase the
Company's reported assets and liabilities by $2 and $3, respectively.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
revised FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51,
'Consolidated Financial Statements'" ("FIN 46R"). FIN 46R requires the assets,
liabilities, and results of operations of a variable interest entity ("VIE") to
be consolidated in the financial statements of the enterprise considered to be
the primary beneficiary of that entity. The Company evaluated material
relationships with certain entities that were considered potential VIEs. The
Company concluded, with one possible exception discussed below, that those
7
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
entities are not VIEs or the Company is not the primary beneficiary of the VIE.
As such, in accordance with FIN 46R, the Company is not required to consolidate
those entities.
The Company evaluated its long-term obligations with one entity that may be
a VIE. The Company has no equity interest in this entity and has confirmed that
the entity is consolidated by an equity owner. The Company has not been able to
obtain the financial information from the entity necessary to determine whether
the Company is the primary beneficiary of the entity. Management of the entity
cited confidentiality considerations with regard to the decision not to provide
the Company with certain financial information. The Company pays approximately
$3 in plant and equipment rental charges on an annual basis to this entity.
In March 2004, the Emerging Issues Task Force ("EITF") of the FASB issued
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128, Earnings per Share" ("EITF 03-6"). EITF 03-6 addresses a
number of questions regarding the computation of earnings per share by companies
that have issued securities other than common stock that contractually entitle
the holder to participate in dividends and earnings of the company when, and if,
it declares dividends on its common stock. EITF 03-6 became effective for
periods beginning after March 31, 2004. EITF 03-6 had no impact on the
Company's financial statements, as the Company has not issued securities for
which EITF 03-6 would apply.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
("the Act") was signed into law on December 8, 2003. In January 2004, the FASB
issued FASB Staff Position ("FSP") No. FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP No. FAS 106-1"),which permitted a sponsor of a
postretirement healthcare plan that provides a prescription drug benefit to make
a one-time election to defer recognition and accounting for the effects of the
Act and the disclosures related to its plans as required by SFAS No. 132
(Revised 2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits" until the FASB developed and issued authoritative guidance on
accounting for the Federal subsidies provided by the Act. The Act introduced a
prescription drug benefit under Medicare ("Medicare Part D") as well as a
Federal subsidy to sponsors of retiree healthcare benefit plans that provide a
medical benefit that is at least actuarially equivalent to Medicare Part D. The
Company elected to make the one-time deferral and, accordingly, the measures of
its accumulated postretirement benefit obligation and net periodic
postretirement benefit cost included in its financial statements and
accompanying notes thereto do not reflect the effects of the Act. On May 19,
2004, the FASB issued FSP No. FAS 106-2 of the same title, which provided final
guidance on the accounting for subsidies under the Act and will become effective
for the Company's third quarter financial report ending September 30, 2004. The
Company is currently evaluating the impact of FSP No. FAS 106-2 and the Act. The
Company does not expect the effects of the Act to be a significant event and
will reflect the effects of the Act in its next measurement of plan obligations
as required by SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". This measurement of plan obligations will occur on the
earlier of December 31, 2004 or the effective date of the announced
stock-for-stock business combination with Lyondell. See Note 2 regarding the
announced stock-for-stock business combination.
Note 5 - Asset Impairment Charges
In the three months and six months ended June 30, 2004, the Company
recorded asset impairment charges of $5 and $8, respectively, primarily related
to the write-off of expenditures for property, plant and equipment at the
Company's Le Havre, France titanium dioxide ("TiO[u]2") manufacturing plant. In
the fourth quarter of 2003, the carrying value of the property, plant and
equipment at this plant was determined to be impaired, and a charge was required
to write down the basis in those assets to zero. Capital expenditures at this
plant for the three months and six months ended June 30, 2004 were capitalized
as property, plant and equipment and then immediately written off as asset
impairment charges as a result of evaluating those assets for impairment under
the guidance of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). Since the basis of all of the property,
plant and equipment for the Le Havre, France TiO[u]2 plant was written down to
zero, no depreciation expense for this plant was recorded in manufacturing and
other costs of sales for the three months and six months ended June 30, 2004.
8
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 6 - Reorganization and Office Closure Costs
On July 21, 2003, the Company announced that it would implement a program
to reduce costs. This program included a reduction of approximately 5% in the
number of the Company's employees worldwide. The Company closed its executive
offices in Red Bank, New Jersey, effective September 1, 2003, and relocated its
headquarters to Hunt Valley, Maryland, where the Company has existing
administrative offices. In addition, the Company announced the suspension of
payment of dividends on its Common Stock.
The Company has recorded cumulative charges related to the program of $20
(including $1 and $2 for the three months and six months ended June 30, 2004,
respectively), of which $19 was for severance-related costs and $1 was for
contractual commitments for ongoing lease costs, net of expected sublease
income, associated with the closure of the Red Bank, New Jersey office for the
remaining term of the lease agreement. All costs associated with this program
are accounted for in accordance with SFAS No. 112, "Employer's Accounting for
Postemployment Benefits" or SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," as appropriate. Cumulative severance-related cash
payments of $23 for the implementation of this program were made through June
30, 2004, including $1 and $9 in the three months and six months ended June 30,
2004, respectively. Substantially all of the remainder of the cash payments
relating to this program, which are estimated to be approximately $3, will be
disbursed during the next several quarters. No significant charges associated
with this program are expected in future periods. Accrued liabilities associated
with this program and included in Accrued expenses and other liabilities were $2
at June 30, 2004. The cumulative charges of $20 associated with the cost
reduction program are less than the cumulative severance-related cash payments
of $23 because some of the cash payments made under the program, primarily for
retirement benefits, were related to expenses and liabilities that were recorded
through the normal course of business in periods prior to the implementation of
this program in mid-2003.
Note 7 - European Receivables Securitization Program
From March 2002 until November 2003, the Company had been transferring its
interest in certain European trade receivables to an unaffiliated third party as
its basis for issuing commercial paper under a revolving securitization
arrangement (annually renewable for a maximum of five years on April 30 of each
year at the option of the third party) with maximum availability of 70 million
euro, which was treated, in part, as a sale under accounting principles
generally accepted in the United States of America. In November 2003, the
Company terminated this securitization arrangement and there were no balances
outstanding at June 30, 2004 or December 31, 2003. The cumulative gross proceeds
from this securitization arrangement through June 30, 2003 was $182. Cash flows
from this securitization arrangement were reflected as operating activities in
the Consolidated Statement of Cash Flows. The aggregate loss on sales associated
with this arrangement for each of the three months and six months ended June 30,
2003 was $1 and was included in selling, development and administrative
("S,D&A") expense. Servicing liabilities associated with the transaction were
insignificant.
