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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
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 No. 0-30270
Crompton Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-2183153
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
199 Benson Road
Middlebury, Connecticut 06749
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 573-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |x| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |x| No | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed as of February 27, 2004 was $822,545,607.
The number of voting shares of Common Stock of the registrant outstanding
as of February 27, 2004 was 114,510,126.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders on April 27, 2004 ...Part III
PART I Page
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Item 1. Business 2
Polymer Products 3
Specialty Products 5
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters 16
and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial 19
Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on 71
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 71
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and 71
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 72
Item 14. Principal Accountant Fees and Services 72
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72
Signatures 80
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PART I.
ITEM 1. BUSINESS
When we use the terms the "Corporation," "Company," "Crompton, "Registrant,"
"we," "us" and "our," unless otherwise indicated or the context otherwise
requires, we are referring to Crompton Corporation and its consolidated
subsidiaries. Certain disclosures included in this Annual Report on Form 10-K
constitute forward-looking statements that are subject to risk and uncertainty.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward-Looking Statements."
(a) General Development of Business
Crompton Corporation, formerly known as CK Witco Corporation, was incorporated
in Delaware in 1999 in connection with the merger of Crompton & Knowles
Corporation and Witco Corporation on September 1, 1999 (the "Merger").
Crompton & Knowles Corporation ("Crompton & Knowles") was incorporated in
Massachusetts in 1900. Crompton & Knowles engaged in the manufacture and sale of
specialty chemicals beginning in 1954 and, beginning in 1961, in the manufacture
and sale of polymer processing equipment. Crompton & Knowles substantially
expanded both its specialty chemical and its polymer processing equipment
businesses through a number of acquisitions in both the United States and
Europe, including the acquisition in 1996 of Uniroyal Chemical Company, Inc.,
("Uniroyal") a multinational manufacturer of performance chemicals, including
rubber chemicals and additives for plastics and lubricants, crop protection
chemicals, and polymers, which include Royalene(R) EPDM rubber and
Adiprene(R)/Vibrathane(R) urethane prepolymers.
Witco Corporation ("Witco") was incorporated in Delaware in 1958 as Witco
Chemical Company, Inc., at which time it succeeded by merger to the business of
Witco Chemical Company, an Illinois corporation formed in 1920. Witco was a
global manufacturer and marketer of specialty chemical products for use in a
wide variety of industrial and consumer applications. In 1995, Witco acquired
OSi Specialties Holding Company, an entity engaged in the manufacture of
silicone surfactants, organofunctional silanes, specialty fluids and amine
catalysts, which was sold in 2003 (see below). In 1998, Witco acquired Ciba
Specialty Chemicals Inc.'s ("Ciba") worldwide polyvinyl chloride heat
stabilizers business and related assets and Ciba acquired Witco's global epoxy
systems and adhesives business and related assets.
On April 24, 2003, the Company entered into an agreement to sell its
OrganoSilicones business unit to a division of General Electric Company ("GE")
and to acquire GE's Specialty Chemicals business. The transaction closed on July
31, 2003 and resulted in a gain of $111.7 million (net of income taxes of $175.3
million). The Company received net cash proceeds of $633.4 million, which
includes proceeds from its first quarterly earn-out payment of $8.75 million
less certain transaction-related fees of $18.4 million. In addition, as part of
the transaction, the Company acquired GE's Specialty Chemicals business valued
at $160 million. The Company will continue to receive quarterly earn-out
payments through September of 2006 based on the combined performance of GE's
existing Silicones business and the OrganoSilicones business that GE acquired
from the Company. The total of such payments will be a minimum of $105 million
and a maximum of $250 million, of which the minimum was recorded on a present
value basis as a receivable on the date of the transaction. The Company will
receive a minimum of $35 million of these cash payments in 2004. Based on the
performance of GE's Silicones business during the fourth quarter of 2003, the
Company will receive an additional $4.5 million of earn-out proceeds in the
first quarter of 2004. The recognition of this additional gain is contingent
upon the continued favorable future performance of GE's Silicones business,
which the Company will assess on a quarterly basis.
In July 2003, the Company announced a cost reduction program to eliminate, at a
minimum, overhead expenses previously absorbed by the OrganoSilicones business.
The Company expects this cost reduction program to result in approximately $40
million of annual pre-tax savings in 2004. In order to achieve its goal, the
Company expects to reduce its global workforce by approximately 375 positions.
(b) Financial Information About Industry Segments
Information as to the sales, operating profit (loss), depreciation and
amortization, assets, capital expenditures and equity method investments
attributable to each of the Corporation's business segments during each of its
last three fiscal years is set forth in the Business Segment Data footnote
included in the Notes to Consolidated Financial Statements on pages 65 through
67 of this Report.
The Corporation's businesses are grouped into two units, "Polymer Products" and
"Specialty Products." Polymer Products consists of separate reporting segments
for Polymer Additives (plastic additives, rubber additives, urethane additives
and petroleum additives), Polymers (EPDM and urethane polymers) and Polymer
Processing Equipment (Davis-Standard). Specialty Products consists of separate
reporting segments for Crop Protection (specialty actives and the Gustafson
Joint Venture) and Other (refined products.)
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(c) Narrative Description of Business
Products and Services
The Corporation manufactures and markets a wide variety of polymer and specialty
products. Most of the Corporation's products are sold to industrial customers
for use as additives, ingredients or intermediates that impart particular
characteristics to the customers' end products. The Corporation's products are
currently marketed in more than 120 countries and serve a wide variety of end
use markets including tires, agriculture, automobiles, textiles, plastics,
lubricants, petrochemicals, leather, construction, recreation, mining,
packaging, home furnishings, personal care, appliances and paper. The principal
products and services offered by the Corporation are described below.
POLYMER PRODUCTS
Polymer Additives
The Polymer Additives business supplies a number of specialty chemicals to the
plastics, rubber, coatings/adhesives and lubricant industries. The Polymer
Additives business had net sales for fiscal 2003 of $1,232 million.
Plastic Additives
The Corporation is a global leader in supplying a broad line of additives to the
plastics industry. These additives are often specially developed and formulated
for a customer's specific manufacturing requirements. The Corporation
manufactures stabilizers, lubricants, plasticizers and peroxide catalysts, and
markets UV stabilizers and antistats, which are used in the manufacture of PVC
resins and compounds for applications such as pipes, fittings, siding, flooring,
window profiles and packaging materials. In addition, the Corporation is a
manufacturer and supplier of polymerization inhibitors, polymerization catalysts
and initiators, antioxidants, lubricants, chemical foaming agents, polymer
modifiers and chemical intermediates as additives for the olefins and styrenics
industries for use in the manufacture of resins and compounds that are employed
in a broad spectrum of applications used in packaging, automobiles,
construction, furniture and appliances. With the acquisition of General
Electric's Specialty Chemical business in 2003, the Corporation expanded its
antioxidant product line with a manufacturing facility and added marketing of
impact modifiers and processing aids. These products are used in PVC and
engineering thermoplastics. The Corporation also produces organotin compounds
for the production of PVC stabilizers and pharmaceuticals, and for use as a
catalyst in the production of polymers and in certain glass applications.
The Corporation is backward integrated in fatty acids for use in the plastic
additives business. Produced are fatty acids and glycerin for internal
consumption and the merchant market. Derivatives of fatty acids (esters,
stearates and amides) are produced for surface modification as direct
lubricants, emulsifiers or as intermediates for ingredients that modify
surfaces. Fatty acids are used as lubricants in polymers (rubber and plastic)
for personal care products and in curing systems for rubber. Glycerin is used to
provide lubrication in pharmaceutical and personal care applications.
Net sales of plastic additives during fiscal 2003, 2002 and 2001 were 32.4%,
28.3% and 25.8% of the Corporation's net sales for such years, respectively.
Rubber Additives
This product line of the Polymer Additives business contains over 60 different
chemicals for use in processing rubber. These products include accelerators,
antioxidants, antiozonants, chemical foaming agents and specialty waxes.
Accelerators are used for curing natural and synthetic rubber, and have a wide
range of activation temperatures, curing ranges and use forms. Antiozonants
protect rubber compounds from flex cracking and ozone, oxygen and heat
degradation. Antioxidants provide rubber compounds with protection against
oxygen, light and heat. Foaming agents produce gas by thermal decomposition or
via a chemical reaction with other components of a polymer system and are mixed
with rubber to produce sponge rubber products. Waxes inhibit static atmospheric
ozone cracking in rubber. Tire manufacturers accounted for approximately 60% of
the Corporation's rubber additives sales in fiscal 2003, with the balance of
such sales going to industrial rubber goods, which includes numerous
manufacturers of hoses, belting, sponge and a wide variety of other engineered
rubber products. The Corporation believes it is the third largest producer of
rubber additives in the world.
Urethane Additives
The urethane additives business is comprised of three product groupings that
offer technologically advanced materials to a diverse and global customer base:
Fomrez(R) saturated polyester polyols, Witcobond(R) polyurethane dispersions,
and Witcothane(R) polyurethane systems. Polyester polyols are employed in
industrial applications such as flexible foam for seating, thermoplastic
urethanes for structural parts, adhesives and coatings. The polyurethane
dispersions are sold to a larger and more diverse customer base primarily for
coating applications such as flooring, fiberglass sizing and textiles. The
polyurethane systems business, which supplies products primarily for use by the
shoe sole industry, is a highly service intensive business.
Baxenden Chemicals Limited, the Corporation's 53.5% owned subsidiary (Croda Inc.
owns 46.5%), is engaged in the manufacture and marketing of isocyanate
derivatives, polyester polyols and specialty polymer systems used in a wide
range
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of applications. The major markets served by Baxenden are automotive,
construction, surface coatings, leather and textile finishing. Sub-markets
include coatings, adhesives, sealants, elastomers and insulation for the above
markets. Baxenden is focused on specialty polymer and resin chemistry and novel
curing mechanisms for such polymers. The core technology is urethane and acrylic
chemistry and also includes novel polyesters and esterification processes.
Petroleum Additives
The Corporation is a global manufacturer and marketer of high-performance
additive components used in transport and industrial lubricant applications. The
component product line includes Hybase(R) overbased calcium sulfonates and
Lobase(R) neutral calcium sulfonates used in motor oils and marine lubricants.
These sulfonates are oil soluble surfactants and their properties include
detergency and corrosion protection to help lubricants keep car, truck and ship
engines clean with minimal wear. Also in the product line are barium and sodium
sulfonates which provide corrosion protection and emulsification in metalworking
fluids. Other key products are the Naugalube(R) antioxidants widely used by the
Corporation's customers in engine oils, gear oils, industrial oils and greases
and Synton(R) high viscosity poly alpha olefins (PAO) used in the production of
synthetic lubricants for automotive, aviation and industrial applications
(e.g.compressor oils and gear oils). Products under development include new
friction modifiers and antiwear additives to meet customers' performance
requirements in automotive applications.
