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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 3, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-82822
INTERNATIONAL SPECIALTY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3807354
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
300 DELAWARE AVENUE, SUITE 303, WILMINGTON, DELAWARE 19801
(Address of principal executive offices) (Zip Code)
(302) 427-5715
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 Act). Yes / / No /X/
As of November 16, 2004, 100 shares of the registrant's common stock (par
value $.001 per share) were outstanding. There is no trading market for the
common stock of the registrant. No shares of the registrant were held by
non-affiliates.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- --------------------
OCTOBER 3, SEPT. 28, OCTOBER 3, SEPT. 28,
2004 2003* 2004* 2003*
--------- --------- --------- ---------
(THOUSANDS)
Net sales............................ $ 295,572 $ 217,821 $ 898,183 $ 679,925
Cost of products sold................ (206,168) (143,712) (607,291) (443,520)
Selling, general and administrative.. (50,041) (42,991) (152,060) (131,743)
Other operating charges.............. - - - (1,451)
Amortization of intangible assets.... (336) (144) (775) (432)
--------- --------- --------- ---------
Operating income..................... 39,027 30,974 138,057 102,779
Interest expense..................... (19,821) (18,858) (58,346) (57,799)
Investment income (loss), net........ (5,268) (5,407) (2,361) 21,477
Other expense, net................... (1,853) (2,026) (6,538) (2,114)
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle............... 12,085 4,683 70,812 64,343
Income taxes......................... (4,230) (1,653) (24,221) (21,952)
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle..... 7,855 3,030 46,591 42,391
Cumulative effect of change in
accounting principle, net of
income tax benefit of $600......... - - - (1,021)
--------- --------- --------- ---------
Net income........................... $ 7,855 $ 3,030 $ 46,591 $ 41,370
========= ========= ========= =========
* Restated - see Note 1.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 3, DECEMBER 31,
2004 2003*
---------- -----------
(THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 66,810 $ 157,637
Investments in trading securities.................. 21,951 126,307
Investments in available-for-sale securities....... 296,473 42,165
Accounts receivable, trade, less allowance of
$7,050 and $5,938 at October 3, 2004 and
December 31, 2003, respectively................. 138,456 100,586
Accounts receivable, other......................... 33,851 21,158
Receivables from related parties................... 16,772 12,085
Inventories........................................ 205,249 205,273
Deferred income tax assets......................... 27,317 25,701
Prepaid expenses................................... 5,784 5,955
---------- ----------
Total Current Assets............................. 812,663 696,867
Property, plant and equipment, net................... 611,700 599,877
Goodwill, net of accumulated amortization of $180,486 337,398 331,101
Intangible assets, net of accumulated amortization of
$1,925 and $1,150 at October 3, 2004 and
December 31, 2003, respectively.................... 18,761 8,866
Long-term loans receivable from related party........ 95,725 95,546
Other assets......................................... 67,618 61,786
---------- ----------
Total Assets......................................... $1,943,865 $1,794,043
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Short-term debt.................................... $ 9,811 $ 68
Current maturities of long-term debt............... 4,439 4,072
Accounts payable................................... 83,644 66,505
Accrued liabilities................................ 83,317 95,061
Income taxes payable............................... 24,541 32,579
---------- ----------
Total Current Liabilities........................ 205,752 198,285
---------- ----------
Long-term debt less current maturities............... 873,399 824,304
---------- ----------
Deferred income tax liabilities...................... 113,865 88,504
---------- ----------
Other liabilities.................................... 136,823 126,736
---------- ----------
Shareholder's Equity:
Common stock, $.001 par value per share;
100 shares issued and outstanding................ - -
Additional paid-in capital......................... 642,267 642,267
Accumulated deficit................................ (40,970) (87,561)
Accumulated other comprehensive income............. 12,729 1,508
---------- ----------
Total Shareholder's Equity....................... 614,026 556,214
---------- ----------
Total Liabilities and Shareholder's Equity........... $1,943,865 $1,794,043
========== ==========
* Restated - see Note 1.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
--------------------
OCTOBER 3, SEPT. 28,
2004* 2003*
--------- ---------
(THOUSANDS)
Cash provided by (used in) operating activities:
Net income................................................. $ 46,591 $ 41,370
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle.... - 1,021
Depreciation........................................... 49,634 45,176
Amortization of intangible assets...................... 775 432
Deferred income taxes.................................. 15,321 21,030
Unrealized losses on securities........................ 52,117 5,185
Increase in working capital items.......................... (41,897) (41,566)
Purchases of trading securities............................ (416,103) (273,709)
Proceeds from sales of trading securities.................. 473,853 439,707
Proceeds (repayments) from sale of accounts receivable..... 3,930 (2,560)
Change in receivable from/payable to related parties....... (4,687) (44,517)
Other, net................................................. 1,653 2,244
--------- ---------
Net cash provided by operating activities.................... 181,187 193,813
--------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisitions...................... (85,083) (55,739)
Purchases of available-for-sale securities................. (375,052) (66,259)
Proceeds from sales of available-for-sale securities....... 132,188 121,382
--------- ---------
Net cash used in investing activities........................ (327,947) (616)
--------- ---------
Cash provided by (used in) financing activities:
Net increase (decrease) in short-term debt................. 9,743 (39,658)
Proceeds from issuance of debt............................. 31,188 -
Increase in borrowings under revolving credit facility..... 20,734 -
Repayments of long-term debt............................... (3,261) (1,663)
Increase in loans to related party......................... (179) (95,295)
Debt issuance costs........................................ (2,124) -
Capital contribution from parent company................... - 1,451
--------- ---------
Net cash provided by (used in) financing activities.......... 56,101 (135,165)
--------- ---------
Effect of exchange rate fluctuations on cash and
cash equivalents........................................... (168) 3,043
--------- ---------
Net change in cash and cash equivalents...................... (90,827) 61,075
Cash and cash equivalents, beginning of period............... 157,637 35,060
--------- ---------
Cash and cash equivalents, end of period..................... $ 66,810 $ 96,135
========= =========
* Restated - see Note 1.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
INTERNATIONAL SPECIALTY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)
NINE MONTHS ENDED
--------------------
OCTOBER 3, SEPT. 28,
2004* 2003*
--------- ---------
(THOUSANDS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)................. $ 63,690 $ 60,956
Income taxes (including taxes paid pursuant to the
Tax Sharing Agreement)............................ 14,348 3,732
Acquisitions:
Estimated fair market value of assets acquired....... $ 30,421 $ 24,206
Purchase price of acquisitions....................... 27,280 13,391
-------- --------
Liabilities assumed.................................. $ 3,141 $ 10,815
======== ========
* Restated - see Note 1.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements for International Specialty Holdings
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company and its
consolidated subsidiaries at October 3, 2004, and the results of operations and
cash flows for the three and nine month periods ended October 3, 2004 and
September 28, 2003. All adjustments are of a normal recurring nature. Certain
amounts in the 2003 consolidated financial statements have been reclassified to
conform to the 2004 presentation. These consolidated financial statements should
be read in conjunction with the annual consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 (the "2003 Form 10-K").