Note 8 - Inventories
Inventories are stated at the lower of cost or market value.
June 30, December 31,
2004 2003
-------- ------------
Finished products ............................... $184 $258
In-process products ............................. 35 38
Raw materials ................................... 86 96
Maintenance parts and supplies .................. 67 65
---- ----
$372 $457
==== ====
9
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 9 - Long-Term Debt and Credit Arrangements
The maturities of the Company's long-term debt through 2009 and thereafter
are as follows:
July 1 - Total at Total at
December 31, June 30, December 31,
2004 2005 2006 2007 2008 2009 Thereafter 2004 2003
------------ ---- ---- ---- ---- ---- ---------- -------- ------------
Revolving loans ................. $-- $-- $ -- $-- $ -- $-- $ -- $ -- $ 52
7.00% Senior Notes .............. -- -- 500 -- -- -- -- 500 500
7.625% Senior Debentures ........ -- -- -- -- -- -- 250 250 250
9.25% Senior Notes .............. -- -- -- -- 475 -- -- 475 475
4.00% Convertible Senior
Debentures ................... -- -- -- -- -- -- 150 150 150
Other long-term debt ............ 2 5 5 3 1 1 3 20 23
--- --- ---- --- ---- --- ---- ------ ------
Maturities of long-term debt .... $ 2 $ 5 $505 $ 3 $476 $ 1 $403 1,395 1,450
=== === ==== === ==== === ====
Non-cash components of
long-term debt ............... 10 17
------ ------
Total debt ...................... 1,405 1,467
Less: current maturities of
long-term debt ............... (5) (6)
------ ------
Total long-term debt ............ $1,400 $1,461
====== ======
On November 25, 2003, the Company received approximately $125 in gross
proceeds and, on December 2, 2003, received an additional $25 in gross proceeds
from the sale by Millennium Chemicals Inc. ("Millennium Chemicals") of $150
aggregate principal amount of the 4.00% Convertible Senior Debentures, which are
guaranteed by Millennium America Inc. ("Millennium America"), a wholly-owned
indirect subsidiary of Millennium Chemicals. The gross proceeds of the sale were
used to repay all of the $47 of outstanding borrowings at that time under the
term loan portion (the "Term Loan") of the Company's five-year credit agreement
expiring June 18, 2006, as amended, (the "Credit Agreement") and $103 of
outstanding borrowings under the revolving loan portion (the "Revolving Loans")
of its Credit Agreement, which currently has a maximum availability of $150. The
Company used $4 of cash to pay the fees relating to the sale of the 4.00%
Convertible Senior Debentures. Under the terms of the agreements relating to the
sale of the 4.00% Convertible Senior Debentures, Millennium Chemicals and
Millennium America agreed to: (1) file with the Securities and Exchange
Commission on or before March 24, 2004 a registration statement covering the
resale of the debentures and the common stock issuable upon conversion thereof
pursuant to Rule 415 under the Securities Act, and (2) use reasonable efforts to
cause this registration statement to be declared effective under the Securities
Act of 1933, as amended (the "Securities Act"), on or before May 23, 2004. On
March 23, 2004, Millennium Chemicals and Millennium America, as guarantor,
initially filed a registration statement with the Securities and Exchange
Commission, and on June 16, 2004, filed an amendment to this registration
statement. However, as of August 9, 2004, this registration statement has not
yet been declared effective by the Securities and Exchange Commission.
Accordingly, since March 23, 2004, Millennium Chemicals has accrued and will
continue to accrue additional interest on the debentures, until the registration
statement is declared effective by the Securities and Exchange Commission, at
an annualized rate of 0.25% until August 22, 2004 and 0.50% thereafter.
On April 25, 2003, the Company received approximately $107 in net proceeds
($109 in gross proceeds) from the issuance and sale by Millennium America of
$100 additional principal amount at maturity of its 9.25% Senior Notes due June
15, 2008 (the "9.25% Senior Notes"), which are guaranteed by Millennium
Chemicals. The net proceeds were used to repay all of the $85 of outstanding
borrowings at that time under the Revolving Loans and for general corporate
purposes. Millennium Chemicals and Millennium America guarantee the obligations
under the Credit Agreement. Under the terms of this issuance and sale,
Millennium America and Millennium Chemicals entered into an exchange and
registration rights agreement with the initial purchasers of the $100 additional
principal amount of these 9.25% Senior Notes. Pursuant to this agreement, each
of Millennium America and Millennium Chemicals agreed to: (1) file with the
Securities and Exchange Commission on or before July 24, 2003
10
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
a registration statement relating to a registered exchange offer for the notes,
and (2) use its reasonable efforts to cause this exchange offer registration
statement to be declared effective under the Securities Act on or before October
22, 2003. On June 13, 2003, Millennium America and Millennium Chemicals, as
guarantor, initially filed a registration statement with the Securities and
Exchange Commission, and on December 15, 2003 and June 25, 2004, filed amended
registration statements. However, as of August 9, 2004, the exchange offer
registration statement had not yet been declared effective. As a result, since
October 22, 2003, Millennium America has been obligated to pay additional
interest at the annualized rate of approximately 1.00% to each holder of the
$100 additional amount of notes. This additional interest will be paid until
such time as this registration statement becomes effective.
The Company had $21 of outstanding undrawn standby letters of credit and no
outstanding borrowings under the Revolving Loans and, accordingly, had $129 of
unused availability under such facility at June 30, 2004. In addition to letters
of credit outstanding under the Credit Agreement, the Company also had
outstanding undrawn standby letters of credit and bank guarantees under other
arrangements of $6 at June 30, 2004. The Company had unused availability under
short-term uncommitted lines of credit, other than the Credit Agreement, of $41
at June 30, 2004.
The Revolving Loans are available in US dollars, British pounds 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. As of June 30, 2004, $21 was outstanding under
the letter of credit subfacility, and no amount under the swingline facility.
The Term Loans were entirely prepaid on November 25, 2003, which effectively
retired the Term Loans as any such amounts prepaid may not be reborrowed. The
interest rates on the Revolving 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. The Leverage Ratio is the ratio of Total Indebtedness to
cumulative EBITDA for the prior four fiscal quarters, each as defined in the
Credit Agreement prior to its amendment in the fourth quarter of 2003.