Polymer Additives are sold through a specialized sales force, including
technical service professionals who address customer inquiries and problems. The
technical service professionals generally have degrees in chemistry and/or
chemical engineering and are knowledgeable in specific product application
fields. The sales and technical service professionals identify and focus on
customers' growth opportunities, working not only with the customers'
headquarters staff, but also with their research and development and
manufacturing personnel on a worldwide basis.
Polymers
The Polymers business, which had net sales for fiscal 2003 of $285.7 million,
has two principal product lines: Adiprene(R)/Vibrathane(R) urethane prepolymers
and Royalene(R) EPDM rubber.
EPDM
Ethylene-propylene-diene rubber ("EPDM") is commonly known as "crackless rubber"
because of its ability to withstand sunlight and ozone without cracking. EPDM's
application end uses include various automobile components, single-ply roofing,
hoses, electrical insulation, tire sidewalls, mechanical seals and gaskets, oil
additives and plastic modifiers. The Corporation produces and markets more than
30 different EPDM polymer variations.
The Corporation believes it is one of the five largest suppliers of EPDM
polymers in the world, and the third largest North American producer of EPDM.
The Corporation's success in this business has been due to several factors,
including product performance, low cost manufacturing, customized products, and
outstanding technical and customer service supported by a highly qualified staff
of technical service specialists with extensive field and rubber processing
experience, which have earned the Corporation a reputation for excellence and
strong customer loyalty.
Royalene(R) products are primarily sold through a dedicated sales force;
however, in certain geographic areas outside the United States, Royalene(R)
products are sold through distributors.
Urethane Polymers
The Corporation believes that it is the leading manufacturer of high performance
liquid castable urethane prepolymers in the world. Among the most common
applications using these prepolymers are solid industrial tires, printing
rollers, industrial rolls, abrasion-resistant mining products such as chutes,
hoppers and slurry transport systems, mechanical goods and a variety of sports
equipment and other consumer items. The Corporation competes effectively in this
business by providing efficient customer service and technical assistance
through a highly regarded technical service staff and a proven ability to
develop new products and technologies for its customers. Over 150 grades of
urethane prepolymers are commercially available from the Corporation.
Adiprene(R)/Vibrathane(R) urethane prepolymers are sold directly by a dedicated
sales force in the United States, Canada and Australia and through direct sales
distributorships in Europe, Latin America and the Far East.
Adiprene(R)/Vibrathane(R) customers are serviced worldwide by a dedicated
technical staff. Technical service personnel support field sales, while a
research and development staff is dedicated to support new product and process
development to meet rapidly changing customer needs. Technical support is a
critical component of the product offering.
Polymer Processing Equipment
The Corporation's wholly owned subsidiary, Davis-Standard Corporation, designs,
manufactures and sells polymer processing equipment, which includes extruders,
electronic controls, and integrated extrusion systems, and offers specialized
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service and modernization programs for in-place polymer processing systems. The
polymer processing equipment business had net sales for fiscal 2003 of $166.5
million.
Integrated polymer processing systems, which include extruders in combination
with controls and other equipment, are used to process polymers into various
products such as plastic sheet and profiles used in appliances, automobiles,
home construction, and furniture; extruded shapes used as house siding,
furniture trim, and substitutes for wood molding; and cast and blown film used
to package many consumer products. Integrated extrusion systems are also used to
compound engineered polymers, to recycle and reclaim plastics, to coat paper,
cardboard and other materials used as packaging, and to apply plastic or rubber
insulation to power cables for electrical utilities and to wire for the
communications, construction, automotive, and appliance industries. Industrial
blow molding equipment produced by the Corporation is sold to manufacturers of
non-disposable plastic items such as tool cases and beverage coolers.
The Corporation is a leading producer of polymer processing equipment for the
polymers industry and competes with domestic and foreign producers of such
products. The Corporation is one of a number of producers of this type of
polymer processing machinery.
In the United States, most of the Corporation's sales of polymer processing
equipment are made by its own dedicated sales force and sales agents. In other
parts of the world, and for export sales from the United States, the
Corporation's sales of such equipment are made largely through agents.
SPECIALTY PRODUCTS
Crop Protection
The Crop Protection business manufactures and markets a wide variety of
agricultural chemicals for many major food crops, including grains, fruits, nuts
and vegetables, and many non-food crops, such as tobacco, cotton, turf, flax and
ornamental plants. The business focuses its efforts mainly on products used on
high-value cash crops, such as ornamentals, nuts, citrus and tree and vine
fruits as opposed to commodity crops such as soybeans and corn. The Crop
Protection business had net sales for fiscal 2003 of $270.9 million.
Specialty Actives
The specialty actives business offers four major crop protection chemical
product lines: fungicides, miticides and insecticides, growth regulants, and
herbicides. Each product line is composed of numerous formulations for specific
crops and geographic regions.
The Corporation has a substantial presence in its targeted segments of the
agrichemicals market due to its strategy of focusing research, product
development, and sales and marketing on highly profitable market niches that are
less sensitive to competitive pricing pressures than commodity segments of the
market. While the products of the specialty actives business represent a
relatively small percentage of the grower's overall costs, these products are
often critical to the success or failure of the crops being treated. In
addition, product line extensions, attention to application effectiveness and
customer service are important factors in developing strong customer loyalty.
In Australia, the Corporation's subsidiary, Hannaford Seedmaster Services Pty.
Ltd., provides seed treatment chemicals and treating services to the local
market as well as agricultural chemicals for various crop and non-crop uses.
The Crop Protection business, under the Uniroyal name, promotes seed treatment
chemicals in all regions of the world other than North America and Australia,
and enjoys a substantial position in the international seed treatment market.
The Corporation anticipates continuing growth in seed treatment, which is
environmentally attractive because it involves very localized use of
agricultural chemicals and very low use rates compared to broad foliar or soil
treatment.
The Crop Protection business markets its products in North America through a
direct sales force selling to a distribution network consisting of more than one
hundred distributors and direct customers. In the international market, the Crop
Protection business' direct sales force services over 300 distributors, dealers
and agents.
Gustafson Joint Venture
In November 1998, the Corporation formed joint ventures with Bayer Corporation
to serve the agricultural seed treatment markets in North America. The
Corporation and Bayer each hold a 50 percent interest in the seed treatment
business operated by Gustafson LLC and Gustafson Partnership (collectively,
"Gustafson").
Gustafson has a leading share of the North American commercial seed treatment
formulation market and is recognized as a technological leader in this market.
Gustafson is engaged directly and through cooperative activities in developing
and formulating seed treatment systems, offering a broad line of chemical
formulations, which contain fungicides, insecticides and seed conditioning aids
in addition to commercial seed treating equipment. Gustafson's expertise enables
it to develop and
5
produce formulations consisting of multiple components to obtain optimum
efficacy against seed and soil disease pathogens and insects.
Gustafson maintains a developmental program in the field of naturally occurring
biological control agents targeted for disease. Gustafson has focused its
efforts on naturally occurring organisms as opposed to genetically engineered
organisms.
OrganoSilicones
In July 2003, the Company completed the sale of its OrganoSilicones business to
GE and its acquisition of GE's Specialty Chemicals business. Information
concerning this transaction is set forth in Item 1(a) on page 2 of this Report
and in the Discontinued Operations footnote included on pages 45 and 46 of Item
8 of this Report.
Other
The Other business of the Corporation, with net sales for fiscal 2003 of $243.2
million, consists of Refined Products.
Refined Products
The refined products business is engaged in the manufacture and marketing of a
wide range of high purity hydrocarbon products, including white oils and ink
oils, petrolatums, microcrystalline waxes, cable compounds, and refrigeration
oils and compressor lubricants, serving numerous global markets predominantly
requiring food grade quality. The business' products serve as lubricants,
emollients, moisture barriers, plasticizers and carriers and are characterized
by their chemical inertness and high quality.
Refined products are used in four major market segments: polymers (including
polystyrene, polyolefin, thermoplastic elastomers and PVC applications),
personal care, refrigeration oils and telecommunication cables, as well as
additional minor markets.
In 1998, Petro-Canada Lubricants of Mississauga, Ontario, Canada, became Refined
Products' supplier for most grades of paraffinic white oils used in certain
applications and refined products became Petro-Canada's exclusive distributor of
these white oils in North America, Latin America and Asia Pacific. The refined
products sales, marketing and distribution organization services refined
products' and Petro- Canada's paraffinic white mineral oil customers for a
variety of applications.
The Corporation markets its refined products primarily directly through its own
sales force.
Sources of Raw Materials
Chemicals, steel, castings, parts, machine components and other raw materials
required in the manufacture of the Corporation's products are generally
available from a number of sources, some of which are foreign. The Corporation
uses significant amounts of petrochemical feedstocks in many of its chemical
manufacturing processes. Large increases in the cost of petrochemical
feedstocks, particularly for sustained periods of time, or other raw materials
could adversely affect the Corporation's operating margins. While temporary
shortages of raw materials used by the Corporation may occur occasionally, such
raw materials are currently readily available. However, their continuing
availability and price are subject to domestic and world market and political
conditions and regulations. Major requirements for key raw materials are
typically purchased pursuant to multi-year contracts. The Corporation is not
dependent on any one supplier for a material amount of its raw material
requirements, except one supplier provides the Corporation with approximately 8
to 10% of diverse raw materials sourced from the supplier's multiple
manufacturing/processing locations.
The Corporation holds a 50% interest in Rubicon Inc. ("Rubicon"), a
manufacturing joint venture between Uniroyal and Huntsman Corporation, located
in Geismar, Louisiana, which supplies both Huntsman and the Corporation with
aniline, and the Corporation with diphenylamine ("DPA"). The Corporation
believes that its aniline and DPA needs in the foreseeable future will be met by
production from Rubicon.
Patents and Licenses
The Corporation has over 2,500 United States and foreign patents and pending
applications and has trademark protection for approximately 570 product names.
Patents, trade names, trademarks, know-how, trade secrets, formulae, and
manufacturing techniques assist in maintaining the competitive position of
certain of the Corporation's products. Patents, formulae, and know-how are of
particular importance in the manufacture of a number of specialty chemicals
manufactured and sold by the Corporation, and patents and know-how are also
significant in the manufacture of certain wire insulating and polymer processing
machinery product lines. The Corporation is licensed to use certain patents and
technology owned by other companies, including some foreign companies, to
manufacture products complementary to its own products, for which it pays
royalties in amounts not considered material to the consolidated results of the
enterprise. Products to which the Corporation has such rights include certain
crop protection chemicals and polymer processing machinery.