NOTE 1. CAPITAL CONTRIBUTION FROM PARENT COMPANY
Effective July 28, 2003, the Company's parent company, International
Specialty Products Inc. ("ISP"), acquired, through a wholly owned limited
partnership, ISP Synthetic Elastomers LP, certain assets of the synthetic rubber
business of Ameripol Synpol Corporation. The synthetic elastomers business
manufactures and sells emulsified styrene butadiene rubber and related products.
Effective August 30, 2004, ISP contributed the synthetic elastomers business to
the capital of the Company. Accordingly, the Company's consolidated financial
statements include the results of the synthetic elastomers business from the
date of its acquisition by ISP. The synthetic elastomers business is being
reported as a separate business segment (see Note 13). The consolidated
financial statements as of December 31, 2003 and for the third quarter of 2003
and the first nine months of 2003 and 2004 have been restated to include the
assets and liabilities and the results of operations of the synthetic elastomers
business from July 28, 2003. As of December 31, 2003 and August 30, 2004, the
effective date of the contribution, consolidated total assets increased by $18.3
and $46.5 million, respectively. For the third quarter and first nine months of
2003, the synthetic elastomers business recorded sales of $2.7 million and a net
loss of $0.9 million. The third quarter and first nine months of 2004 include
sales of $42.8 and $116.8 million, respectively, and net income of $0.2 and $3.2
million, respectively.
NOTE 2. RELATED PARTY TRANSACTION
In August 2004, the Company entered into a loan agreement with ISP
pursuant to which the Company will allow ISP to borrow from time to time up to
$350.0 million with interest at the rate of 3.74% per annum on the outstanding
principal balance. Commencing in 2005, payment of interest is due in arrears on
the outstanding principal balance on January 31 and July 31 for each year
thereafter. This facility shall terminate August 2007, unless terminated
earlier. ISP has also agreed to enter into a loan agreement as the lender with
an entity controlled by Samuel J. Heyman on terms substantially the same as the
loan agreement between the Company and ISP. While, as of October 3, 2004 there
were no borrowings outstanding under either facility, during the third quarter
there was an outstanding balance as of any one time of as much as $27.4 million.
5
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. CREDIT FACILITIES
On April 2, 2004, the Company's wholly owned subsidiary, ISP Chemco Inc.
("ISP Chemco"), and three of its wholly owned subsidiaries, amended and restated
its June 2001 $450.0 million senior secured credit facilities (the "Senior
Credit Facilities"). The Senior Credit Facilities provide a $250.0 million term
loan with a maturity in March 2011, which replaced the $225.0 million term loan
that was due to mature in June 2008. In connection therewith, the Company
borrowed an additional $31.2 million to bring the outstanding balance of the
term loan to $250.0 million. The Senior Credit Facilities reduced the
margin-based interest rate for term loan borrowings and amended financial
covenant ratios, including the elimination of the minimum adjusted net worth
covenant. For additional information relating to the Senior Credit Facilities,
reference is made to Note 14 to consolidated financial statements contained in
the 2003 Form 10-K.
On April 15, 2004, the $225.0 million revolving credit facility under the
Senior Credit Facilities, which was to terminate in June 2006, was reduced to
$200.0 million, including a borrowing capacity not in excess of $50.0 million
for letters of credit, and the maturity was extended to April 15, 2009. In
addition, the margin-based interest rate for revolving credit borrowings was
reduced.
In April 2004, ISP Synthetic Elastomers LP entered into a $25.0 million
Financing Agreement (the "Credit Facility"), which can be increased to $35.0
million at our option. The initial borrowings under the Credit Facility were
primarily used to partially repay intercompany advances and for working capital
purposes. The Credit Facility has a maturity date of April 13, 2009, subject to
certain conditions, and is secured by a lien upon substantially all of the
assets of ISP Synthetic Elastomers LP. Availability under the Credit Facility is
based upon Eligible Accounts Receivable and Eligible Inventory, as defined in
the Credit Facility, and includes a borrowing capacity not in excess of $10.0
million for letters of credit. The Credit Facility bears interest at a floating
rate based upon the Prime Rate or LIBOR, each as defined in the Credit Facility.
The Credit Facility does not contain any required financial covenants as long as
a minimum availability requirement is met. Borrowings outstanding under the
Credit Facility, which are included in long-term debt, amounted to $20.7 million
at October 3, 2004.