The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. Compliance with
these covenants is monitored frequently in order to assess the likelihood of
continued compliance. As a result of the restatement of its prior financial
statements as discussed in Note 17, the Company obtained a waiver on August 6,
2004 under the Credit Agreement relating to certain representations under the
Credit Agreement regarding such prior financial statements. The Company was in
compliance with all covenants under the Credit Agreement in effect at
June 30, 2004.
The financial covenants in the Credit Agreement require the Company to
maintain a Senior Secured Leverage Ratio, defined as the ratio of Senior Secured
Indebtedness, as defined, to cumulative EBITDA for the prior four fiscal
quarters, each as defined, of no more than 1.25 to 1.00 for each of the
remaining quarters of 2004 and 1.00 to 1.00 for the first quarter of 2005 and
thereafter, and an Interest Coverage Ratio, defined as the ratio of cumulative
EBITDA for the prior four fiscal quarters to Net Interest Expense, for the same
period, each as defined, of no less than 1.35 to 1.00 for the first and second
quarters of 2004; 1.40 to 1.00 for the third quarter of 2004; 1.50 to 1.00 for
the fourth quarter of 2004; and 1.75 to 1.00 for the first quarter of 2005 and
thereafter. 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
11
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
assets; (viii) engage in mergers or acquisitions; (ix) engage in domestic
accounts receivable securitization transactions; and (x) enter into restrictive
agreements. In addition, in the event the Company sells certain assets as
specified in the Credit Agreement and the Leverage Ratio is equal to or greater
than 3.75 to 1.00, the outstanding Revolving Loans must be prepaid with a
portion of the Net Cash Proceeds, as defined, of such sale and the maximum
availability under the Credit Agreement would be decreased by 50% of the
aggregate Net Cash Proceeds received from such asset sales in excess of $100.
Any sale involving Equistar or certain inventory or accounts receivable would
reduce the maximum availability under the Credit Agreement by 100% of such Net
Cash Proceeds received. 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. In connection with the announced stock-for-stock
business combination with Lyondell, the Company obtained an amendment to its
Credit Agreement on July 7, 2004, which will allow the consummation of the
announced stock-for-stock business combination with Lyondell and modifies the
definition of EBITDA to exclude certain transaction costs related to this
business combination.
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" and, together with the 7.00% Senior Notes and
the 9.25% Senior Notes, the "Senior Notes"), that are fully and unconditionally
guaranteed by Millennium Chemicals. The indenture under which the 7.00% Senior
Notes and 7.625% 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
Millennium Chemicals to merge, consolidate or transfer substantially all of
their respective assets. This indenture allows Millennium America and its
Restricted Subsidiaries to grant security on loans of up to 15% of Consolidated
Net Tangible Assets ("CNTA"), as defined, of Millennium America and its
consolidated subsidiaries. Accordingly, based upon CNTA and secured borrowing
levels at June 30, 2004, any reduction in CNTA below approximately $1,000 would
decrease the Company's availability under the Revolving Loans by 15% of any such
reduction. CNTA was approximately $2,000 at June 30, 2004. The 7.00% Senior
Notes and the 7.625% Senior Debentures can be accelerated by the holders thereof
if any other debt in excess of $20 is in default and is accelerated.
The 9.25% Senior Notes were issued by Millennium America and are guaranteed
by Millennium Chemicals. 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) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." Although the Company has no intention at the
present time to pay dividends or make distributions, repurchase its Common
Stock, or make other restricted payments, the Company would be prohibited by
this covenant from doing so at the present time. The indenture also requires
the calculation of 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 quarters. The Company must maintain a Consolidated Coverage Ratio of 2.25
to 1.00. Currently, the Company's Consolidated Coverage Ratio is below this
threshold and, therefore, the Company is subject to certain restrictions that
limit the Company's ability to incur additional indebtedness, pay dividends,
repurchase capital stock, make certain other restricted payments, and enter into
mergers or consolidations. However, if the 9.25% Senior Notes were to receive
investment grade credit ratings from both Moody's Investors Service ("Moody's")
and Standard & Poor's ("S&P") and meet certain other requirements as
12
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
specified in the indenture, certain of these covenants would no longer apply.
The 9.25% Senior Notes can be accelerated by the holders thereof if any other
debt in excess of $30 is in default and is accelerated.
The consummation of the announced stock-for-stock business combination with
Lyondell is expected to give each holder of the 9.25% Senior Notes the right to
require the Company to purchase all or part of such holder's securities at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase.
The 4.00% Convertible Senior Debentures were issued by Millennium Chemicals
and are guaranteed by Millennium America. Holders may convert their debentures
into shares of the Company's Common Stock at a conversion price, subject to
adjustment upon certain events, of $13.63 per share, which is equivalent to a
conversion rate of 73.3568 shares $1,000 principal amount of debentures. The
conversion privilege may be exercised under the following circumstances:
o prior to November 15, 2018, during any fiscal quarter commencing
after December 31, 2003, if the closing price of the Company's
Common Stock on at least 20 of the 30 consecutive trading days
ending on the first trading day of that quarter is greater than
125% of the then current conversion price;
o on or after November 15, 2018, at any time after the closing
price of the Company's Common Stock on any date is greater than
125% of the then current conversion price;
o if the debentures are called for redemption;
o upon the occurrence of specified corporate transactions,
including a consolidation, merger or binding share exchange
pursuant to which the Company's Common Stock would be converted
into cash or property other than securities;
o during the five business-day period after any period of ten
consecutive trading days in which the trading price per $1,000
thousand dollar principal amount of debentures on each day was
less than 98% of the product of the last reported sales price of
the Company's Common Stock and the then current conversion rate;
and
o at any time when the long-term credit rating assigned to the
debentures is either Caa1 or lower, in the case of Moody's, or B-
or lower in the case of S&P, or either rating agency has
discontinued, withdrawn or suspended its rating.
The debentures are redeemable at the Company's option beginning November
15, 2010 at a redemption price equal to 100% of their principal amount, plus
accrued interest, if any. On November 15 in each of 2010, 2013 and 2018, holders
of debentures will have the right to require the Company to repurchase all or
some of the debentures they own at a purchase price equal to 100% of their
principal amount, plus accrued interest, if any. The Company may choose to pay
the purchase price in cash or shares of the Company's Common Stock or any
combination thereof. In the event of a conversion request upon a credit ratings
event as described above, after June 18, 2006, the Company has the right to
deliver, in lieu of shares of Common Stock, cash or a combination of cash and
shares of Common Stock. Holders of the debentures will also have the right to
require the Company to repurchase all or some of the debentures they own at a
cash purchase price equal to 100% of their principal amount, plus accrued
interest, if any, upon the occurrence of certain events constituting a
Fundamental Change, as defined in the indenture. This indenture also limits the
Company's ability to consolidate with or merge with or into any other person, or
sell, convey, transfer or lease properties and assets substantially as an
entirety to another person, except under certain circumstances. The consummation
of the announced stock-for-stock business combination with Lyondell is not
expected to be considered a Fundamental Change, as defined in the indenture.