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While the existence of a patent is prima facie evidence of its validity, the
Corporation cannot assure that any of its patents will not be challenged nor can
it predict the outcome of any such challenge. The Corporation believes that no
single patent, trademark, or other individual right is of such importance,
however, that expiration or termination thereof would materially affect its
business.
Seasonal Business
With the exception of the Crop Protection business, the sales of which are
influenced by agricultural growing seasons, no material portion of any segment
of the business of the Corporation is significantly seasonal.
Customers
The Corporation does not consider any reporting segment of its business
dependent on a single customer or a few customers, the loss of any one or more
of who would have a material adverse effect on the reporting segment. No one
customer's business accounts for more than ten percent of neither the
Corporation's gross revenues nor more than ten percent of its earnings before
taxes.
Backlog
Because machinery production schedules range from about 60 days to 10 months,
backlog is significant to the Corporation's polymer processing equipment
business. Firm backlog of customers' orders for this business at the end of 2003
totaled approximately $62 million compared with $76 million at the end of 2002.
It is expected that most of the 2003 backlog will be shipped during 2004. Orders
for specialty chemicals and polymers are generally filled from inventory stocks
and thus are excluded from backlog.
Competitive Conditions
The Corporation is a major manufacturer of polymer products and specialty
products. Competition varies by product and by geographic region, except that in
rubber chemicals the market is fairly concentrated. In that market, the
Corporation believes that it is one of the three largest suppliers of rubber
chemicals in the world. In addition, the EPDM market is fairly concentrated. The
Corporation believes that it is one of the five largest suppliers of EPDM
polymers in the world, and the third largest producer of EPDM in North America.
Product performance, quality, technical and customer service, and price are all
important factors in competing in the polymer product and specialty product
businesses.
Research and Development
The Corporation conducts research and development on a worldwide basis at a
number of facilities, including field stations that are used for crop protection
research and development activities. Research and development expenditures by
the Corporation totaled $51.5 million for the year 2003, $54.3 million for the
year 2002, and $56.0 million for the year 2001.
Environmental Matters
Chemical companies are subject to extensive environmental laws and regulations
concerning, among other things, emissions to the air, discharges to land,
surface, subsurface strata and water and the generation, handling, storage,
transportation, treatment and disposal of waste and other materials and are also
subject to other federal, state and local laws and regulations regarding health
and safety matters.
Environmental Regulation. The Corporation believes that its business, operations
and facilities have been and are being operated in substantial compliance in all
material respects with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations. The ongoing operations of chemical manufacturing plants,
however, entail risks in these areas and there can be no assurance that material
costs or liabilities will not be incurred. In addition, future developments,
such as increasingly strict requirements of environmental and health and safety
laws and regulations and enforcement policies thereunder, could bring into
question the handling, manufacture, use, emission or disposal of substances or
pollutants at facilities owned, used or controlled by the Corporation or the
manufacture, use or disposal of certain products or wastes by the Corporation
and could involve potentially significant expenditures. To meet changing
permitting and regulatory standards, the Corporation may be required to make
significant site or operational modifications, potentially involving substantial
expenditures and reduction or suspension of certain operations. The Corporation
incurred $10.9 million of costs for capital projects and $30.0 million for
operating and maintenance costs related to environmental compliance at its
facilities during fiscal 2003. In fiscal 2004, the Corporation expects to incur
approximately $12.9 million of costs for capital projects and $29.7 million for
operating and maintenance costs related to environmental compliance at its
facilities. During fiscal 2003, the Corporation spent $16.6 million to clean up
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previously utilized waste disposal sites and to remediate current and past
facilities. The Corporation expects to spend approximately $17.2 million during
fiscal 2004 to clean up such waste disposal sites and to remediate current and
past facilities.
Beginning in 2003, European environmental regulations has limited the use of
lead-based heat stabilizers that until now have been essential to the
manufacture of polyvinyl chloride construction pipe. As an alternative to these
lead-based products, the Corporation has patented new technology for an
organic-based, heavy-metal-free product. Capacity has been added at the
Corporation's Lampertheim, Germany plant to produce this product. In October
2001, the International Maritime Organization passed a regulation banning the
use of TBTO in paints for ships. The regulation goes into effect one year after
25% of the member nations representing at least 25% of the world's shipping
tonnage adopt the regulation. The Corporation manufactures TBTO at its
Bergkamen, Germany plant. Sales of this product were not material in 2003.
Pesticide Regulation. The Corporation's Crop Protection business is subject to
regulation under various federal, state, and foreign laws and regulations
relating to the manufacture, sales and use of pesticide products.
In August, 1996, Congress enacted the Food Quality Protection Act of 1996
("FQPA"), which made significant changes to the Federal Insecticide, Fungicide,
and Rodenticide Act ("FIFRA"), governing U.S. sale and use of pesticide
products, and the Federal Food, Drug, and Cosmetic Act ("FFDCA"), which limits
pesticide residues on food. FQPA facilitated registrations and reregistrations
of pesticides for special (so called "minor") uses under FIFRA and authorized
collection of maintenance fees to support pesticide reregistrations.
Coordination of regulations implementing FIFRA and FFDCA is now required. Food
safety provisions of FQPA establish a single standard of safety for pesticide
residue on raw and processed foods; require that information be provided through
large food retail stores to consumers about the health risks of pesticide
residues and how to avoid them; preempt state and local food safety laws if they
are based on concentrations of pesticide residues below recently established
federal residue limits (called "tolerances"); and ensure that tolerances protect
the health of infants and children.
FFDCA, as amended by FQPA, authorizes the Environmental Protection Agency
("EPA") to set a tolerance for a pesticide in or on food at a level, which poses
"a reasonable certainty of no harm" to consumers. The EPA is required to review
all tolerances for all pesticide products by August 2006. Some of the
Corporation's products have successfully completed review, others are currently
under review and other products will be reviewed under this standard in the
future.
The European Commission ("EC") has established procedures whereby all existing
active ingredient pesticides will be reviewed. This EC regulation became
effective in 1993 and will result in a review of all commercial products. The
initial round of reviews covered ninety products, four of which are the
Corporation's products. Data from the Corporation pertaining to these products
were submitted for review in mid-2003. Other of the Corporation's products will
be reviewed in future years. The process may lead to full reregistration in
member states of the EC or may lead to some restrictions, or cancellation of
registrations if adverse data is discovered.
Employees
The Corporation had 5,521 employees on December 31, 2003.
Available Information
The Corporation's internet website address is www.cromptoncorp.com. The
Corporation makes available free of charge on or through its internet website
the Corporation's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
soon as reasonably practicable after the Corporation electronically files such
material with, or furnishes it to, the Securities and Exchange Commission
("Commission").
The Corporation's Corporate Governance Principles, Code of Business Conduct and
charters for its Audit Committee and its Organization, Compensation and
Governance Committees are available on the Corporation's website and will be
available, free of charge, to any stockholder who requests them from the
Corporation's Investor Relations Department at Crompton Corporation, 199 Benson
Road, Middlebury, CT 06749 USA. The information contained on the Corporation's
website is not incorporated by reference in this annual report on Form 10-K and
should not be considered a part of this report.
Geographic Information
The information with respect to sales and property, plant and equipment
attributable to each of the major geographic areas served by the Corporation for
each of the Corporation's last three fiscal years, is set forth in the Notes to
Consolidated Financial Statements on pages 67 and 68 of this Report.
The Corporation considers that the risks relating to operations of its foreign
subsidiaries are comparable to those of other U.S. companies, which operate
subsidiaries in developed countries. All of the Corporation's international
operations are subject to
8
fluctuations in the relative values of the currencies in the various countries
in which its activities are conducted and other risks inherent in conducting
business internationally.
ITEM 2. PROPERTIES
The following table sets forth information as to the principal operating
properties and other significant properties of the Corporation and its
subsidiaries. All properties are owned in fee except where otherwise indicated:
Location Facility Reporting Segment
- -------- -------- -----------------
UNITED STATES
Alabama
Bay Minette Plant Polymer Additives
Connecticut
Bethany Research Center Crop
Middlebury Corporate Offices, Research Center* Corporate Headquarters
Naugatuck Research Center Polymer Additives, Polymers
Pawcatuck Office, Plant, Machine Shop, Tech Center Polymer Processing Equipment
Illinois
Mapleton Plant Polymer Additives, Polymers, Other
Louisiana
Geismar Plant Crop, Polymer
Taft Plant Polymer Additives
New Jersey
Perth Amboy Plant Polymer Additives
Somerville Office, Plant, Machine Shop Polymer Processing Equipment
New York
Tarrytown Research Center* Polymer Additives, Other
North Carolina
Gastonia Plant Crop, Polymer Additives, Polymers
Pennsylvania
Petrolia Plant Other
Tennessee
Memphis Plant Polymer Additives, Other
Texas
Marshall Plant Polymer Additives
West Virginia
Morgantown Plant, Research Center Polymer Additives
INTERNATIONAL
Australia
Regency Park, S.A. Office, Machine Shop* Crop
Seven Hills Office, Laboratory* Polymers
Belgium
Antwerp Office* Crop, Polymer Additives, Polymers, Other
Brazil
Rio Claro Plant Crop, Polymer Additives, Polymers
Sao Paulo Office* Crop, Polymer Additives, Polymers
Canada
Elmira Plant Crop, Polymer Additives, Polymers
Guelph Research Center Crop, Polymer Additives, Polymers
Scarborough Plant* Polymer Additives
West Hill Plant Polymer Additives
Germany
Bergkamen Plant* Polymer Additives
Erkrath Office, Plant, Machine Shop, Tech Center Polymer Processing Equipment
Haan Office and Machine Shop Polymer Processing Equipment
Lampertheim Plant Polymer Additives
Italy
Latina Plant Crop, Polymer Additives, Polymers
9
Location Facility Reporting Segment
- -------- -------- -----------------
Korea
Ansan Plant Polymer Additives
Mexico
Altamira Plant Polymer Additives
Cuautitlan Plant Polymer Additives
The Netherlands
Ankerwag Plant Crop
Amsterdam Plant Polymer Additives, Other
Haarlem Plant Polymer Additives, Other
Koog aan de Zaan Plant Polymer Additives, Other
Republic of China
Kaohsiung Plant** Polymer Additives
Nanjing Plant (Under Construction) Polymers
Singapore Administrative, Research, Sales Office* Polymer Additives, Polymers, Other
Thailand
Mapthaphut Plant* Polymer Additives
United Kingdom
Accrington Plant*** Polymer Additives
Droitwich Plant*** Polymer Additives
Evesham Research Center Crop
Langley Office* Crop, Polymer Additives, Polymers, Other
Oldbury Office, Plant, Machine Shop Polymer Processing Equipment
- -------------
* Facility leased by the Corporation.