NOTE 4. ACQUISITIONS
During the first quarter of 2004, ISP Chemco completed three acquisitions
in Europe to further enhance the Company's global specialty chemicals business.
The purchase price of the assets and businesses acquired totaled $27.3 million
in cash.
6
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. NEW ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
a revised FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable
Interest Entities," replacing FIN 46 which had originally been issued in January
2003. FIN No. 46R addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. The Company will be
required to apply FIN 46R to variable interests in variable interest entities
created after December 31, 2003. The Company does not currently have an interest
in a variable interest entity. Therefore, FIN 46R will not have an immediate
impact on the Company's consolidated financial statements.
In May 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-2 to
provide guidance on accounting for the effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act") for employers that
sponsor postretirement health care plans which provide prescription drug
benefits. In addition, the FSP requires those employers to provide certain
disclosures in their financial statements regarding the effect of the Act and
the related subsidy on postretirement health obligations and net periodic
postretirement benefit cost. The Company adopted the provisions of FSP FAS No.
106-2 effective for the quarterly period beginning July 5, 2004. The impact on
the Company's financial statements was insignificant.
NOTE 6. INVESTMENT INCOME (LOSS)
Investment income (loss) for the first nine months of 2004 includes a $5.5
million other than temporary impairment charge related to an available-for-sale
equity security held in the Company's investment portfolio. The Company
periodically reviews investment securities for impairment when the cost basis of
a security exceeds the market value.
7
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. COMPREHENSIVE INCOME
Third Quarter Ended Nine Months Ended
-------------------- ---------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
--------- --------- ---------- ---------
(Thousands)
Net income................................... $ 7,855 $ 3,030 $ 46,591 $ 41,370
-------- -------- --------- ---------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains arising during
the period, net of income tax
provision of $(3,254), $(5,513),
$(4,756) and $(5,693), respectively..... 6,835 10,392 9,270 8,725
Less: reclassification adjustment for
gains (losses) included in net income,
net of income tax (provision) benefit of
$(1,302), $684, $267 and $(168),
respectively............................ 2,560 (1,658) (2,662) (563)
-------- -------- --------- ---------
Total change for the period................. 4,275 12,050 11,932 9,288
-------- -------- --------- ---------
Foreign currency translation adjustment....... 2,807 (239) (711) 9,411
-------- -------- --------- ---------
Total other comprehensive income.............. 7,082 11,811 11,221 18,699
-------- -------- --------- ---------
Comprehensive income.......................... $ 14,937 $ 14,841 $ 57,812 $ 60,069
======== ======== ========= =========
Changes in the components of accumulated other comprehensive income for the
nine months ended October 3, 2004 are as follows:
Unrealized Cumulative Additional
Gains (Losses) Foreign Minimum Accumulated
On Available- Currency Pension Other
for-Sale Translation Liability Comprehensive
Securities Adjustment Adjustment Income
-------------- ----------- ---------- -------------
(Thousands)
Balance, December 31, 2003... $ (1,405) $ 9,033 $ (6,120) $ 1,508
Change for the period........ 11,932 (711) - 11,221
--------- --------- --------- ---------
Balance, October 3, 2004..... $ 10,527 $ 8,322 $ (6,120) $ 12,729
========= ========= ========= =========
8
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. INVENTORIES
Inventories comprise the following:
October 3, December 31,
2004 2003
--------- ------------
(Thousands)
Finished goods................ $118,836 $126,227
Work-in-process............... 38,544 36,415
Raw materials and supplies.... 47,869 42,631
-------- --------
Inventories................... $205,249 $205,273
======== ========
At October 3, 2004 and December 31, 2003, $64.0 and $62.7 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, the value of
inventories would have been $6.7 and $4.2 million higher at October 3, 2004 and
December 31, 2003, respectively.
NOTE 9. GOODWILL AND INTANGIBLE ASSETS
The following schedule reconciles the changes in the carrying amount of
goodwill, by business segment, for the nine months ended October 3, 2004.
Specialty Industrial Mineral Synthetic Total
Chemicals Chemicals Products Elastomers Goodwill
--------- ---------- --------- ---------- ---------
(Thousands)
Balance, December 31, 2003........ $ 279,562 $ - $ 51,539 $ - $ 331,101
Acquisitions and valuation
adjustment..................... 6,212 - - - 6,212
Translation adjustment............ 85 - - - 85
--------- ---------- --------- ---------- ---------
Balance, October 3, 2004.......... $ 285,859 $ - $ 51,539 $ - $ 337,398
========= ========== ========= ========== =========
The following is information as of October 3, 2004 and December 31,
2003 related to the Company's acquired intangible assets:
October 3, 2004 December 31, 2003
Range of ----------------------------- ----------------------------
Amortizable Gross Carrying Accumulated Gross Carrying Accumulated
Lives Amount Amortization Amount Amortization
----------- -------------- ------------ -------------- ------------
(Dollars in Thousands)
Intangible assets subject to amortization:
Patents.................................... 5- 20 years $ 669 $ (155) $ 669 $ (113)
Formulations............................... 5- 10 years 2,740 (203) - -
Unpatented technology...................... 10-15 years 1,100 (44) - -
Customer base.............................. 10-15 years 2,348 (105) - -
Non-compete agreements..................... 2- 5 years 3,419 (1,327) 1,571 (971)
EPA registrations.......................... 5 years 166 (91) 166 (66)
---------- -------- ---------- ---------
Total amortizable intangible assets...... 10,442 (1,925) 2,406 (1,150)
---------- -------- ---------- ---------
Intangible assets not subject to amortization:
Trademarks................................. 5,596 - 2,962 -
EPA registrations.......................... 4,648 - 4,648 -
---------- -------- --------- ---------
Total unamortized intangible assets...... 10,244 - 7,610 -
---------- -------- --------- ---------
Total intangible assets......................... $ 20,686 $ (1,925) $ 10,016 $ (1,150)
========== ======== ========= =========
9
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. GOODWILL AND INTANGIBLE ASSETS - (CONTINUED)
Estimated amortization expense: (Thousands)
Year ended December 31, ----------
2004................................................ $ 1,100
2005................................................ 1,301
2006................................................ 1,301
2007................................................ 1,037
2008................................................ 1,037
NOTE 10. ASSET RETIREMENT OBLIGATIONS
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations," effective
January 1, 2003. SFAS No. 143 established accounting and reporting standards for
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and the normal operation
of a long-lived asset. The Company holds long-lived assets that have legal
obligations associated with their retirement, including deep wells that require
capping, minerals quarries that require reclamation and other plant assets
subject to certain environmental regulations. As a result of adopting SFAS No.