However, the Company does expect to execute with the trustee a supplemental
indenture providing that each debenture shall be convertible into Lyondell's
common stock at a conversion ratio determined in accordance with the
indenture to reflect the exchange ratio in the business combination.
Although the Company does not currently pay a dividend to its common
stockholders, Lyondell does currently pay a dividend. If the Company executes a
supplemental indenture with the trustee, as described above, and Lyondell
continues to pay a dividend to its common stockholders, the conversion rate, as
defined, will be adjusted. The conversion rate will be increased by a percentage
calculated by dividing the average of the last
13
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
reported sales price of Lyondell's common stock for the ten consecutive trading
days prior to the business day immediately preceding the record date by this
average less the amount in cash per share that Lyondell distributes to holders
of its common stock. At the current market prices of Lyondell's common stock,
this percentage would be approximately 1.0% per quarter.
At June 30, 2004, the Company was in compliance with all covenants in the
indentures governing the 9.25% Senior Notes, 7.00% Senior Notes, 7.625% Senior
Debentures, and 4.00% Convertible Senior Debentures.
The Company, as well as the Senior Notes and the 4.00% Convertible Senior
Debentures, are currently rated BB- by S&P with a stable outlook. Moody's has
assigned the Company a senior implied rating of Ba3, and the Senior Notes and
the 4.00% Convertible Senior Debentures a rating of B1 with a negative outlook.
These ratings are non-investment grade ratings.
On March 29, 2004, S&P placed the Company's ratings on Credit Watch with
negative implications reflecting the future ownership by the highly leveraged
Lyondell and the strong likelihood that the ratings of the Company will be
lowered modestly upon completion of the proposed transaction. On March 30, 2004,
Moody's placed the Company's credit ratings under review for possible downgrade
following the announcement by Lyondell and the Company that the two companies
signed a definitive agreement that, if completed, will result in the combination
of the Company with Lyondell in a stock-for-stock transaction. Moody's cited
concerns over the potential impact that future distributions by the Company, as
an operating subsidiary of Lyondell, to Lyondell will have on the Company's
credit profile over the long term, primarily the potential for elevated debt
levels over the next several years while Lyondell seeks to de-lever its balance
sheet.
Note 10 - 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 June 30,
2004, these contracts had expiration dates no later than December 28, 2004.
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 recorded in
current earnings. Net amounts included in earnings, which offset similar amounts
from foreign currency denominated trade receivables and payables, were a loss of
$2 and insignificant for the three months and six months ended June 30, 2004,
respectively, and were a gain of $3 for each of the three months and six months
ended June 30, 2003.
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. Net amounts 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 insignificant for each of the three
months and six months ended June 30, 2004 and were a loss of $4 for each of the
three months and six months ended June 30, 2003. Hedge ineffectiveness had no
impact on earnings for the three months and six months ended June 30, 2004 and
2003. No forward exchange contract cash flow hedges were discontinued during the
three months and six months ended June 30, 2004 and 2003. The Company currently
estimates that the net gains on foreign currency cash flow hedges included in
OCI at June 30, 2004 that will be reclassified to earnings during the next
twelve months is insignificant.
14
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
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
and commodity options with various terms to manage the volatility related to
anticipated purchases of natural gas and certain commodities, a portion of which
exposes the Company to natural gas price risk. As of June 30, 2004, there were
no such contracts outstanding. The mark-to-market gains or losses on qualifying
hedges were included in OCI to the extent effective, and reclassified into Cost
of products sold in the period during which the hedged transaction affected
earnings. The mark-to-market gains or losses on ineffective portions of hedges
are recognized immediately in Cost of products sold. Net amounts on commodity
swaps designated as cash flow hedges reclassified to Cost of products sold to
match the gain or loss on the underlying transaction being hedged were
insignificant for each of the three months ended June 30, 2004 and 2003 and the
six months ended June 30, 2004, and were gains of $1 for the six months ended
June 30, 2003. Hedge ineffectiveness had no impact on earnings for the three
months and six months ended June 30, 2004 and 2003. No commodity swap cash flow
hedges were discontinued in the three months and six months ended June 30, 2004
or in the three months ended June 30, 2003, and net losses on commodity swap
cash flow hedges that were discontinued in the six months ended June 30, 2003
were not significant. The Company had no gains or losses on commodity swaps
included in OCI at June 30, 2004.
In addition, the Company utilizes commodity swap and option arrangements to
manage price volatility related to anticipated purchases of certain commodities,
a portion of which exposes the Company to natural gas price risk. These
derivatives are not designated as hedges for accounting purposes. The gains and
losses on these instruments are recorded in current earnings. Net amounts
included in earnings were insignificant in each of the three months and six
months ended June 30, 2004 and net losses were $1 for each of the three months
and six months ended June 30, 2003.
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. At June 30, 2004, the Company had outstanding
interest rate swap agreements with a notional amount of $225, which are
designated as fair value hedges of underlying fixed-rate obligations. The
valuation of these interest rate swap agreements at June 30, 2004 resulted in a
loss of $1, which required the recognition of a swap liability and a
corresponding decrease in the carrying value of long-term debt of $1. The gains
and losses on both the interest rate swaps and the hedged portion of the
underlying debt are recorded in Interest expense. Hedge ineffectiveness had no
impact on earnings for the three months and six months ended June 30, 2004 and
2003.
Note 11 - Pension and Other Postretirement Benefits
The following table provides the components of net periodic benefit cost
and the amount of contributions for pensions:
Pension Benefits
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net periodic benefit cost
Service cost, including interest ........ $ 4 $ 4 $ 7 $ 7
Interest on PBO ......................... 13 13 26 26
Return on plan assets ................... (16) (17) (32) (34)
Amortization of unrecognized net loss ... 3 1 6 3
---- ---- ---- ----
Net periodic benefit cost ............... 4 1 7 2
Defined contribution plan ............... 1 1 2 2
---- ---- ---- ----
Net periodic benefit cost ............... $ 5 $ 2 $ 9 $ 4
==== ==== ==== ====
Company pension trust contributions ........ $ 3 $ 2 $ 6 $ 4
==== ==== ==== ====
The Company expects to contribute approximately $12 to pension plan trusts
during 2004.