** Facility owned by Uniroyal Chemical Taiwan Ltd., which is 80% owned by
Uniroyal.
*** Facility owned by Baxenden Chemicals Limited, which is 53.5% owned by the
Corporation.
All facilities are considered to be in good operating condition, well
maintained, and suitable for the Corporation's requirements.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in claims, litigation, administrative proceedings
and investigations of various types in a number of jurisdictions. A number of
such matters involve, or may involve, claims for a material amount of damages
and relate to or allege environmental liabilities, including clean-up costs
associated with hazardous waste disposal sites, natural resource damages,
property damage and personal injury.
Environmental Liabilities
Each quarter, the Corporation evaluates and reviews estimates for future
remediation and other costs to determine appropriate environmental reserve
amounts. For each site, a determination is made of the specific measures that
are believed to be required to remediate the site, the estimated total cost to
carry out the remediation plan, the portion of the total remediation costs to be
borne by the Corporation and the anticipated time frame over which payments
toward the remediation plan will occur. The total amount accrued for such
environmental liabilities at December 31, 2003, was $120.7 million. The
Corporation estimates the potential liabilities to range from $109 million to
$133 million at December 31, 2003. It is reasonably possible that the
Corporation's estimates for environmental remediation liabilities may change in
the future should additional sites be identified, further remediation measures
be required or undertaken, the interpretation of current laws and regulations be
modified or additional environmental laws and regulations be enacted.
The Corporation and some of its subsidiaries have been identified by federal,
state or local governmental agencies, and by other potentially responsible
parties (a "PRP") under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or comparable state statutes, as a PRP
with respect to costs associated with waste disposal sites at various locations
in the United States. Because these regulations have been construed to authorize
joint and several liability, the EPA could seek to recover all costs involving a
waste disposal site from any one of the PRP's for such site, including the
Corporation, despite the involvement of other PRP's. In many cases, the
Corporation is one of several hundred PRPs so identified. In a few instances,
the Corporation is one of only a handful of PRPs. In certain instances, a number
of other financially responsible PRP's are also involved, and the Corporation
expects that any ultimate liability resulting from such matters will be
apportioned between the Corporation and such other parties. In addition, the
10
Corporation is involved with environmental remediation and compliance activities
at some of its current and former sites in the United States and abroad. The
more significant of these matters are described below.
Laurel Park - The EPA, the State of Connecticut, and the Laurel Park Coalition
(consisting of Uniroyal and a number of other parties) have entered into a
Consent Decree governing the design and implementation of the selected remedy
for the Laurel Park site. Remedial construction began at the Laurel Park site in
July 1996, and was completed in 1998. Operation and maintenance activities at
the site are ongoing.
Litigation brought by the Laurel Park Coalition seeking contribution to the
costs from the owner/operators of the site and later from other identified
generator parties has resulted in substantial recoveries from a number of
parties. In December 2000 and January 2001, the United States District Court for
the District of Connecticut ("District Court") issued final judgment allowing
recovery against various municipalities by the Laurel Park Coalition in the
aggregate amount of approximately $1,044,000, and declaring that the defendants
at the Laurel Park site are liable for certain stated percentages of future
response costs. As a result of a settlement with one municipality, the aggregate
amount of the outstanding judgment has been reduced to approximately $761,000.
In October 2002, the United States Second Circuit Court of Appeals ("Second
Circuit") generally affirmed the recoveries adopted by the District Court with
respect to the municipal defendants. In November 2002, the municipal defendants
filed a Petition for Rehearing En Banc with the Second Circuit which was denied
in January 2003. Immediately following this denial, the same defendants filed a
Motion to Stay Mandate for 90 days to allow them to petition the United States
Supreme Court for a writ of certiorari. In June 2003, the Petition for Writ of
Certiorari was denied and the matter was remanded to the District Court to
perform a calculation concerning interest due on response costs. The District
Court subsequently ordered mediation that was unsuccessful. The District Court
then directed the parties to submit calculations of interest in accordance with
the Second Circuit's decision.
Vertac - Uniroyal and its Canadian subsidiary, Uniroyal Chemical Co./Cie
(formerly known as Uniroyal Chemical Ltd./Ltee) were joined with others as
defendants in consolidated civil actions brought in the United States District
Court, Eastern District of Arkansas, Western Division ("Court") by the United
States of America, the State of Arkansas and Hercules Incorporated ("Hercules"),
relating to a Vertac Chemical Corporation site in Jacksonville, Arkansas.
Uniroyal has been dismissed from the litigation. On May 21, 1997, the Court
entered an order finding that Uniroyal Chemical Co./Cie is jointly and severally
liable to the United States, and finding that Hercules and Uniroyal Chemical
Co./Cie are liable to each other in contribution. On October 23, 1998, the Court
entered an order granting the United States' motion for summary judgment against
Uniroyal Chemical Co./Cie and Hercules as to the amount of its claimed removal
and remediation costs of $102.9 million at the Vertac site. Trial on the
allocation of these costs as between Uniroyal Chemical Co./Cie and Hercules was
concluded on November 6, 1998, and on February 3, 2000, the Court entered an
Order finding Uniroyal Chemical Co./Cie liable to the United States for
approximately $2,300,000 and liable to Hercules in contribution for
approximately $700,000. On April 10, 2001, the United States Court of Appeals
for the Eighth Circuit ("Appeals Court") (i) reversed a decision in favor of the
United States and against Hercules with regard to the issue of divisibility of
harm and remanded the case back to the Court for a trial on the issue; (ii)
affirmed the finding of arranger liability against Uniroyal Co./Cie; and (iii)
set aside the findings of contribution between Hercules and Uniroyal Co./Cie by
the Court pending a decision upon remand. The Appeals Court also deferred ruling
on all constitutional issues raised by Hercules and Uniroyal Co./Cie pending
subsequent findings by the Court. On June 6, 2001, the Appeals Court denied
Uniroyal Co./Cie's petition for rehearing by the full Appeals Court on the
Appeals Court's finding of arranger liability against Uniroyal Co./Cie and on
December 10, 2001, Uniroyal Co./Cie's Petition for a Writ of Certiorari to the
United States Supreme Court with regard to the issue of its arranger liability
was denied. On December 12, 2001, the Court concluded hearings pursuant to the
April 10, 2001 remand by the Appeals Court and briefing on the issue of
divisibility was completed in January 2003. A decision from the Court is
expected during the second quarter of 2004.
The Corporation intends to assert all meritorious legal defenses and all other
equitable factors which are available to it with respect to the above matters.
The resolution of these matters could have a material adverse effect on its
consolidated results of operations in any given year or other reporting period
if a number of these matters are resolved unfavorably.
Antitrust Investigations and Related Matters
Antitrust Investigations
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber chemicals
will be resolved.
11
The Company also reached agreement with the Commissioner of Competition and the
Attorney General (the "Attorney General") of Canada on March 15, 2004, regarding
a criminal antitrust investigation of the Company. The Company has agreed to
plead guilty to one count of conspiring to lessen competition unduly in the sale
and marketing of certain rubber chemicals in Canada. The Attorney General and
the Company will jointly recommend that the court impose a sentence requiring
the Company to pay a fine of $9 million Canadian (U.S. $7 million), payable in
six annual installments, without interest, beginning in 2004. If the court
accepts the joint recommendation at a hearing expected to occur in the next
several months, the Canadian investigation of the Company with respect to rubber
chemicals will be resolved.
Expected cash payments for U.S. and Canadian fines total $2.3 million in 2004;
$2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007; $16.2 million
in 2008; and $18.5 million in 2009. The Company recorded a charge of $45.2
million against results of operations for its fiscal year ended December 31,
2003, as a reserve for the payment of the U.S. and Canadian fines.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the Company
cannot predict the timing or outcome of that investigation, including the amount
of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in, coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the "Governmental
Authorities") with respect to possible antitrust violations relating to the sale
and marketing of certain other products, including ethylene propylene diene
monomer (EPDM); heat stabilizers, including tin-based stabilizers and
precursors, mixed metal stabilizers and epoxidized soybean oil (ESBO); nitrile
rubber; and urethanes and urethane chemicals. Such investigations concern
anticompetitive practices, including price fixing and customer or market
allocations, undertaken by the Company and such subsidiaries and certain of
their officers and employees. The Company and its affiliates that are subject to
the investigations have received from each of the Governmental Authorities
verbal or written assurances of conditional amnesty from prosecution and fines.
The EC's grant of conditional amnesty with respect to heat stabilizers is
presently limited to tin-based stabilizers and their precursors, but the Company
expects to be granted conditional amnesty by the EC with respect to mixed metal
stabilizers and ESBO in the near future. The assurances of amnesty are
conditioned upon several factors, including continued cooperation with the
Governmental Authorities. The Company is actively cooperating with the
Governmental Authorities regarding such investigations.
Since inception of the governmental investigations, the Company has been
conducting its own internal investigation with the assistance of special
counsel. The Company has completed its review of the matters under investigation
by the Governmental Authorities as well as all other areas of the Company's
business and products to determine compliance with applicable antitrust law and
with the Company's antitrust guidelines and policies. During the course of the
Company's internal investigation, the Company has provided the Governmental
Authorities with information regarding other areas of the Company's business and
products that may involve certain anticompetitive practices. As discussed above,
the Company has received, from each of the Governmental Authorities, verbal or
written assurances of conditional amnesty from prosecution and fines with
respect to each of such areas. In addition, the Company has completed its
internal investigation of any improper or criminal conduct by current and former
officers and employees of the Company and its affected subsidiaries. During the
course of the Company's internal investigation, the Company has strengthened its
training and compliance programs and has taken certain actions with respect to
certain employees, including termination of employment and other disciplinary
actions.
During the fiscal year ended December 31, 2003, the Company had sales of rubber
processing chemicals, including accelerators, antioxidants and antiozonants, of
$191 million; sales of EPDM of $144 million; sales of heat stabilizers,
including tin-based stabilizers and precursors, mixed metal stabilizers and
ESBO, of approximately $224 million; and sales of urethanes and urethane
chemicals of approximately $286 million. The Company's 2003 sales did not
include sales of nitrile rubber, which is no longer part of the Company's
business. The nitrile rubber business was previously part of a joint venture
between the Company and an unaffiliated company. In December 2001, the Company
sold its interest in the joint venture, which had 2001 sales of approximately
$30 million.