143, effective January 1, 2003, the Company recognized an after-tax charge of
$1.0 million ($1.6 million before an income tax benefit of $0.6 million) as the
cumulative effect of a change in accounting principle, and recorded an asset
retirement obligation of $1.9 million and a net increase in property, plant and
equipment of $0.3 million.
NOTE 11. OTHER OPERATING CHARGES
In February 2003, the Company's parent company, ISP, completed a going
private transaction. As a result, the Company's stock-based compensation plans
were terminated and payments were made in accordance with the terms of that
transaction. Accordingly, holders of approximately 2.7 million vested,
in-the-money stock options outstanding and exercisable on February 28, 2003
received cash amounts aggregating $1.5 million that were recorded as
compensation expense in the first quarter of 2003.
NOTE 12. BENEFIT PLANS
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan
for certain hourly employees in the United States (the "Hourly Retirement
Plan"). Benefits under this plan are based on stated amounts for each year of
service. The Company's funding policy is consistent with the minimum funding
requirements of ERISA.
ISP Marl GmbH, a wholly owned German subsidiary of the Company, provides
a noncontributory defined benefit retirement plan for its hourly and salaried
10
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 12. BENEFIT PLANS - (CONTINUED)
employees (the "ISP Marl Plan"). Benefits under this plan are based on average
earnings over each employee's career with the Company.
The Company's net periodic pension cost for the third quarter and first
nine months of 2004 and 2003 for the Hourly Retirement Plan included the
following components:
Third Quarter Ended Nine Months Ended
------------------------- --------------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
--------- ---------- ---------- ---------
(Thousands)
Service cost............................. $ 69 $ 60 $ 207 $ 180
Interest cost............................ 523 525 1,569 1,574
Expected return on plan assets........... (736) (716) (2,208) (2,148)
Amortization of actuarial losses......... 126 98 378 294
Amortization of unrecognized prior
service cost........................... 60 69 180 208
------- -------- ------- -------
Net periodic pension cost................ $ 42 $ 36 $ 126 $ 108
======= ======== ======= =======
The Company's net periodic pension cost for the third quarter and first
nine months of 2004 and 2003 for the ISP Marl Plan included the following
components:
Third Quarter Ended Nine Months Ended
------------------------- --------------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
---------- ---------- --------- ----------
(Thousands)
Service cost............................. $ 23 $ 20 $ 69 $ 60
Interest cost............................ 48 39 144 117
Amortization of unrecognized prior
service cost........................... 1 1 3 3
------- -------- ------- -------
Net periodic pension cost................ $ 72 $ 60 $ 216 $ 180
======= ======== ======= =======
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees.
The net periodic postretirement benefit (income) cost for the third
quarter and first nine months of 2004 and 2003 included the following
components:
Third Quarter Ended Nine Months Ended
--------------------------- --------------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
---------- ------------ ---------- ---------
(Thousands)
Service cost............................. $ (9) $ 32 $ 8 $ 96
Interest cost............................ 75 156 281 467
Amortization of actuarial (gains) losses. (33) 7 (66) 21
Amortization of unrecognized prior
service cost........................... (71) (71) (213) (213)
------- -------- ------- -------
Net periodic postretirement benefit
(income) cost......................... $ (38) $ 124 $ 10 $ 371
======= ======== ======= =======
11
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 13. BUSINESS SEGMENT INFORMATION
Third Quarter Ended Nine Months Ended
--------------------- -----------------------
October 3, Sept. 28, October 3, Sept. 28,
2004 2003 2004 2003
--------- --------- --------- ----------
(Thousands)
Net sales:
Specialty Chemicals....................... $ 168,725 $ 153,464 $ 532,979 $ 470,378
Industrial Chemicals...................... 50,521 35,047 148,283 128,574
Synthetic Elastomers (1).................. 42,799 2,696 116,845 2,696
Mineral Products (2)...................... 33,527 26,614 100,076 78,277
--------- --------- --------- ---------
Net sales................................... $ 295,572 $ 217,821 $ 898,183 $ 679,925
========= ========= ========= =========
Operating income (loss):
Specialty Chemicals....................... $ 33,760 $ 29,760 $ 121,564 $ 96,697
Industrial Chemicals...................... (736) (1,221) (2,322) (5,342)
Synthetic Elastomers (1).................. 679 (1,198) 5,347 (1,198)
Mineral Products.......................... 5,528 3,496 13,580 12,233
--------- --------- --------- ---------
Total segment operating income............ 39,231 30,837 138,169 102,390
Unallocated corporate office.............. (204) 137 (112) 389
--------- --------- --------- ---------
Total operating income...................... 39,027 30,974 138,057 102,779
Interest expense, investment income (loss)
and other expense, net ................. (26,942) (26,291) (67,245) (38,436)
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle.. $ 12,085 $ 4,683 $ 70,812 $ 64,343
========= ========= ========= =========
(1) See Note 1.