15
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
The following table provides the components of net periodic benefit cost
and the amount of benefits paid for other postretirement benefits:
Other Postretirement Benefits
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net periodic benefit (income) cost
Service cost, including interest ........ $-- $-- $-- $--
Interest on PBO ......................... 1 1 1 2
Amortization of prior service credit..... (2) (1) (3) (1)
--- --- --- ---
Net periodic benefit (income) cost ...... $(1) $-- $(2) $ 1
=== === === ===
Other postretirement benefits paid ......... $ 3 $ 4 $ 6 $ 6
=== === === ===
As a result of rising medical benefit costs and competitive business
conditions, the Company announced in the first quarter of 2004 that, effective
April 1, 2004, it planned to reduce the level of retiree medical benefits
provided to essentially all of its retirees by offering a monthly subsidy to
retirees that enroll in designated preferred provider organization plans or
Medicare supplement insurance plans. This change will reduce the Company's
accumulated postretirement benefit obligation by approximately $45. Beginning in
2004, the Company is recognizing this reduction ratably over approximately
thirteen years through other postretirement employee benefit ("OPEB") net
periodic benefit cost. Estimated OPEB net periodic benefit cost for the year
ending December 31, 2004, after giving effect to this change, will be income of
approximately $4 compared to a benefit cost of $2 for the year ended December
31, 2003. The Company estimates that cash payments for retiree medical and
insurance benefits for the year ending December 31, 2004 will be approximately
$11, which is slightly less than such payments made for the year ended December
31, 2003 of $12, as the Company transitions to the subsidy plan. Cash payments
for retiree medical and insurance benefits in subsequent years are estimated to
be significantly less than in 2003.
Note 12 - Comprehensive Income (Loss)
The following table sets forth the components of other comprehensive income
(loss) and total comprehensive income (loss):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss ....................................... $ (7) $(9) $(17) $(36)
Other comprehensive (loss) income
Net gains (losses) on derivative financial
instruments .............................. -- -- 1 (3)
Currency translation adjustment ............. (21) 46 (12) 59
---- --- ---- ----
Total comprehensive (loss) income .............. $(28) $37 $(28) $ 20
==== === ==== ====
Note 13 - Commitments and Contingencies
Legal and Environmental: The Company and various Company subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. These include several proceedings alleging injurious exposure
of plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries. Typically, such
proceedings involve claims made by many plaintiffs against many defendants in
the chemical industry. Millennium Petrochemicals Inc., a wholly-owned operating
subsidiary of the Company ("Millennium Petrochemicals"), is one of a number of
defendants in 100 active premises-based asbestos cases (i.e., where the alleged
exposure to asbestos-containing materials was to employees of third-party
contractors or subcontractors on the premises of certain current or former
Company facilities, and did not relate to any products manufactured or sold by
the Company or any of its predecessors). Of the cases filed
16
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
against Millennium Petrochemicals, only three assert specific damage amounts
other than asserting damages in excess of the statutory minimum. The three cases
that do assert a specific amount of damages each assert a minimum of
$200,000 exemplary damages. Millennium Petrochemicals is responsible for these
premises-based cases as a result of its indemnification obligations under the
Company's agreements with Equistar; however, Equistar will be required to
indemnify Millennium Petrochemicals for any such claims filed on or after
December 1, 2004 related to the assets or businesses contributed by Millennium
Petrochemicals to Equistar. Millennium Inorganic Chemicals Inc., a wholly-owned
operating subsidiary of the Company ("Millennium Inorganic Chemicals"), is one
of a number of defendants in 90 premises-based asbestos cases filed primarily
in late 2003 in Baltimore County, Maryland, which assert damages in excess
of the statutory minimum. Approximately half of these claims are on the active
docket and half are on an inactive docket of claims for which no legal
obligations attach and no defense costs are being incurred. With respect to the
active docket, at the current rate, cases filed in 2003 are not likely to be
scheduled to be tried for at least 10 years. To date, no premises-based asbestos
case has been tried in the State of Maryland. A defunct indirect Company
subsidiary is among a number of defendants in 60 asbestos cases in Texas, where
the alleged exposure was to persons on the premises of facilities where vessels
formerly fabricated by this defunct subsidiary were situated. All of these cases
assert unspecified monetary damages in excess of the statutory minimum.
Together with other alleged past manufacturers of lead-based paint and lead
pigments for use in paint, the Company, 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, counties, school districts, individuals and the State of
Rhode Island, and seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and public nuisance. The majority of these
legal proceedings assert unspecified monetary damages in excess of the statutory
minimum and, in certain cases, contain general language requesting equitable
relief from defendants such as abatement of lead-based paint in buildings. Legal
proceedings relating to lead pigment or paint are in various procedural stages
or pre-trial, post-trial and post-dismissal settings.
The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has not accrued
any liabilities for any lead-based paint and lead pigment litigation. The
Company has insurance policies that potentially provide approximately $1,000 in
indemnity coverage for lead-based paint and lead pigment litigation. That
estimate of indemnity coverage would depend upon the timing of any request for
indemnity and the solvency of the various insurance carriers that are part of
the coverage block at the time of such a request. As a result of insurance
coverage litigation initiated by the Company, an Ohio trial court issued a
decision in 2002 effectively requiring certain insurance carriers to resume
paying defense costs in the lead-based paint and lead pigment cases. Indemnity
coverage was not at issue in the Ohio court's decision. The insurance carriers
may appeal the Ohio decision regarding defense costs, and they have in the past
and may in the future attempt to deny indemnity coverage if there is ever a
settlement or an adverse judgment in any lead-based paint or lead pigment case.
In 1986, a predecessor of a company that is now a subsidiary of the Company
sold its recently acquired Glidden Paints business. As part of that sale, the
seller agreed to indemnify the purchaser against certain claims made during the
first eight years after the sale; the purchaser agreed to indemnify the seller
against such claims made after the eight-year period. With the exception of two
cases, all pending lead-based paint and lead pigment litigation involving the
Company and its subsidiaries, including the Rhode Island case, was filed after
the eight-year period. Accordingly, the Company believes that it is entitled to
full indemnification from the purchaser against lead-based paint and lead
pigment cases filed after the eight-year period. The purchaser disputes that it
has such an indemnification obligation, and claims that the seller must
indemnify it. Since the Company's defense costs to date largely have been
covered by insurance and there never has been a settlement paid by, nor any
judgment rendered against, the Company (or any other company sued in any
lead-based paint or lead pigment litigation), the parties' indemnification
claims have not been ruled on by a court.
