UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10145
LYONDELL CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
| Delaware | 95-4160558 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 1221 McKinney Street, Suite 700, Houston, Texas |
77010 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 652-7200
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Number of shares of common stock outstanding as of June 30, 2004: 178,491,306
(includes common stock, $1.00 par value, and Series B common stock, $1.00 par value)
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
| For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
| Millions of dollars, except per share data |
2004 |
2003 |
2004 |
2003 |
||||||||||||
| Sales and other operating revenues |
$ | 1,161 | $ | 913 | $ | 2,266 | $ | 1,902 | ||||||||
| Cost of sales |
1,084 | 866 | 2,113 | 1,822 | ||||||||||||
| Selling, general and administrative expenses |
49 | 45 | 94 | 87 | ||||||||||||
| Research and development expenses |
8 | 8 | 16 | 17 | ||||||||||||
| 1,141 | 919 | 2,223 | 1,926 | |||||||||||||
| Operating income (loss) |
20 | (6 | ) | 43 | (24 | ) | ||||||||||
| Interest expense |
(111 | ) | (102 | ) | (222 | ) | (202 | ) | ||||||||
| Interest income |
3 | 3 | 5 | 20 | ||||||||||||
| Other income (expense), net |
(3 | ) | (3 | ) | (4 | ) | 13 | |||||||||
| Loss before equity investments and income taxes |
(91 | ) | (108 | ) | (178 | ) | (193 | ) | ||||||||
| Income (loss) from equity investments: |
||||||||||||||||
| Equistar Chemicals, LP |
33 | (32 | ) | 39 | (132 | ) | ||||||||||
| LYONDELL-CITGO Refining LP |
63 | 37 | 119 | 56 | ||||||||||||
| Other |
1 | (4 | ) | 2 | (6 | ) | ||||||||||
| 97 | 1 | 160 | (82 | ) | ||||||||||||
| Income (loss) before income taxes |
6 | (107 | ) | (18 | ) | (275 | ) | |||||||||
| Provision for (benefit from) income taxes |
3 | (39 | ) | (6 | ) | (94 | ) | |||||||||
| Net income (loss) |
$ | 3 | $ | (68 | ) | $ | (12 | ) | $ | (181 | ) | |||||
| Basic and diluted earnings (loss) per share |
$ | 0.02 | $ | (0.43 | ) | $ | (0.07 | ) | $ | (1.13 | ) | |||||
See Notes to the Consolidated Financial Statements.
1
LYONDELL CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
| Millions, except shares and par value data |
June 30, 2004 |
December 31, 2003 |
||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 455 | $ | 438 | ||||
| Accounts receivable: |
||||||||
| Trade, net |
414 | 365 | ||||||
| Related parties |
83 | 84 | ||||||
| Inventories |
327 | 347 | ||||||
| Prepaid expenses and other current assets |
59 | 82 | ||||||
| Deferred tax assets |
43 | 43 | ||||||
| Total current assets |
1,381 | 1,359 | ||||||
| Property, plant and equipment, net |
2,533 | 2,640 | ||||||
| Investments and long-term receivables: |
||||||||
| Investment in Equistar Chemicals, LP |
1,002 | 965 | ||||||
| Investment in PO joint ventures |
831 | 866 | ||||||
| Investment in and receivable from LYONDELL-CITGO Refining LP |
209 | 232 | ||||||
| Other investments and long-term receivables |
88 | 85 | ||||||
| Goodwill |
1,080 | 1,080 | ||||||
| Other assets, net |
382 | 406 | ||||||
| Total assets |
$ | 7,506 | $ | 7,633 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable: |
||||||||
| Trade |
$ | 314 | $ | 284 | ||||
| Related parties |
156 | 147 | ||||||
| Accrued liabilities |
244 | 268 | ||||||
| Total current liabilities |
714 | 699 | ||||||
| Long-term debt |
4,152 | 4,151 | ||||||
| Other liabilities |
686 | 680 | ||||||
| Deferred income taxes |
768 | 792 | ||||||
| Commitments and contingencies |
||||||||
| Minority interest |
138 | 155 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $1.00 par value, 340,000,000 shares authorized, 142,330,000 shares issued |
142 | 142 | ||||||
| Series B common stock, $1.00 par value, 80,000,000 shares authorized, 37,879,455 and 36,823,421 shares issued, respectively |
38 | 37 | ||||||
| Additional paid-in capital |
1,588 | 1,571 | ||||||
| Retained deficit |
(574 | ) | (474 | ) | ||||
| Accumulated other comprehensive loss |
(98 | ) | (54 | ) | ||||
| Treasury stock, at cost, 1,718,149 and 2,360,834 shares, respectively |
(48 | ) | (66 | ) | ||||
| Total stockholders’ equity |
1,048 | 1,156 | ||||||
| Total liabilities and stockholders’ equity |
$ | 7,506 | $ | 7,633 | ||||
See Notes to the Consolidated Financial Statements.