(2) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $24.2 and $19.5 million for the third quarter of
2004 and 2003, respectively, and $73.3 and $59.2 million for the first nine
months of 2004 and 2003, respectively.
NOTE 14. CONTINGENCIES
For information regarding contingencies, reference is made to Note 21 to
consolidated financial statements contained in the 2003 Form 10-K.
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims") under the Comprehensive Environmental Response Compensation and
Liability Act, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed. A number of these Environmental Claims are in
the early stages or have been dormant for protracted periods.
While the Company cannot predict whether adverse decisions or events can
occur in the future, in the opinion of the Company's management, the resolution
12
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
of the Environmental Claims should not be material to the business, liquidity,
results of operations, cash flows or financial position of the Company. However,
adverse decisions or events, particularly as to increases in remedial costs,
discovery of new contamination, assertion of natural resource damages, plans for
development of the Company's Linden, New Jersey property, and the liability and
the financial responsibility of the Company's insurers and of the other parties
involved at each site and their insurers, could cause the Company to increase
its estimate of its liability or decrease its estimate of insurance recoveries
in respect of those matters. It is not currently possible to estimate the amount
or range of any additional liability.
Tax Claim Against G-I Holdings Inc.
The predecessor of ISP and certain of its domestic subsidiaries were
parties to tax sharing agreements with members of a consolidated group for
Federal income tax purposes that included G-I Holdings Inc. (the "G-I Holdings
Group") in certain prior years. Until January 1, 1997, ISP and its domestic
subsidiaries were included in the consolidated Federal income tax returns of the
G-I Holdings Group and, accordingly, would be severally liable for any tax
liability of the G-I Holdings Group in respect of those prior years. Those tax
sharing agreements are no longer applicable with respect to the tax liabilities
of ISP for periods subsequent to January 1, 1997, because neither the Company
nor any of its domestic subsidiaries are members of the G-I Holdings Group for
periods after January 1, 1997. In January 2001, G-I Holdings filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to
its asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service ("IRS") of a deficiency in the amount of $84.4 million (after
taking into account the use of net operating losses and foreign tax credits
otherwise available for use in later years) in connection with the formation in
1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants
partnership"), a partnership in which G-I Holdings held an interest. On
September 21, 2001, the IRS filed a proof of claim with respect to such
deficiency in the G-I Holdings bankruptcy against G-I Holdings and ACI Inc., a
subsidiary of G-I Holdings which also held an interest in the surfactants
partnership and also has filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. If the proof of claim is sustained, ISP
and/or certain of its subsidiaries together with G-I Holdings and several
current and former subsidiaries of G-I Holdings would be severally liable for
taxes and interest in the amount of approximately $291 million, computed as of
October 3, 2004. On May 7, 2002, G-I Holdings, together with ACI Inc., filed an
objection to the proof of claim, which objection will be heard by the United
States District Court for the District of New Jersey overseeing the G-I Holdings
bankruptcy. G-I Holdings has advised the Company that it believes that it will
prevail in this tax matter involving the surfactants partnership, although there
can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. For additional
information relating to G-I Holdings, reference is
13
INTERNATIONAL SPECIALTY HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 14. CONTINGENCIES - (CONTINUED)
made to Notes 8 and 21 to consolidated financial statements contained in the
2003 Form 10-K.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us" and "our" refer to
International Specialty Holdings Inc. and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our critical accounting
policies during the first nine months of 2004. For a discussion of our critical
accounting policies, reference is made to the "- Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
RESULTS OF OPERATIONS - THIRD QUARTER 2004 COMPARED WITH
THIRD QUARTER 2003
Overview
Effective July 28, 2003, our parent company, International Specialty
Products Inc., which we refer to as "ISP," acquired, through a wholly owned
limited partnership, ISP Synthetic Elastomers LP, certain assets of the
synthetic rubber business of Ameripol Synpol Corporation. Effective August 30,
2004, ISP contributed the synthetic elastomers business to our capital.
Accordingly, our consolidated financial statements have been restated to include
the results of the synthetic elastomers business from the date of its
acquisition by ISP (see Note 1 to consolidated financial statements).
We recorded net income of $7.9 million for the third quarter of 2004
compared with net income of $3.0 million in the third quarter of 2003. The
improved results for the third quarter of 2004 were attributable to
significantly higher operating income.
Net Sales. Net sales by business segment for the third quarter of 2004
and 2003 were:
Third Quarter Ended
-----------------------------
October 3, Sept. 28,
2004 2003
---------- ----------
(Millions)
Specialty chemicals.................... $ 168.7 $ 153.5
Industrial chemicals................... 50.5 35.0
Synthetic elastomers................... 42.8 2.7
Mineral products....................... 33.6 26.6
--------- ---------
Net sales............................ $ 295.6 $ 217.8
========= =========
Net sales for the third quarter of 2004 were $295.6 million compared
with $217.8 million in the third quarter of 2003. The $77.8 million (36%)
increase in sales resulted primarily from the synthetic elastomers business
($42.8 million), acquired during the third quarter of 2003, in addition to
higher unit volumes in all other business segments (totaling $32.4 million) and
the favorable impact of the weaker U.S. dollar ($5.2 million), primarily in
15
Europe. Specialty chemicals sales also benefited from the three acquisitions
made during the first quarter of 2004.