The Company does not expect the resolution of the rubber chemicals
investigations by the U.S. and Canada to have a material adverse effect on its
consolidated financial position. However, the resolution of any other possible
antitrust violations against the Company and certain of its subsidiaries and the
resolution of any civil claims now pending or hereafter asserted against them
may have a material adverse effect on the Company's financial condition, results
of operations and prospects. No assurances can be given regarding the outcome or
timing of these matters.
During the fiscal year ended December 31, 2003, the Company also incurred
antitrust investigation and related costs of $32.5 million (pre-tax). The
Company expects to continue to incur substantial costs until all antitrust
investigations are concluded and civil claims are resolved.
12
Civil Lawsuits
Federal Antitrust Class Actions.
The Company, individually or together with certain of its subsidiaries and other
companies, is a defendant in certain direct purchaser class action lawsuits
filed in federal courts during the period from late March, 2003 through
February, 2004 involving the sale of rubber chemicals, EPDM, plastic additives,
including heat stabilizers, impact modifiers and processing aids, and nitrile
rubber.
With respect to rubber chemicals, the Company, its subsidiary Uniroyal Chemical
Company, Inc. ("Uniroyal") and other companies are defendants in a single,
consolidated direct purchaser class action lawsuit filed in the United States
District Court, Northern District of California, by plaintiffs on behalf of
themselves and a class consisting of all persons and entities who purchased
rubber chemicals in the United States directly from any of the defendants, or
any present or former parent, subsidiary or affiliate, at any time during the
period from January 1, 1994 through the present. The consolidated class action
lawsuit consolidates six previously pending class action lawsuits filed in
California. In addition to the consolidated action, the Company, its subsidiary
Uniroyal and other companies are defendants in a single class action lawsuit,
also filed in the United States District Court, Northern District of California,
by plaintiffs on behalf of themselves and a class consisting of all persons and
entities who purchased rubber chemicals in the United States directly from any
of the defendants at any time during the period from January 1, 1994 through the
present.
With respect to EPDM, the Company, its subsidiary Uniroyal and other companies,
are defendants in a single, consolidated direct purchaser class action lawsuit
filed in the United States District Court, District of Connecticut, by
plaintiffs on behalf of themselves and a class consisting of all persons and
entities who purchased EPDM in the United States directly from any of the
defendants, or any present or former parent, subsidiary or affiliate, at any
time during the period from January 1, 1994 through December 31, 2002. The
consolidated class action lawsuit consolidates eleven previously pending class
action lawsuits filed in California, Connecticut, New Jersey and New York that
had been transferred to the United States District Court, District of
Connecticut, and coordinated for pretrial purposes by the Judicial Panel on
Multidistrict Litigation.
With respect to plastic additives, the Company and other companies are
defendants in a single, consolidated class action lawsuit filed in the United
States District Court, Eastern District of Pennsylvania, by plaintiffs on behalf
of themselves and a class consisting of all persons and entities who purchased
plastic additives in the United States directly from any of the defendants or
from any predecessors, parents, subsidiaries, or affiliates at any time during
the period from January 1, 1990 through January 31, 2003. The consolidated class
action lawsuit consolidates seven previously pending class action lawsuits filed
in Pennsylvania.
With respect to nitrile rubber, the Company, its subsidiary Uniroyal and other
companies are defendants in six class action lawsuits filed in the United States
District Court, Western District of Pennsylvania, by plaintiffs on behalf of
themselves and a class consisting of all persons and entities who purchased
nitrile rubber from any of the defendants or from any predecessors, parents,
subsidiaries, or affiliates at any time during various periods with the earliest
period commencing on January 1, 1994.
The complaints in these actions principally allege that the defendants conspired
to fix, raise, maintain or stabilize prices for rubber chemicals, EPDM, plastic
additives or nitrile rubber, as applicable, sold in the United States in
violation of Section 1 of the Sherman Act and that this caused injury to the
plaintiffs who paid artificially inflated prices for such products as a result
of such alleged anticompetitive activities. The plaintiffs seek, among other
things, treble damages of unspecified amounts, costs (including attorneys' fees)
and injunctive relief preventing further violations of the Sherman Act.
State Antitrust Class Actions.
With respect to rubber chemicals, the Company and certain of its subsidiaries
along with other companies, are defendants in nine pending putative indirect
purchaser class action lawsuits filed during the period from October, 2002
through December, 2002 in state courts in nine states. The putative class in
each of the actions comprises all persons within each of the applicable states
who purchased tires other than for resale that were manufactured using rubber
processing chemicals sold by the defendants since 1994. The complaints
principally allege that the defendants agreed to fix, raise, stabilize and
maintain the price of rubber processing chemicals used as part of the tire
manufacturing process in violation of state antitrust and consumer protection
laws and that this caused injury to individuals who paid more to purchase tires
as a result of such alleged anticompetitive activities. The plaintiffs seek,
among other things, treble damages of an unspecified amount, interest and
attorneys' fees and costs. The Company and its defendant subsidiaries have filed
motions to dismiss on substantive and personal jurisdictional grounds or answers
with respect to each of these actions. Ten previously pending rubber chemicals
class action lawsuits filed in Arizona, Kansas, Maine, Nebraska, New Mexico, New
York, North Dakota, Wisconsin and Washington D.C. have been dismissed.
13
With respect to EPDM, the Company, its sudsidiary Uniroyal and other companies
are defendants in a consolidated indirect purchaser class action lawsuit, filed
on October 31, 2003 in California. The consolidated class action lawsuit
consolidates three previously pending indirect purchaser class action lawsuits
filed in California. The putative class in this action comprises all persons or
entities in California who indirectly purchased EPDM at any time from at least
January 1, 1994 to the present. The complaint principally alleges that the
Company conspired to fix, raise, stabilize and maintain the price of EPDM and
allocate markets and customers in the United States and California in violation
of California's Cartwright Act and Unfair Competition Act and that this caused
injury to purchasers who paid more to purchase, indirectly, EPDM as a result of
such alleged anticompetitive activities. The plaintiffs seek, among other
things, treble damages of an unspecified amount, costs (including attorneys'
fees) and disgorgement of profits.
With respect to plastic additives, the Company and other companies are
defendants in a direct purchaser class action lawsuit, filed on April 8, 2003 in
Ohio, by a plaintiff on behalf of itself and a class consisting of all
individuals and entities that purchased polyvinyl chloride ("PVC") modifiers
directly from the defendants in Ohio since 1999. The complaint principally
alleges that the defendants and co-conspirators agreed to fix, raise, stabilize
and maintain the price of PVC modifiers in violation of Ohio's Valentine Act and
that this caused injury to purchasers who paid more to purchase PVC modifiers as
a result of such alleged anticompetitive activities. The plaintiff seeks, among
other things, treble damages of an unspecified amount, costs (including
attorneys' fees) and injunctive relief preventing the defendants from continuing
the unlawful activities alleged in the complaint. The parties have been advised
to meet and confer to devise an orderly discovery process.
With respect to nitrile rubber, the Company is a defendant in an indirect
purchaser class action lawsuit, filed on March 4, 2004 in California. The
putative class in this action comprises all persons or entities in California
who indirectly purchased nitrile rubber at any time from at least January 1,
1994 to the December 31, 2002. The complaint principally alleges that the
Company conspired to fix, raise, stabilize and maintain the price of nitrile
rubber and allocate markets and customers in the United States and California in
violation of California's Cartwright Act and Unfair Competition Act and that
this caused injury to purchasers who paid more to purchase, indirectly, nitrile
rubber as a result of such alleged anticompetitive activities. The plaintiffs
seek, among other things, treble damages of an unspecified amount, costs
(including attorneys' fees) and disgorgement of profits.
Federal Securities Class Actions.
Between July 18, 2003 and September 5, 2003, plaintiffs, on behalf of all
purchasers of the Company's stock during the period from October 26, 1998
through October 8, 2002, filed three federal securities class action lawsuits in
California against the Company and certain of its officers and directors. The
complaints principally allege that the defendants caused the Company's shares to
trade at artificially inflated levels through the issuance of false and
misleading financial statements in violation of federal securities laws by
inflating profits as a result of engaging in an illegal price-fixing conspiracy
with respect to rubber chemicals and that this wrongful conduct caused injury to
the plaintiffs who paid artificially inflated prices in connection with their
purchase of the Company's publicly traded securities. The plaintiffs seek, among
other things, damages of unspecified amounts, interest and attorneys' fees and
costs. Plaintiffs filed two additional federal class action lawsuits containing
substantially similar allegations in Connecticut. The plaintiffs in the three
federal court actions filed in California agreed to voluntarily dismiss these
actions and proceed instead in the two federal securities class actions filed in
Connecticut. Notices of voluntary dismissal with respect to the three federal
court actions filed in California were filed in October 2003.
Plaintiffs filed a sixth class action lawsuit in Connecticut state court on
behalf of those persons or entities who acquired the Company's common stock in
connection with the Company's merger with Witco Corp. The complaint principally
alleged that the defendants breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements in violation of federal securities
laws by inflating profits as a result of engaging in an illegal price-fixing
conspiracy with respect to rubber chemicals. The plaintiffs contended that this
wrongful conduct caused them injury by causing them to exchange their Witco
shares at artificially inflated prices and inducing them to accept as
consideration for their Witco shares, shares in a new company whose balance
sheet did not reflect its true liabilities. This action was subsequently removed
to Connecticut federal court. While a motion to remand this case to state court
was pending, plaintiffs agreed to voluntarily dismiss the action and proceed
instead in the two federal securities class actions filed in Connecticut, as
described above. A voluntary dismissal of this sixth class action lawsuit was
filed in November 2003.
The Connecticut federal court actions have been ordered to be consolidated in
Connecticut federal court. Plaintiffs' motion for the appointment of lead
plaintiff and lead plaintiff's counsel is currently pending before the court. It
is anticipated that after the court resolves plaintiffs' motion for the
appointment of lead plaintiff and lead plaintiff's counsel, the appointed
plaintiff's counsel will file a new consolidated amended class action complaint.
At that point, the court will set a briefing schedule for defendants' motions
addressed to the consolidated amended complaint.
14
Shareholder Derivative Lawsuit.
The Company and its board of directors are defendants in a shareholder
derivative lawsuit, filed on August 25, 2003 in Connecticut state court,
nominally brought on behalf of the Company. The complaint principally alleges
that the Company's directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result of
engaging in an illegal price-fixing conspiracy with respect to rubber chemicals.