The Company's businesses are subject to extensive federal, state, local and
foreign laws, regulations, rules and ordinances concerning, among other things,
emissions to the air, discharges and releases to land and water, the generation,
handling, storage, transportation, treatment and disposal of wastes and other
materials and the remediation of environmental pollution caused by releases of
wastes and other materials (collectively, "Environmental Laws"). The operation
of any chemical manufacturing plant and the distribution of chemical products
entail risks under Environmental Laws, many of which provide for substantial
fines and criminal sanctions
17
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
for violations. There can be no assurance that significant costs or liabilities
will not be incurred with respect to the Company's operations and activities. In
particular, the production of TiO[u]2, TiCl[u]4, vinyl acetate monomer ("VAM"),
acetic acid, methanol and certain other chemicals involves the handling,
manufacture or use of substances or compounds that may be considered to be
toxic or hazardous within the meaning of certain Environmental Laws, and
certain operations have the potential to cause environmental or other damage.
Significant expenditures including facility-related expenditures could be
required in connection with any investigation and remediation of threatened
or actual pollution, triggers under existing Environmental Laws tied to
production or new requirements under Environmental Laws.
The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flow in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the eight-county Houston/Galveston region has been
designated a severe non-attainment area for ozone by the U.S. Environmental
Protection Agency (the "EPA") under a "one-hour" ozone standard. Emission
reduction controls for nitrogen oxides ("NOx"), which contribute to ozone
formation, must be installed at each of Equistar's six plants located in the
Houston/Galveston region prior to a November 2007 compliance deadline for the
one-hour ozone standard. Revised rules adopted by the regulatory agencies
changed the required NOx emission reduction levels from 90% to 80%. Under the
revised 80% standard, Equistar estimates that the incremental capital
expenditures would range between $165 and $200. Equistar's cumulative capital
expenditures through June 30, 2004 totaled $85. This estimate could be affected
by increased costs for stricter proposed controls over highly reactive, volatile
organic compounds ("HRVOCs"). The regulatory agency for the state of Texas, the
Texas Commission on Environmental Quality, or "TCEQ," plans to finalize the
HRVOC rules by December 2004. Equistar is still assessing the impact of the
proposed HRVOC revisions. In addition, in April 2004, the EPA designated the
eight-county Houston/Galveston region a moderate non-attainment area under an
"eight-hour" ozone standard. As a result, the TCEQ must submit a plan to the EPA
in 2007 to demonstrate compliance with the eight-hour ozone standard in 2010.
The TCEQ is continuing with its current plan to revise the HRVOC rules in 2004.
The timing and amount of the estimated expenditures are subject to these
regulatory and other uncertainties, as well as to obtaining the necessary
permits and approvals. There can be no assurance as to the ultimate cost of
implementing any plan developed to comply with the final ozone standards.
Certain Company subsidiaries have been named as defendants, potentially
responsible parties (the "PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites or facilities currently owned,
operated or used by the Company's current or former subsidiaries or
predecessors. The Company's estimated individual exposure for potential cleanup
costs, damages for personal injury or property damage related to these
proceedings has been estimated to be between $0.01 for several small sites and
$18 for the Kalamazoo River Superfund Site in Michigan.
A subsidiary of the Company is named as one of four PRPs at the Kalamazoo
River Superfund Site. The site involves contamination of river sediments and
floodplain soils with polychlorinated biphenyls. In October 2000, the Kalamazoo
River Study Group (the "KRSG"), of which one of the Company's subsidiaries is a
member, submitted to the State of Michigan a Draft Remedial Investigation and
Draft Feasibility Study, which evaluated a number of remedial options. The cost
for these remedial options ranged from $0 to $2,500; however, the Company
strongly believes that the likelihood of the cost being either $0 or $2,500
is remote. At the end of 2001, the EPA took responsibility for the site at the
request of the State. Based upon an interim allocation, the Company is paying
35% of costs related to studying and evaluating the environmental condition of
the river. Guidance as to how the EPA will likely proceed with any further
evaluation and remediation at the Kalamazoo site is not expected until 2005 at
the earliest, as the agency has delayed cleanup planning to allow several
interim measures to go forward. The EPA has initiated a process that will lead
to a facilitation ("the Facilitation") among the agency, the Company, another
KRSG member, the Michigan Departments of Environmental Quality and Natural
Resources, and certain federal natural resource trustees. The Facilitation
participants, guided by the EPA, are in the process of selecting a facilitator
and determining the governing principles of the Facilitation. One of the goals
of the Facilitation, expected to commence in late 2004, is to determine what
additional investigation and data are needed to further develop cleanup options
for downstream portions of the Kalamazoo River. Another interim measure the EPA
is in the process of initiating is the development of a computer model that will
be designed to seek to identify all polychlorinated biphenyls sources on the
Kalamazoo River and determine how polychlorinated biphenyls move, and where they
are deposited. Some results, but not all, are expected by the end of 2005. At
the point in time when the EPA announces how it intends to proceed, the
Company's estimate of its liability at the Kalamazoo site will be re-
18
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
evaluated. The Company's ultimate liability for the Kalamazoo site will depend
on many other factors that have not yet been determined, including the ultimate
remedy selected by the EPA, the number and financial viability of the other
members of the KRSG as well as of other PRPs outside the KRSG, and the
determination of the final allocation among the members of the KRSG and other
PRPs. Recently, the EPA identified 14 private entities and 7 municipalities and
sent them formal requests for information regarding their possible connection
with the Kalamazoo site.
On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit against
Millennium Inorganic Chemicals 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. In the suit, Slidell seeks unspecified monetary
damages in excess of the statutory minimum. The Company believes it has
substantial defenses to these allegations and has filed a counterclaim against
Slidell. The trial in this matter is expected to take place in the fourth
quarter of 2004.
The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities, is between $47 and $73 and has accrued $59 as of June 30, 2004.