Gross Margin. Our gross margin in the third quarter of 2004 was 30.2%
compared with 34.0% in the third quarter of 2003. The overall margin was reduced
due to the lower margin synthetic elastomers business which had a gross margin
of 7.7% for the third quarter of 2004. The gross margin for the specialty
chemicals segment increased to 42.4% in the third quarter of 2004 from 41.5% in
the same period of 2003 as a result of the favorable impact of higher volumes
and the weaker U.S. dollar, partially offset by higher manufacturing costs,
while the gross margin for the mineral products segment increased to 26.4% from
23.0% in the third quarter of 2003 as a result of favorable pricing and the
impact of higher unit volumes. The gross margin for the industrial chemicals
segment decreased to 11.2% from 13.9% in the third quarter of 2003 primarily due
to the adverse impact of the stronger Euro on European-based manufacturing
costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased 16% in the third quarter of 2004 to $50.0 million from $43.0
million in the third quarter of 2003, however, as a percent of sales, decreased
to 16.9% from 19.7% in the third quarter of 2003, due mainly to the inclusion of
operating expenses for the synthetic elastomers business, for which operating
expenses represented only 6.0% of sales. The increase in selling, general and
administrative expenses in the third quarter of 2004 related primarily to higher
selling and distribution costs as a result of the higher sales levels.
Operating Income. Operating income (loss) by business segment for the
third quarter of 2004 and 2003 was:
Third Quarter Ended
-----------------------------
October 3, Sept. 28,
2004 2003
---------- ----------
(Millions)
Specialty chemicals.................... $ 33.8 $ 29.8
Industrial chemicals................... (0.7) (1.2)
Synthetic elastomers................... 0.7 (1.2)
Mineral products....................... 5.5 3.5
--------- ---------
Total segment operating income....... 39.3 30.9
Unallocated corporate office items..... (0.3) 0.1
--------- ---------
Operating income..................... $ 39.0 $ 31.0
========= =========
Operating income for the third quarter of 2004 was $39.0 million, a 26%
increase compared with $31.0 million in the third quarter of 2003. Operating
income for the specialty chemicals segment was $33.8 million for the third
quarter of 2004, a 13% improvement compared with $29.8 million in the third
quarter of 2003. The improved results were attributable to higher unit volumes
in the personal care product line and an improved product mix and manufacturing
efficiencies achieved in the fine chemicals product line. Operating income for
the specialty chemicals segment in the third quarter of 2004 was also favorably
impacted by the weaker U.S. dollar and, to a lesser extent, by the contribution
to income from the three specialty chemical niche acquisitions made during the
first quarter of 2004 (see "-Liquidity and Financial Condition" below).
The industrial chemicals segment recorded an operating loss of $0.7 million
in the third quarter of 2004 compared with an operating loss of $1.2 million in
the third quarter of 2003. The results were attributable to
16
favorable unit volumes and pricing, partially offset by the adverse impact of
the stronger Euro on European-based manufacturing costs.
Operating income for the synthetic elastomers segment was $0.7 million in
the third quarter of 2004 compared with an operating loss of $1.2 million in the
third quarter of 2003 after its acquisition when the business was in its
start-up phase.
Operating income for the mineral products segment was $5.5 million in the
third quarter of 2004 compared with $3.5 million in the third quarter of 2003.
The 57% improvement in operating income from the third quarter of 2003 was due
to higher unit volumes and favorable pricing, partially offset by increased
manufacturing costs and higher freight and distribution expenses.
Interest Expense. Interest expense for the third quarter of 2004 was
$19.8 million compared with $18.9 million in the same period in 2003. The higher
interest expense was attributable to higher average borrowings ($1.2 million
impact), partially offset by lower average interest rates ($0.3 million impact),
both as a result of the refinancing of our senior secured credit facility in
April 2004 (see "-Liquidity and Financial Condition" below).
Investment Income (Loss). Investment losses in the third quarter of 2004
were $5.3 million compared with investment losses of $5.4 million in the third
quarter of 2003.
Other Expense, net. Other expense, net, comprises foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating items of expense. Other expense, net, was $1.9 million in the
third quarter of 2004 compared with $2.0 million in the third quarter of 2003.
Income Taxes. In the third quarter of 2004, we recorded a provision for
income taxes of $4.2 million. Our effective tax rate for the third quarter of
2004 was 35.0%, which was consistent with an effective tax rate of 35.3% in the
third quarter of 2003.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through four reportable business segments:
specialty chemicals; industrial chemicals; synthetic elastomers; and mineral
products.
Specialty Chemicals
Sales in the third quarter of 2004 were $168.7 million compared with $153.5
million in the same period in 2003. The 10% increase in sales was mainly
attributable to higher unit volumes ($15.1 million), primarily in the personal
care and performance chemicals product lines. The favorable impact of the weaker
U.S. dollar ($3.6 million), primarily in Europe, also benefited sales. The
personal care product line experienced strong volume growth in its skin care and
oral care markets in Europe and North America. Sales for the performance
chemicals, food and personal care product lines also benefited from the three
acquisitions made during the first quarter of 2004.
17
Operating income for the specialty chemicals segment improved 13% to $33.8
million for the third quarter of 2004 compared with $29.8 million in the third
quarter of 2003. The improved results were attributable to the favorable effect
of higher unit volumes (totaling $10.6 million), mainly in the personal care and
performance chemicals product lines, and an improved product mix and
manufacturing efficiencies achieved in the fine chemicals product line.
Operating income for the specialty chemicals segment in the third quarter of
2004 was also favorably impacted by the weaker U.S. dollar ($1.2 million) and,
to a lesser extent, from the contribution to income from the three acquisitions
made during the first quarter of 2004. Partially offsetting these favorable
factors was unfavorable pricing ($3.5 million) across all product lines and
higher manufacturing costs in all product lines other than fine chemicals
(totaling $3.6 million).