The plaintiffs contend that this wrongful conduct caused the Company's financial
results to be inflated, cost the Company its credibility in the marketplace and
market share, and has and will continue to cost the Company millions of dollars
in investigative and legal fees. The plaintiffs seek, among other things,
punitive damages of an unspecified amount, prejudgment interest and attorneys'
fees and costs. On January 8, 2004, plaintiffs' counsel and defendants' counsel
filed a joint motion to stay the derivative action until 90 days after the
federal court rules on any motions to dismiss in the Connecticut federal court
securities class actions. The state court has not yet ruled on this joint
motion.
The federal and state actions described above are in early procedural stages of
litigation and, accordingly, the Company cannot predict their outcome. The
Company and its defendant subsidiaries believe that they have substantial
defenses to these actions and intend to defend vigorously all such actions.
However, the resolution of any civil claims now pending or hereafter asserted
against the Company or any of its subsidiaries could have a material adverse
effect on the Company's financial condition, results of operations and
prospects. The Company has not recorded a charge for potential liabilities and
expenses in connection with the civil claims, because it is not yet able to
reasonably estimate a reserve for such potential costs.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation are as follows:
Robert L. Wood, age 49, has served as President and Chief Executive Officer of
the Company since January 2004. Previously, Mr. Wood served for 27 years with
The Dow Chemical Company in a variety of executive capacities, most recently as
business group President for Thermosets and Dow Automotive.
Vincent A. Calarco, age 61, has served as Chairman of the Board since 1999 and
as President and Chief Executive Officer of the Registrant from 1999 to January
2004. Mr. Calarco served as President and Chief Executive Officer of Crompton &
Knowles from 1985 to 1999, and Chairman of the Board from 1986 to 1999. Mr.
Calarco has been a member of the Board of Directors of the Registrant since 1999
and was a member of the Board of Directors of Crompton & Knowles from 1985 to
1999.
Robert W. Ackley, age 62, has served as Executive Vice President, Polymer
Processing Equipment of the Registrant since 1999. Mr. Ackley served as Vice
President, Polymer Processing Equipment, of Crompton & Knowles from 1998 to 1999
and has served as President of Davis-Standard Corporation (prior to 1995,
Davis-Standard Division) since 1983.
Peter Barna, age 60, has served as Senior Vice President and Chief Financial
Officer of the Registrant since 1999. Mr. Barna served as Senior Vice President
and Chief Financial Officer of Crompton & Knowles in 1999 and as Vice
President-Finance of Crompton & Knowles from 1996 to 1999. Mr. Barna was the
Principal Accounting Officer of Crompton & Knowles from 1986 to 1999 and its
Treasurer from 1980 to 1996.
John T. Ferguson II, age 57, has served as Senior Vice President and General
Counsel of the Registrant since 1999 and served as Secretary of the Registrant
from 1999 to 2000. Mr. Ferguson served as Vice President of Crompton & Knowles
from 1996 to 1999, and General Counsel and Secretary of Crompton & Knowles from
1989 to 1999. Mr. Ferguson served as a member of the Board of Directors of the
Registrant in 1999.
Mary L. Gum, PhD., age 56, has served as Executive Vice President, Performance
Chemicals and Elastomers Group since 2003. Dr. Gum served as Executive Vice
President, OrganoSilicones Group & Urethanes, of the Registrant from 2002 to
2003 and served as Executive Vice President, OrganoSilicones Group, from 1999 to
2002.
Marvin H. Happel, age 64, has served as Senior Vice President, Organization &
Administration of the Registrant since 1999. Mr. Happel served as Vice
President-Organization and Administration of Crompton & Knowles from 1996 to
1999 and Vice President-Organization from 1986 to 1996.
15
Alfred F. Ingulli, age 62, has served as Executive Vice President, Crop
Protection and Strategy & Development, of the Registrant since 2003 and
Executive Vice President, Crop Protection, from 1999 to 2003. Mr. Ingulli served
as Vice President, Crop Protection, of Crompton & Knowles from 1998 to 1999 and
as Executive Vice President, Crop Protection of Uniroyal since 1994.
John R. Jepsen, age 48, has served as Vice President and Treasurer of the
Registrant since 1999. Mr. Jepsen served as Treasurer of Crompton & Knowles from
1998 to 1999. Mr. Jepsen served with the International Paper Company as
Assistant Treasurer, International from 1996 to 1998 and, prior to that, as
Director of Corporate Finance from 1986 to 1996.
Myles S. Odaniell, age 45, has served as Executive Vice President, Plastics and
Petroleum Additives since 2003. Previously, Mr. Odaniell served for more than 20
years with Cytec Industries/American Cyanamid Company in a variety of executive
capacities, most recently as President, Coating and Performance Chemicals and
President, Cytec Latin America.
Walter K. Ruck, age 61, has served as Senior Vice President, Europe, Africa and
Middle East since 2003, and Senior Vice President, Operations, of the Registrant
from 1999 to 2003. Mr. Ruck has served as Vice President, Operations, of
Uniroyal since 1998; and served as Vice President, Manufacturing, of Uniroyal
from 1997 to 1998. He served as Regional Vice President, Americas of Uniroyal
from 1995 to 1997 and Regional Vice President of Uniroyal from 1994 to 1995.
Barry J. Shainman, age 61, has served as Secretary of the Registrant since 2000
and has served as Assistant General Counsel of the Registrant since 1999. Mr.
Shainman served as Secretary of Uniroyal from 1998 to 2000 and has served as
Senior Corporate Counsel of Uniroyal since 1990.
Michael F. Vagnini, age 47, has served as Vice President and Controller of the
Registrant since 2002; Corporate Controller of the Registrant from 1999 to 2002
and Corporate Controller of Crompton & Knowles from 1998 to 1999. Mr. Vagnini
has served as Corporate Controller of Uniroyal since 1995.
The term of office of each of the above-named executive officers is until the
first meeting of the Board of Directors following the next annual meeting of
stockholders and until the election and qualification of his or her successor.
There is no family relationship between any of such officers, and there is no
arrangement or understanding between any of them and any other person pursuant
to which any such officer was selected as an officer.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes the range of market prices for Crompton
Corporation's common stock on the New York Stock Exchange and the amount of
dividends per share by quarter during the past two years.
2003
-----------------------------------------
First Second Third Fourth
------ ------ ----- ------
Dividends per common share $ 0.05 0.05 0.05 0.05
Market price per common share:
High $ 6.90 7.75 7.63 7.37
Low $ 3.63 3.75 5.10 5.31
2002
-----------------------------------------
First Second Third Fourth
------ ------ ----- ------
Dividends per common share $ 0.05 0.05 0.05 0.05
Market price per common share:
High $12.75 13.00 12.90 10.69
Low $ 8.46 10.25 8.81 5.44
The number of registered holders of common stock of the Company on December 31,
2003 was 5,787.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the Company for each of its last five fiscal
years follows:
(In millions of dollars, except per share data) 2003 2002 2001 2000 1999(a)(b)
--------- ------- ------- ------- ----------
Summary of Operations
Net sales $ 2,185.0 2,090.3 2,286.5 2,554.0 1,933.4
Gross profit $ 569.0 622.0 659.9 763.6 669.6
Selling, general and administrative $ 353.0 354.5 378.9 371.1 311.1
Depreciation and amortization $ 115.4 111.4 150.8 148.8 106.0
Research and development $ 51.5 54.3 56.0 59.2 57.9
Equity income $ (13.2) (7.9) (9.2) (11.4) (10.6)
Facility closures, severance and related costs $ 19.6 18.0 101.5 20.2 --
Antitrust costs $ 77.7 6.3 -- -- --
Impairment of long-lived assets $ -- -- 80.4 -- --
Acquired in-process research and development $ -- -- -- -- 195.0
Merger and related costs $ -- -- -- -- 29.5
Operating profit (loss) $ (35.0) 85.4 (98.5) 175.7 (19.3)
Interest expense $ 89.7 101.7 109.9 120.4 69.8
Loss on early extinguishment of debt $ 24.7 -- -- -- 24.6
Other expense, net (c) $ 5.4 38.0 27.2 7.1 49.2
Earnings (loss) from continuing operations
before income taxes and cumulative effect of
accounting change $ (154.8) (54.3) (235.6) 48.2 (162.9)
Income taxes (benefit) $ (36.1) (18.9) (79.9) 22.8 27.0
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (118.7) (35.4) (155.7) 25.4 (189.9)
Earnings from discontinued operations $ 26.3 50.9 31.8 63.9 14.9
Gain on sale of discontinued operations $ 111.7 -- -- -- --
Cumulative effect of accounting change $ (0.4) (299.0) -- -- --
Net earnings (loss) $ 19.0 (283.5) (123.9) 89.3 (175.0)
Per Share Statistics
Basic and Diluted
Earnings (loss) from continuing operations before
cumulative effect of accounting change $ (1.05) (0.31) (1.38) 0.22 (2.28)
Earnings from discontinued operations $ 0.23 0.44 0.28 0.56 0.18
Gain on sale of discontinued operations $ 0.99 -- -- -- --
Cumulative effect of accounting change $ -- (2.63) -- -- --
Net earnings (loss) $ 0.17 (2.50) (1.10) 0.78 (2.10)
Dividends $ 0.20 0.20 0.20 0.20 0.10
Book value $ 2.64 1.76 4.84 6.69 6.50
Common stock trading range: High $ 7.75 13.00 12.19 14.19 21.38
Low $ 3.63 5.44 6.20 6.94 7.13
Average shares outstanding (in thousands)-Basic 112,531 113,568 113,061 113,644 83,507
Average shares outstanding (in thousands)-Diluted 112,531 113,568 113,061 115,165 83,507
Financial Position
Working capital $ 109.2 365.6 412.7 624.4 390.2
Current ratio 1.2 1.5 1.6 1.9 1.4
Total assets $ 2,529.2 2,840.8 3,232.2 3,528.3 3,726.6
Total debt $ 814.7 1,256.8 1,412.0 1,493.9 1,375.5
Stockholders' equity $ 302.7 199.9 547.5 754.0 759.9
Total capital employed $ 1,117.4 1,456.7 1,959.5 2,247.9 2,135.4
Debt to total capital % 72.9 86.3 72.1 66.5 64.4
17
(In millions of dollars, except for number of employees) 2003 2002 2001 2000 1999(a)
------- ------- ------- ------- --------
Other Statistics
Net cash (used in) provided by operations $ (14.8) 201.8 205.0 210.6 88.6
Capital spending from continuing operations $ 81.7 84.3 92.3 107.1 131.8
Depreciation from continuing operations $ 100.8 99.9 119.0 116.8 81.0
Amortization from continuing operations $ 14.5 11.6 31.8 32.0 25.0
Number of employees at end of year 5,521 6,777 7,340 8,306 8,612
(a) The Company's 1999 operating results may not be comparable to its
operating results in subsequent periods due to the merger of Crompton &
Knowles Corporation and Witco Corporation on September 1, 1999.