Expenses or benefits associated with these contingencies, including changes in
estimated costs to resolve these contingencies, are included in the Company's
S,D&A expense. Expenses resulting from changes in estimated liabilities for
these contingencies for the six months ended June 30, 2004 were $6, and for the
three months ended June 30, 2004 and 2003 and the six months ended June 30, 2003
were insignificant. The Company expects that cash expenditures related to these
potential liabilities will be made over a number of years, and will not be
concentrated in any single year. This accrual also reflects the fact that
certain Company subsidiaries have contractual obligations to indemnify other
parties against certain environmental and other liabilities. For example, the
Company agreed as part of its spin-off from Hanson plc ("Hanson") to indemnify
Hanson and certain of its subsidiaries against certain of such contractual
indemnification obligations, and Millennium Petrochemicals agreed as part of the
December 1, 1997 formation of Equistar to indemnify Equistar for certain
liabilities related to the assets contributed by Millennium Petrochemicals to
Equistar in excess of $7, which threshold was exceeded in 2001. The terms of
these indemnification agreements do not limit the maximum potential future
payments to the indemnified parties. The maximum amount of future
indemnification payments is dependent upon many factors and is not practicable
to estimate.
No assurance can be given that actual costs for environmental matters will
not exceed accrued amounts or that estimates made with respect to
indemnification obligations will be accurate. In addition, it is possible that
costs will be incurred with respect to contamination, indemnification
obligations or other environmental matters that currently are unknown or as to
which it is currently not possible to make an estimate.
19
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 14 - Operations by Business Segment
The Company's principal operations are managed and grouped as three
separate business segments: Titanium Dioxide and Related Products, Acetyls and
Specialty Chemicals. Operating income and expense not identified with the three
separate business segments, including certain of the Company's S,D&A expense not
allocated to its three business segments, employee-related costs from
predecessor businesses and certain other expenses, are grouped under the heading
Other. The following is a summary of the Company's operations by business
segment:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales
Titanium Dioxide and Related Products... $363 $293 $696 $581
Acetyls................................. 101 99 207 201
Specialty Chemicals..................... 24 24 50 49
---- ---- ---- ----
Total................................ $488 $416 $953 $831
==== ==== ==== ====
Operating income (loss)
Titanium Dioxide and Related Products... $ 10 $ 23 $ 22 $ 44
Acetyls................................. 2 5 11 12
Specialty Chemicals..................... 2 2 4 4
Other................................... (3) (6) (13) (9)
---- ---- ---- ----
Total................................ $ 11 $ 24 $ 24 $ 51
==== ==== ==== ====
Depreciation and amortization
Titanium Dioxide and Related Products... $ 19 $ 23 $ 38 $ 45
Acetyls................................. 3 3 6 6
Specialty Chemicals..................... 2 2 4 4
---- ---- ---- ----
Total................................ $ 24 $ 28 $ 48 $ 55
==== ==== ==== ====
Capital expenditures
Titanium Dioxide and Related Products... $ 12 $ 10 $ 21 $ 17
Acetyls................................. 1 -- 2 --
Specialty Chemicals..................... -- 1 -- 2
---- ---- ---- ----
Total................................ $ 13 $ 11 $ 23 $ 19
==== ==== ==== ====
June 30, December 31,
2004 2003
-------- ------------
Goodwill
Titanium Dioxide and Related Products... $ 56 $ 56
Acetyls................................. 48 48
---- ----
Total................................ $104 $104
==== ====
20
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 15 - Information on Equistar
The following is summarized financial information for Equistar:
June 30, December 31,
2004 2003
-------- ------------
Current assets............................... $1,430 $1,261
Noncurrent assets............................ 3,684 3,767
------ ------
Total assets.............................. $5,114 $5,028
====== ======
Current liabilities.......................... $ 782 $ 754
Noncurrent liabilities....................... 2,686 2,673
Partners' capital............................ 1,646 1,601
------ ------
Total liabilities and partners' capital... $5,114 $5,028
====== ======
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
------ ------ ------ ------
Net sales.................................... $2,099 $1,597 $4,061 $3,238
Operating income (loss)...................... 99 24 160 (72)
Net income (loss)............................ 43 (49) 48 (195)
On March 31, 2003, Equistar completed transactions involving a 15-year
propylene supply arrangement and the sale of a polypropylene production facility
in Pasadena, Texas. Equistar received total cash proceeds of $194, including the
value of the polypropylene inventory sold. Approximately $159 of the total cash
proceeds represented a partial prepayment for product to be delivered under a
long-term supply arrangement, primarily at cost-based prices. Equistar will
recognize this deferred revenue over 15 years, as the associated product is
delivered. Equistar's results for the six months ended June 30, 2003,
include a $12 loss on the sale of the polypropylene production facility.
In April 2003, Equistar issued $450 of 10.625% senior notes due in 2011.
The proceeds, net of associated fees, were used to prepay $300 of 8.5% notes due
in the first quarter of 2004, approximately $122 of the $296 of the then
outstanding term loans under Equistar's credit facility and prepayment premiums
of approximately $17. Equistar's results for the three months and six months
ended June 30, 2003, include $19 of debt prepayment costs, consisting of the $17
prepayment premium and the write-off of $2 of unamortized debt issuance costs
related to the prepaid term loan.
21
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information
Millennium America 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% Senior Notes, the 7.625%
Senior Debentures, and the 9.25% Senior Notes, and is the principal borrower
under the Credit Agreement. Millennium Chemicals is the issuer of the 4%
Convertible Senior Debentures. Millennium America fully and unconditionally
guarantees all obligations under the Credit Agreement and the 4.00% Convertible
Senior Debentures. The 7% Senior Notes, the 7.625% Senior Debentures and the
9.25% Senior Notes, as well as outstanding amounts under the Credit Agreement,
are fully and unconditionally guaranteed by Millennium Chemicals. Accordingly,
the following Condensed Consolidating Balance Sheets at June 30, 2004 and
December 31, 2003, the Condensed Consolidating Statements of Operations for the
three months and six months ended June 30, 2004 and 2003, and the Condensed
Consolidating Statements of Cash Flows for the six months ended June 30, 2004
and 2003, 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) Millennium Chemicals, (ii)
Millennium America, and (iii) all subsidiaries of Millennium Chemicals other
than Millennium America (the "Non-Guarantor Subsidiaries"). The investment in
subsidiaries of Millennium America and Millennium Chemicals are accounted for by
the equity method; accordingly, the shareholders' deficit of Millennium America
and Millennium Chemicals are presented as if each of those companies and their
respective subsidiaries were reported on a consolidated basis.
22
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information - Continued
Millennium
Condensed Consolidating Millennium Millennium Non-Guarantor Chemicals Inc.