2
LYONDELL CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the six ended June 30, |
||||||||
| Millions of dollars |
2004 |
2003 |
||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (12 | ) | $(181 | ) | |||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
127 | 118 | ||||||
| (Income) losses from equity investments |
(160 | ) | 82 | |||||
| Distributions of earnings from affiliates |
120 | 56 | ||||||
| Deferred income taxes |
(8 | ) | (92 | ) | ||||
| Gain on sale of equity interest |
— | (18 | ) | |||||
| Changes in assets and liabilities that provided (used) cash: |
||||||||
| Accounts receivable |
(56 | ) | (4 | ) | ||||
| Inventories |
17 | (14 | ) | |||||
| Accounts payable |
50 | 34 | ||||||
| Income taxes refundable, net of payable |
1 | 33 | ||||||
| Other assets and liabilities, net |
(1 | ) | 14 | |||||
| Net cash provided by operating activities |
78 | 28 | ||||||
| Cash flows from investing activities: |
||||||||
| Expenditures for property, plant and equipment |
(27 | ) | (238 | ) | ||||
| Distributions in excess of earnings from affiliates |
48 | 102 | ||||||
| Contributions and advances to affiliates |
(22 | ) | (78 | ) | ||||
| Proceeds from sale of equity interest |
— | 28 | ||||||
| Maturity of other short-term investments |
— | 25 | ||||||
| Net cash used in investing activities |
(1 | ) | (161 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Dividends paid |
(63 | ) | (57 | ) | ||||
| Issuance of long-term debt |
— | 318 | ||||||
| Repayment of long-term debt |
— | (103 | ) | |||||
| Other |
4 | (4 | ) | |||||
| Net cash (used in) provided by financing activities |
(59 | ) | 154 | |||||
| Effect of exchange rate changes on cash |
(1 | ) | 1 | |||||
| Increase in cash and cash equivalents |
17 | 22 | ||||||
| Cash and cash equivalents at beginning of period |
438 | 286 | ||||||
| Cash and cash equivalents at end of period |
$ | 455 | $ | 308 | ||||
See Notes to the Consolidated Financial Statements.
3
LYONDELL CHEMICAL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Preparation
The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell Chemical Company (“Lyondell”) in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Lyondell 2003 Annual Report on Form 10-K.
2. Employee Stock Options
In the first quarter 2003, Lyondell adopted the “fair value” method of accounting for employee stock options, the preferred method as defined by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. Lyondell is using the prospective transition method, one of three alternatives under SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, for a voluntary change to the fair value method. Under the prospective transition method, an estimate of the fair value of options granted to employees during 2003 and thereafter is charged to earnings over the related vesting periods. This change resulted in an after-tax charge of approximately $1 million for each of the six-month periods ended June 30, 2004 and 2003.
Prior to 2003, Lyondell accounted for employee stock options under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost was recognized in connection with stock options granted prior to 2003 under Lyondell’s plans. The pro forma effect on net income and earnings per share of measuring compensation expense for such grants in the manner prescribed in SFAS No. 123 is summarized in the table below:
| For the three months ended June 30, |
For the six months ended June 30, |
||||||||||||||
| Millions of dollars, except per share data |
2004 |
2003 |
2004 |
2003 |
|||||||||||
| Reported net income (loss) |
$ | 3 | $ | (68 | ) | $ | (12 | ) | $ | (181 | ) | ||||
| Add stock-based compensation expense included in net income (loss), net of tax |
— | — | 1 | 1 | |||||||||||
| Deduct stock-based compensation expense using fair value method for all awards, net of tax |
— | (2 | ) | (1 | ) | (4 | ) | ||||||||