Industrial Chemicals
Sales in the third quarter of 2004 were $50.5 million compared with
$35.0 million in the third quarter of 2003. The 44% increase in sales resulted
from higher unit volumes ($12.5 million), favorable pricing ($1.4 million) and
by the favorable effect of the weaker U.S. dollar ($1.6 million).
The industrial chemicals segment recorded an operating loss of $0.7 million
in the third quarter of 2004 compared with an operating loss of $1.2 million in
the third quarter of 2003. The results were attributable to the favorable impact
of higher unit volumes and favorable pricing (totaling $2.4 million), partially
offset by the adverse impact of the stronger Euro on European-based
manufacturing costs.
Synthetic Elastomers
The synthetic elastomers business was acquired by our parent company, ISP,
in July 2003 and ISP contributed this business to our company effective August
30, 2004. The synthetic elastomers business manufactures and sells emulsified
styrene butadiene rubber and related products. Since the date of its
acquisition, we have expended nearly $14 million for capital improvements for
this business.
Sales for the synthetic elastomers business segment were $42.8 million in
the third quarter of 2004 compared with $2.7 million in the third quarter of
2003 after the date of its acquisition. The synthetic elastomers business
recorded operating income of $0.7 million in the third quarter of 2004 compared
with an operating loss of $1.2 million in the third quarter of 2003 after its
acquisition when the business was in its start-up phase.
Mineral Products
Sales for the mineral products segment for the third quarter of 2004 were
$33.6 million compared with $26.6 million for the third quarter of 2003. The 26%
increase was due to higher unit volumes ($4.8 million) as a result of
industry-wide growth and also favorable pricing ($2.1 million). The sales growth
included 24% higher sales to Building Materials Corporation of America, an
affiliate which we refer to as "BMCA."
Operating income for the mineral products segment was $5.5 million in the
third quarter of 2004 compared with $3.5 million for the third quarter of 2003.
The 57% improvement from the third quarter of 2003 was primarily due to
18
the impact of the higher unit volumes and favorable pricing (totaling $3.4
million), partially offset by increased manufacturing costs and higher freight
and distribution expenses (totaling $1.4 million).
RESULTS OF OPERATIONS - FIRST NINE MONTHS 2004 COMPARED WITH
FIRST NINE MONTHS 2003
Overview
We recorded net income of $46.6 million for the first nine months of
2004 compared with net income of $41.4 million in the first nine months of 2003.
The improved results for the first nine months of 2004 were attributable to
higher operating income, partially offset by investment losses. Net income for
the first nine months of 2003 included a $1.0 million after-tax charge for the
cumulative effect of a change in accounting principle from the adoption of
Statement of Financial Accounting Standards, which we refer to as "SFAS," No.
143, "Accounting for Asset Retirement Obligations."
Net Sales. Net sales by business segment for the first nine months of 2004
and 2003 were:
Nine Months Ended
-----------------------------
October 3, Sept. 28,
2004 2003
---------- ----------
(Millions)
Specialty chemicals.................... $ 533.0 $ 470.4
Industrial chemicals................... 148.3 128.5
Synthetic elastomers................... 116.8 2.7
Mineral products....................... 100.1 78.3
--------- ---------
Net sales............................ $ 898.2 $ 679.9
========= =========
Net sales for the first nine months of 2004 were $898.2 million compared
with $679.9 million in the first nine months of 2003. The $218.3 million (32%)
increase in sales resulted primarily from the synthetic elastomers business
($116.8 million), acquired during the third quarter of 2003, in addition to
higher unit volumes in all other business segments (totaling $84.4 million). The
favorable impact of the weaker U.S. dollar ($25.8 million), primarily in Europe,
also benefited sales.
Gross Margin. Our gross margin in the first nine months of 2004 was
32.4% compared with 34.8% in the first nine months of 2003. The overall margin
was reduced due to the lower margin synthetic elastomers business which had a
gross margin of 10.1% for the first nine months of 2004. The gross margin for
the specialty chemicals segment increased to 44.5% in the first nine months of
2004 from 43.1% in the same period of 2003 as a result of the favorable impact
of higher volumes and the weaker U.S. dollar, partially offset by unfavorable
pricing. Also, the gross margin for the industrial chemicals segment increased
to 11.5% in the first nine months of 2004 from 10.7% in the same period of 2003
due to higher unit volumes and manufacturing efficiencies, partially offset by
the adverse impact of the stronger Euro on European-based manufacturing costs.
The gross margin for the mineral products segment decreased to 24.9% from 26.2%
in the first nine months of 2003 as a result of higher manufacturing costs.
Selling, General and Administrative. Selling, general and administrative
expenses increased 15% in the first nine months of 2004 to $152.1 million from
$131.7 million in the first nine months of 2003, however, as a percent of
19
sales, decreased to 16.9% from 19.4% in the first nine months of 2003, due
mainly to the inclusion of operating expenses for the synthetic elastomers
business, for which operating expenses represented only 5.5% of sales. The
increase in selling, general and administrative expenses in the first nine
months of 2004 related primarily to higher selling and distribution costs as a
result of the higher sales levels.
Other operating charges. Other operating charges of $1.5 million in the
first nine months of 2003 represented a charge for compensation expense for
stock option payments related to ISP's going private transaction in February
2003.