Balance Sheets America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
June 30, 2004
ASSETS
Inventories .............................. $ -- $ -- $ 372 $ -- $ 372
Other current assets ..................... 44 1 557 -- 602
Property, plant and equipment, net ....... -- -- 725 -- 725
Investment in Equistar ................... -- -- 483 -- 483
Investment in subsidiaries ............... 332 81 -- (413) --
Other assets ............................. 8 3 34 -- 45
Goodwill ................................. -- -- 104 -- 104
Due from parent and affiliates, net ...... 675 -- -- (675) --
------ ---- ------ ------- ------
Total assets .......................... $1,059 $ 85 $2,275 $(1,088) $2,331
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term debt ..... $ -- $ -- $ 5 $ -- $ 5
Other current liabilities ................ 9 4 376 -- 389
Long-term debt ........................... 1,237 150 13 -- 1,400
Deferred income taxes .................... -- -- 270 -- 270
Other liabilities ........................ 1 -- 313 -- 314
Due to parent and affiliates, net ........ -- 7 668 (675) --
------ ---- ------ ------- ------
Total liabilities ..................... 1,247 161 1,645 (675) 2,378
Minority interest ........................ -- -- 29 -- 29
Shareholders' (deficit) equity ........... (188) (76) 601 (413) (76)
------ ---- ------ ------- ------
Total liabilities and shareholders'
(deficit) equity ................... $1,059 $ 85 $2,275 $(1,088) $2,331
====== ==== ====== ======= ======
December 31, 2003 (Restated - See Note 17)
ASSETS
Inventories .............................. $ -- $ -- $ 457 $ -- $ 457
Other current assets ..................... 24 1 526 -- 551
Property, plant and equipment, net ....... -- -- 766 -- 766
Investment in Equistar ................... -- -- 469 -- 469
Investment in subsidiaries ............... 369 95 -- (464) --
Other assets ............................. 12 3 36 -- 51
Goodwill ................................. -- -- 104 -- 104
Due from parent and affiliates, net ...... 733 -- -- (733) --
------ ---- ------ ------- ------
Total assets .......................... $1,138 $ 99 $2,358 $(1,197) $2,398
====== ==== ====== ======= ======
LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY
Current maturities of long-term debt ..... $ -- $ -- $ 6 $ -- $ 6
Other current liabilities ................ 9 1 355 -- 365
Long-term debt ........................... 1,295 150 16 -- 1,461
Deferred income taxes .................... -- -- 272 -- 272
Other liabilities ........................ -- -- 325 -- 325
Due to parent and affiliates, net ........ -- 6 727 (733) --
------ ---- ------ ------- ------
Total liabilities ..................... 1,304 157 1,701 (733) 2,429
Minority interest ........................ -- -- 27 -- 27
Shareholders' (deficit) equity ........... (166) (58) 630 (464) (58)
------ ---- ------ ------- ------
Total liabilities and shareholders'
(deficit) equity ................... $1,138 $ 99 $2,358 $(1,197) $2,398
====== ==== ====== ======= ======
23
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information - Continued
Millennium
Condensed Consolidating Millennium Millennium Non-Guarantor Chemicals Inc.
Statements of Operations America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
Three Months Ended
June 30, 2004
Net sales ................................ $ -- $-- $488 $-- $488
Cost of products sold .................... -- -- 413 -- 413
Depreciation and amortization ............ -- -- 24 -- 24
Selling, development and
administrative expense ................ 1 -- 32 -- 33
Asset impairment charges ................. -- -- 5 -- 5
Combination costs ........................ -- -- 1 -- 1
Reorganization and office closure
costs ................................. -- -- 1 -- 1
---- --- ---- --- ----
Operating (loss) income ............... (1) -- 12 -- 11
Interest (expense) income, net ........... (24) (1) 1 -- (24)
Intercompany interest income
(expense), net ........................ 26 (1) (25) -- --
Earnings on Equistar investment .......... -- -- 12 -- 12
Equity in loss of subsidiaries ........... (8) (5) -- 13 --
Other expense, net ....................... -- -- (3) -- (3)
Provision for income taxes ............... -- -- (3) -- (3)
---- --- ---- --- ----
Net loss .............................. $ (7) $(7) $ (6) $13 $ (7)
==== === ==== === ====
Three Months Ended
June 30, 2003
Net sales ................................ $ -- $-- $416 $-- $416
Cost of products sold .................... -- -- 326 -- 326
Depreciation and amortization ............ -- -- 28 -- 28
Selling, development and
administrative expense ................ -- -- 37 -- 37
Reorganization and office closure costs... -- -- 1 -- 1
---- --- ---- --- ----
Operating income ...................... -- -- 24 -- 24
Interest expense, net .................... (23) -- -- -- (23)
Intercompany interest income
(expense), net ........................ 24 (1) (23) -- --
Loss on Equistar investment .............. -- -- (14) -- (14)
Equity in loss of subsidiaries ........... (19) (8) -- 27 --
Other expense, net ....................... -- -- (2) -- (2)
Benefit from income taxes ................ -- -- 6 -- 6
---- --- ---- --- ----
Net loss .............................. $(18) $(9) $ (9) $27 $ (9)
==== === ==== === ====
24
MILLENNIUM CHEMICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(Dollars in millions, except share data)
Note 16 - Supplemental Financial Information - Continued
Millennium
Condensed Consolidating Millennium Millennium Non-Guarantor Chemicals Inc.
Statements of Operations America Inc. Chemicals Inc. Subsidiaries Eliminations and Subsidiaries
------------ -------------- ------------- ------------ ----------------
Six Months Ended
June 30, 2004
Net sales .............................. $ -- $ -- $953 $-- $953
Cost of products sold .................. -- -- 801 -- 801
Depreciation and amortization .......... -- -- 48 -- 48
Selling, development and administrative
expense ............................. 1 -- 65 -- 66
Asset impairment charges ............... -- -- 8 -- 8
Combination costs ...................... -- -- 4 -- 4
Reorganization and office closure
costs ............................... -- -- 2 -- 2
---- ---- ---- --- ----
Operating (loss) income ............. (1) -- 25 -- 24
Interest (expense) income, net ......... (47) (3) 1 -- (49)
Intercompany interest income (expense),
net ................................. 51 (1) (50) -- --
Earnings on Equistar investment ........ -- -- 14 -- 14
Equity in loss of subsidiaries ......... (20) (14) -- 34 --
Other expense, net ..................... -- -- (5) -- (5)
(Provision for) benefit from income
taxes ............................... (1) 1 (1) -- (1)
---- ---- ---- --- ----
Net loss ............................ $(18) $(17) $(16) $34 $(17)
==== ==== ==== === ====
Six Months Ended
June 30, 2003
Net sales .............................. $ -- $ -- $831 $-- $831
Cost of products sold .................. -- -- 657 -- 657
Depreciation and amortization .......... -- -- 55