(b) The loss on early extinguishment of debt in 1999 has been reclassified
from an extraordinary item to a component of net earnings (loss) from
continuing operations before income taxes in accordance with FASB
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections."
(c) Other expense, net includes a loss of $34.7 million on the sale of the
industrial specialties business unit in 2002, losses of $17.3 and $1.8
million on the sale of the industrial colors business unit and the nitrile
rubber joint venture, respectively, in 2001, and in 1999 a loss of $83.3
million on the sale of the textile colors business unit partially offset
by a gain of $42.1 million on the sale of the specialty ingredients
business unit.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is a global producer of specialty chemicals and polymer products and
equipment. The Company has approximately 5,500 employees worldwide and sells its
products in more than 120 countries. The Company is headquartered in Middlebury,
Connecticut. The Company operates in various markets, including automotive,
construction, agriculture, packaging and industrial rubber. Each of these
markets is impacted by a number of economic and other factors.
The primary economic factors that influence operations are industrial
production, capacity utilization, residential and commercial construction, auto
production and resin production. In addition, the Company's crop protection
business is influenced by worldwide weather conditions and its polymer
processing equipment business is influenced by capital spending cycles. The
Company also monitors the Gross National Product for key foreign economies.
During 2003, the Company experienced an increase in unit volume across many
businesses due in part to an improvement in worldwide economic conditions.
Other major factors affecting the Company's financial performance include raw
material and energy costs, selling prices and the impact of changes in foreign
exchange rates. The Company continued to experience elevated raw material and
energy costs during 2003 and does not yet see signs of abatement. Although
selling price declines were less significant in 2003 than those realized in
2002, the pricing environment remained very competitive. After three years of
softness or declines in selling prices, the Company has begun to see some
stabilization that may translate into a more favorable pricing environment in
2004. Consequently, the Company has recently announced, and is attempting to
implement, selective price increases in a number of its businesses to mitigate
the impact of higher raw material and energy costs. Although foreign exchange
rates had a favorable impact on sales in 2003, the Company realized a slightly
negative impact on earnings in 2003 primarily as a result of selling European
and Canadian manufactured products at dollar denominated prices in Asia, Latin
America and the United States.
In response to the impact of the above-mentioned external factors, the Company
has undertaken various cost reduction initiatives over the past several years
and continues to aggressively pursue cost reductions to mitigate the impact of
these factors. The latest initiative was announced in July of 2003 and is
expected to yield an additional $40 million of annual pre-tax cost savings in
2004. An important component of the Company's cost reduction efforts is its
continued expansion of its Six Sigma programs.
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber chemicals
will be resolved.
The Company also reached agreement with the Commissioner of Competition and the
Attorney General (the "Attorney General") of Canada on March 15, 2004, regarding
a criminal antitrust investigation of the Company. The Company has agreed to
plead guilty to one count of conspiring to lessen competition unduly in the sale
and marketing of certain rubber chemicals in Canada. The Attorney General and
the Company will jointly recommend that the court impose a sentence requiring
the Company to pay a fine of $9 million Canadian (U.S. $7 million), payable
in six annual installments, without interest, beginning in 2004. If the court
accepts the joint recommendation at a hearing expected to occur in the next
several months, the Canadian investigation of the Company with respect to rubber
chemicals will be resolved.
Expected cash payments for U.S. and Canadian fines total $2.3 million in 2004;
$2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007; $16.2 million
in 2008; and $18.5 million in 2009.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the Company
cannot predict the timing or outcome of that investigation, including the amount
of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the "Governmental
Authorities") with respect to possible antitrust violations relating to the sale
and marketing of certain other products, including ethylene propylene diene
monomer (EPDM); heat stabilizers, including tin-based stabilizers and
precursors, mixed metal
19
stabilizers and epoxidized soybean oil (ESBO); nitrile rubber; and urethanes and
urethane chemicals. The Company and its affiliates that are subject to the
investigations have received from each of the Governmental Authorities verbal or
written assurances of conditional amnesty from prosecution and fines.
The Company recorded pre-tax charges of $77.7 million for antitrust costs in its
consolidated statement of operations at December 31, 2003. This includes a $45.2
million charge to reserve for the payment of U.S. and Canadian fines, which
represents the present value of the expected payments of $57 million. The
Company also incurred pre-tax antitrust costs of $32.5 million associated with
antitrust investigations and related civil lawsuits. The Company expects to
continue to incur substantial costs until all antitrust investigations are
concluded and civil claims are resolved.
The Company and certain of its subsidiaries, together with other companies, are
defendants in certain federal direct purchaser and state direct and indirect
purchaser class action lawsuits principally alleging that the defendants
conspired to fix, raise, maintain or stabilize prices for rubber chemicals,
EPDM, plastic additives, including impact modifiers and processing aids, and
nitrile rubber in violation of federal and state law. The Company and certain of
its officers and directors are also defendants in federal securities class
action lawsuits principally alleging that the defendants caused the Company's
shares to trade at artificially inflated levels through the issuance of false
and misleading financial statements in violation of federal securities laws by
inflating profits as result of engaging in an illegal price fixing conspiracy
with respect to rubber chemicals. In addition, the Company and its board of
directors are defendants in a shareholder derivative lawsuit principally
alleging that the directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result of
engaging in an illegal price fixing conspiracy with respect to rubber chemicals.
These federal and state actions are in early procedural stages of litigation
and, accordingly, the Company cannot predict their outcome. The Company and its
defendant subsidiaries believe that they have substantial defenses to these
actions and intend to defend vigorously all such actions.
The Company has not recorded a charge for potential liabilities and expenses in
connection with the coordinated civil investigation by the EC or with the civil
claims, because it is not yet able to reasonably estimate a reserve for such
potential costs. The resolution of the coordinated civil investigation by the EC
and any civil claims now pending or hereafter asserted against the Company or
any of its subsidiaries could have a material adverse effect on the Company's
financial condition, results of operations and prospects.
The Company's domestic credit facility expires in October 2004. The Company is
in the process of negotiating a new credit facility and reviewing its
refinancing alternatives with several leading financial institutions. The
Company will finance its short-term operations with cash flows provided by
operations, earn-out proceeds to be received from GE related to the sale of the
OrganoSilicones business, its existing credit facilities and its accounts
receivable securitization programs. The Company expects to obtain new financing
prior to the expiration of its domestic credit facility that will provide
flexibility to cover future obligations and operating needs.
During 2003, the Company appointed a Business Ethics and Compliance Officer and
implemented a company-wide training and awareness program reaching all employees
of the Company. The goals of the Company's compliance program are to ensure that
employees comply with all legal requirements in the jurisdictions where the
Company conducts business and to ensure that all employees perform their duties
in accordance with the Company's Code of Business Conduct.
The Company's management is working diligently to ensure the Company's resources
are well allocated and that its strategies are sound and well executed. The main
goals of management are to improve business unit operating performance and
profitability, strengthen flexibility through debt reduction, improve the
Company's pricing discipline to offset cost increases, resolve pending legal
issues and continue to reduce costs through cost reduction programs, including
Six Sigma applications.
LIQUIDITY AND CAPITAL RESOURCES
During 2003, the Company's net cash used in operations was $14.8 million, of
which the most significant uses resulted from lower earnings excluding the gain
on sale of discontinued operations, decreases in accounts payable and accounts
receivable securitization, and payments for items previously accrued, including
severance, environmental and foreign income tax payments. Net cash provided by
investing activities was $547.5 million, which included proceeds from the sale
of the OrganoSilicones business of $633.4 million and capital expenditures of
$87.6 million. Net cash used in financing activities was $514.3 million, which
included net payments of indebtedness of $448.2 million, a premium paid on early
extinguishment of debt of $23.8 million, dividends paid of $22.6 million and
common stock acquired of $22.1 million. Cash flows from operating, investing and
financing activities include cash flows from discontinued operations.
On April 24, 2003, the Company entered into an agreement to sell its
OrganoSilicones business unit to a division of General Electric Company (GE) and
to acquire GE's Specialty Chemicals business. The transaction closed on July 31,
2003 and resulted in a gain of $111.7 million (net of income taxes of $175.3
million). The Company received net cash proceeds of
20
$633.4 million, which includes proceeds from its first quarterly earn-out
payment of $8.75 million less certain transaction-related fees of $18.4 million.
In addition, as part of the transaction, the Company acquired GE's Specialty
Chemicals business valued at $160 million. The Company will continue to receive
quarterly earn-out payments through September of 2006 based on the combined
performance of GE's existing Silicones business and the OrganoSilicones business
that GE acquired from the Company. The total of such payments will be a minimum
of $105 million and a maximum of $250 million, of which the minimum was recorded
on a present value basis as a receivable on the date of the transaction. The
Company will receive a minimum of $35 million of these cash payments in 2004.
Based on the performance of GE's Silicones business during the fourth quarter of
2003, the Company will receive an additional $4.5 million of earn-out proceeds
in the first quarter of 2004. The recognition of this additional gain is
contingent upon the continued favorable future performance of GE's Silicones
business, which the Company will assess on a quarterly basis.
The Company has used proceeds from this transaction primarily to reduce
indebtedness. On July 31, 2003, the Company reduced the borrowings under its
domestic credit facility from $294 million to zero and in August of 2003, the
Company repurchased $250 million of its 8.5% notes and repaid the $61.3 million
balance of its EURIBOR based bank loans. As a result of the repurchase of $250
million of its 8.5% notes in August 2003, the Company recorded a loss on early
extinguishment of debt of $24.7 million. Included in this loss is a premium of
$23.8 million and a write-off of $0.9 million related to the unamortized
discount and debt issuance costs related to the notes repurchased.
The December 31, 2003 working capital balance of $109.2 million decreased $256.4
million from the December 31, 2002 balance of $365.6 million, and the current
ratio decreased to 1.2 from 1.5 in 2002. The decreases in working capital and
the current ratio were primarily due to the classification of the assets and
liabilities related to the OrganoSilicones business as assets and liabilities
held for sale in 2002. In addition, there was an increase in notes payable
primarily due to the classification of the domestic credit facility as
short-term due to its October 2004 expiration date and an increase in income
taxes payable. These factors were partially offset by an increase in cash due to
proceeds from the sale of the OrganoSilicones business, increases in accounts
receivable, inventory and other current assets resulting in part from the
acquisition of the GE Specialty Chemicals business and a decrease in accounts
payable. Average days sales in receivables from continuing operations increased
to 28 days in 2003, versus 21 days in 2002. Excluding the accounts receivable
securitization programs, average days sales in receivables from continuing
operations decreased slightly to 64 days in 2003 versus 65 days in 2002. Average
inventory turnover from continuing operations increased slightly to 4.2 in 2003,
compared to 4.1 in 2002.
Net cash used in operations of $14.8 million decreased $216.6 million from
$201.8 million of net cash provided by operations in 2002. Key factors that
contributed to this decrease were the increase in the loss from continuing
operations of $83.2 million and the decrease in earnings from discontinued
operations of $24.6 million due to the sale of the OrganoSilicones business in
July 2003. The 2003 loss from continuing operations includes a pre-tax charge
for antitrust costs of $77.7 million as compared to a pre-tax charge of $6.3
million in 2002. Net cash used in operations was also impacted by changes in
certain working capital accounts, of which the most significant changes are
summarized below:
(In thousands) 2003 2002 Change
--------- --------- ---------
Accounts receivable $ 75,407 $ 7,858 $ 67,549
Accounts receivable - securitization (38,051) (157) (37,894)
Inventories 39,421 22,683 16,738
Accounts payable (82,220) 28,945 (111,165)
The changes in the working capital accounts shown above were impacted by the
sale of the OrganoSilicones business. In addition to the impact of the sale,
working capital decreased due to a reduction in accounts payable related to the
timing of payments in 2003 as compared to 2002. The Company expects changes in
working capital for 2004 to more closely correlate with business activity
levels. In addition, net cash provided by operations in 2002 included a
non-recurring $50 million federal income tax refund.
Depreciation and amortization, including discontinued operations, decreased to
$136.1 million in 2003 as compared to $146.6 million in 2002 primarily as a
result of the sale of the OrganoSilicones business on July 31, 2003. The Company
expects depreciation and amortization to further decline in 2004 as the annual
impact of the sale of the OrganoSilicones business is fully realized.
The Company's debt to total book capital decreased to 73% in 2003 from 86% in
2002. The decrease is due to a decrease in debt and an increase in stockholders'
equity, both of which were significantly impacted by the transaction with GE.
Capital expenditures for 2003 totaled $87.6 million compared to $100.3 million
in 2002. Capital expenditures for 2003 included $81.7 million from continuing
operations and $5.9 million from discontinued operations. Capital expenditures
for 2002 included $84.3 from continuing operations and $16 million from
discontinued operations. The decrease in capital
21
expenditures from continuing operations is primarily due to timing with respect
to certain capital spending projects and a reduction in spending. The Company
estimates that its capital expenditures for 2004 will approximate $90 to $100
million, primarily for the Company's replacement needs and improvement of
domestic and foreign facilities.
Contractual Obligations and Other Cash Requirements
The Company has obligations to make future cash payments under contracts and
commitments, including long-term debt agreements, lease obligations,
environmental liabilities and other long-term liabilities. At December 31, 2003,
the Company's long-term debt agreements included various notes, debentures and
bank loans for which payments totaling $754.0 million will be payable through
2026. The Company has $96.7 million of operating lease obligations at December
31, 2003, primarily related to the lease of office space. Such obligations are
net of future sublease income and will be expensed over the life of the related
lease contracts. The Company also has environmental liabilities, recorded on an
undiscounted basis, for future remediation, and operating and maintenance costs
directly related to remediation. The Company estimates its potential
environmental liability to range from $109 million to $133 million, and has
recorded a liability for environmental remediation of $120.7 million at December
31, 2003. As of December 31, 2003, the Company recorded a $45.2 million
antitrust reserve for the payment of U.S. and Canadian fines, which represents
the present value of the expected payments of $57 million that are payable in
six annual installments beginning in June 2004. As of December 31, 2003, the
Company had unconditional purchase commitments to purchase $1.5 million of raw
materials from outside vendors. The Company also has other miscellaneous
long-term liabilities, excluding pension and other post-retirement liabilities,
of $39.2 million.
The following table summarizes the Company's significant contractual cash
obligations as of December 31, 2003:
(In millions) Payments Due by Period
-----------------------------------------------------------------
2008 and
Contractual Obligations Total 2004 2005 2006 2007 Thereafter
--------- ------ ------- ------- ------ ----------
Long-term debt * $ 754.0 $ -- $ 350.0 $ 150.0 $ -- $ 254.0
Operating leases * 96.7 17.9 15.2 10.5 9.1 44.0
Environmental liabilities
(including current portion) * 120.7 17.2 22.6 17.3 15.1 48.5
Antitrust reserve (including
current portion) * 57.0 2.3 2.3 6.5 11.2 34.7
Unconditional purchase
obligations 1.5 1.5 -- -- -- --
Other long-term liabilities
(excluding pension and other
post-retirement liabilities) 39.2 -- 5.5 3.3 1.6 28.8
--------- ------ ------- ------- ------ ----------
Total $ 1,069.1 $ 38.9 $ 395.6 $ 187.6 $ 37.0 $ 410.0
========= ====== ======= ======= ====== ==========
* Additional information is provided in the Indebtedness, Leases, Antitrust
Investigations and Related Matters, and Contingencies footnotes in the Notes to
Consolidated Financial Statements.
In addition to the items included in the above table, the Company has accruals
related to its cost reduction programs totaling $22.8 million, from which it
expects to make cash payments of approximately $20.1 million in 2004.
During 2003, the Company made payments under its operating leases, environmental
liabilities, unconditional purchase obligations and cost reduction programs of
approximately $24.4 million, $16.6 million, $0.8 million, and $30.4 million,
respectively, which it financed from operations.
The Company also has several defined benefit pension plans, as described in the
Pension and Other Post-Retirement Benefit Plans footnote in the Notes to
Consolidated Financial Statements. The Company funds these plans based on the
minimum amounts required by law plus such amounts the Company deems appropriate.
Estimated funding requirements for the domestic pension plans are $4.6 million
for 2004 and $6.8 million for 2005. Estimated funding requirements have not been
provided for periods after 2005 due to their dependence on factors that are not
readily determinable. The Company contributed $30.9 million in 2003, which
included a special $20.9 million contribution of the Company's common stock,
which was in excess of the minimum required contribution for 2003 thereby
reducing the funding requirements for 2004 and 2005. The funding estimates for
2004 and 2005 are based upon actual December 31, 2003, asset values and the
assumption that the Company would contribute the minimum required contributions.
The funding estimates also assume pension funding relief legislation will be
extended and no other significant changes with regards to demographics,
legislation, plan provisions, or actuarial assumptions or methods to determine
the estimated funding requirements. For further information, see the Critical
Accounting Estimates section included herein.
22
The Company has post-retirement health care plans that provide health and life
insurance benefits to certain retired and active employees and their
beneficiaries, as described in the Pension and Other Post-Retirement Benefit
Plans footnote in the Notes to Consolidated Financial Statements. These plans
are generally not pre-funded and expenses are paid by the Company as incurred,
with the exception of certain inactive government related plans. Approximately
$18.4 million was paid on behalf of the plan participants for the domestic plans
in 2003. Estimated payments for the domestic plans are $19.4 million for 2004
and $20.7 million for 2005. These estimates are based on an average growth rate
of approximately 8.9% due to the estimated impact of health care cost inflation
and demographic changes. Estimated payments have not been provided for periods
after 2005 due to their dependence on factors that are not readily determinable.
The Company's domestic credit facility expires in October 2004 and was
classified as short-term at December 31, 2003. Borrowings under this facility
were $57 million at December 31, 2003. The Company's $350 million of outstanding
notes have a scheduled maturity of March 2005 and accordingly will be classified
as short-term in March 2004.
The Company also has standby letters of credit and guarantees with various
financial institutions. At December 31, 2003, the Company had $58.2 million of
outstanding letters of credit and guarantees primarily related to its
environmental remediation liabilities, insurance obligations, a potential tax
exposure and a customer guarantee. For losses that the Company believes are
probable and which are estimable, the Company has accrued for such amounts in
its consolidated balance sheets.
Sources of Cash
The Company expects to finance its continuing operations and capital spending
requirements in 2004 with cash flows provided by operations and additional
proceeds from the sale of its OrganoSilicones business. The Company does not
anticipate that it will require material uses of cash outside of the normal
course of business to support its operating needs in 2004.
In 2003, the Company received its first minimum earn-out payment from GE of
$8.75 million, which was included in net proceeds from sale of businesses. In
2004, the Company will receive $35 million of minimum earn-out payments. The
Company will also receive an additional $4.5 million of earn-out proceeds in the
first quarter of 2004 based on the performance of GE's Silicones business during
the fourth quarter of 2003. The total amount of additional proceeds in excess of
the minimum is indeterminate at this time as it is contingent upon the continued
favorable future performance of GE's Silicones business. The Company may receive
additional proceeds or could be required to refund the $4.5 million of
additional proceeds.
The Company has a five-year credit facility of $300 million, which is scheduled
to mature in October 2004. Borrowings on this facility are at various rate
options to be determined on the date of borrowing. On April 1, 2003, the Company
utilized its credit facility to repay its $165 million of 6.6% notes due in
2003. On July 31, 2003, the Company utilized a portion of the proceeds from the
transaction with GE to reduce the borrowings under its credit facility from $294
million to zero. Borrowings under this agreement amounted to $57 million at
December 31, 2003 and carried a weighted-average interest rate of 3.57%. The
Company also has arrangements with various banks for lines of credit for its
international subsidiaries aggregating $26.3 million, of which $3.7 million was
outstanding at December 31, 2003.
The Company is in the process of reviewing its refinancing alternatives with
several leading financial institutions. The Company expects to obtain new
financing prior to the expiration of its domestic credit facility.
The Company has an accounts receivable securitization program to sell up to $150
million of domestic accounts receivable to agent banks. At December 31, 2003,
$106.1 million of domestic accounts receivable had been sold under these
agreements. In addition, the Company's European subsidiaries have an agreement
to sell their eligible accounts receivable to agent banks. At December 31, 2003,
$93.3 million of international accounts receivable had been sold under these
agreements.
Debt Covenants
The Company is required to report compliance with certain financial covenants to
its lenders on a quarterly basis. Under these covenants, the Company is required
to maintain a leverage ratio (adjusted total debt to adjusted earnings before
interest, taxes, depreciation and amortization ("Bank EBITDA"), with adjustments
to both debt and earnings being made in accordance with the terms of the
domestic credit facility agreement) and an interest coverage ratio (Bank EBITDA
to interest expense). The Company also provides a security interest in certain
domestic personal property not to exceed 10% of consolidated net tangible
assets. As a result of the waiver and amendments to the domestic credit facility
agreement dated October 17, 2003 and November 10, 2003, the leverage and
interest coverage ratio covenants were modified to allow for more latitude
beginning in the third quarter of 2003. The Company was in compliance with the
financial covenants of its domestic credit facility at December 31, 2003.