Operating Income. Operating income (loss) by business segment for the
first nine months of 2004 and 2003 was:
Nine Months Ended
-----------------------------
October 3, Sept. 28,
2004 2003
--------- ----------
(Millions)
Specialty chemicals.................... $ 121.6 $ 96.7
Industrial chemicals................... (2.3) (5.3)
Synthetic elastomers................... 5.3 (1.2)
Mineral products....................... 13.6 12.2
--------- ---------
Total segment operating income....... 138.2 102.4
Unallocated corporate office items..... (0.1) 0.4
--------- ---------
Operating income..................... $ 138.1 $ 102.8
========= =========
Operating income for the first nine months of 2004 was $138.1 million
compared with $102.8 million in the first nine months of 2003. Excluding the
other operating charges discussed above, operating income increased 32% to
$138.1 million from $104.3 million in the first nine months of 2003 (see
"Non-GAAP Financial Measures" below).
Operating income for the specialty chemicals segment was $121.6 million for
the first nine months of 2004 compared with $96.7 million in the first nine
months of 2003. On a comparable basis, excluding the aforementioned charges
pertaining to specialty chemicals, operating income for the segment improved 24%
to $121.6 million compared with $97.8 million in the first nine months of 2003.
The improved results were attributable to higher unit volumes in the personal
care and performance chemicals product lines and an improved product mix and
manufacturing efficiencies achieved in the fine chemicals product line.
Operating income for the specialty chemicals segment in the first nine months of
2004 was also favorably impacted by the weaker U.S. dollar ($13.0 million) and,
to a lesser extent, by the contribution to income from the three specialty
chemical niche acquisitions made during the first quarter of 2004 (see
"-Liquidity and Financial Condition" below).
The industrial chemicals segment recorded an operating loss of $2.3 million
in the first nine months of 2004. Excluding the aforementioned other operating
charges in the first nine months of 2003 pertaining to industrial chemicals, the
operating loss in the first nine months of 2003 was $5.1 million. The lower
losses were attributable to higher unit volumes and manufacturing efficiencies,
partially offset by the adverse impact of the stronger Euro on European-based
manufacturing costs.
Operating income for the synthetic elastomers segment was $5.3 million in
the first nine months of 2004 compared with an operating loss of $1.2 million
20
in the first nine months of 2003 after its acquisition when the business was in
its start-up phase.
Operating income for the mineral products segment was $13.6 million in the
first nine months of 2004. On a comparable basis, excluding other operating
charges in the first nine months of 2003 pertaining to mineral products,
operating income was $12.4 million for the first nine months of 2003. The
improvement in operating income was due to the favorable impact of higher unit
volumes and favorable pricing, partially offset by increased manufacturing costs
and higher freight and distribution expenses.
Interest Expense. Interest expense for the first nine months of 2004 was
$58.3 million compared with $57.8 million in the same period in 2003. The higher
interest expense was attributable to higher average borrowings ($1.4 million
impact), partially offset by lower average interest rates ($0.9 million impact),
both as a result of the refinancing of our senior secured credit facility in
April 2004 (see "-Liquidity and Financial Condition" below).
Investment Income (Loss). Investment losses in the first nine months of
2004 were $2.4 million compared with investment income of $21.5 million in the
first nine months of 2003. The investment losses resulted from higher unrealized
portfolio losses, partially offset by higher realized gains. Investment losses
in the first nine months of 2004 include a $5.5 million other than temporary
impairment charge related to an available-for-sale equity security held in our
investment portfolio.
Other Expense, net. Other expense, net, comprises foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating items of expense. Other expense, net, was $6.5 million in the
first nine months of 2004 compared with $2.1 million in the first nine months of
2003. The higher expense in the first nine months of 2004 was due to unfavorable
foreign exchange.
Income Taxes. In the first nine months of 2004, we recorded a provision for
income taxes of $24.2 million. Our effective tax rate for the first nine months
of 2004 and 2003 was 34.2% and 34.1%, respectively.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our business through four reportable business segments:
specialty chemicals; industrial chemicals; synthetic elastomers; and mineral
products. The operating income for the first nine months of 2003 for each
business segment discussed below is adjusted for the non-GAAP financial measures
in the table below.
Non-GAAP Financial Measures
The business segment review below and the discussion of operating
income above contain information regarding non-GAAP financial measures contained
within the meaning of Item 10 of Regulation S-K promulgated by the Securities
and Exchange Commission. As used herein, "GAAP" refers to U.S. generally
accepted accounting principles. We use non-GAAP financial measures to eliminate
the effect of certain other operating gains and charges on reported operating
income. Management believes that these financial measures are useful to
bondholders and financial institutions because such measures exclude
21
transactions that are unusual due to their nature or infrequency and therefore
allow bondholders and financial institutions to more readily compare our
company's performance from period to period. Management uses this information in
monitoring and evaluating our company's performance and the performance of
individual business segments. The non-GAAP financial measures included herein
have been reconciled to the most directly comparable GAAP financial measure as
is required under Item 10 of Regulation S-K regarding the use of such financial
measures. These non-GAAP financial measures should be considered in addition to,
and not as a substitute, or superior to, operating income or other measures of
financial performance in accordance with U.S. generally accepted accounting
principles.
Nine Months Ended
------------------------
October 3, September 28,
2004 2003
--------- ------------
(Millions)
Reconciliation of non-GAAP financial measures:
Operating income per GAAP............................. $ 138.1 $ 102.8
Non-GAAP adjustments:
Add: Other operating charges(1)..................... - 1.5
--------- ---------
Operating income as adjusted.......................... $ 138.1 $ 104.3
========= =========
Supplemental Business Segment Information:
Operating income (loss):
Operating income per GAAP - Specialty Chemicals.... $ 121.6 $ 96.7
Non-GAAP adjustments (1)........................... - 1.1
--------- ---------
Operating income - Specialty Chemicals as adjusted. $ 121.6 $ 97.8
========= =========
Operating loss per GAAP - Industrial Chemicals..... $ (2.3) $ (5.3)
Non-GAAP adjustments (1)........................... - 0.2
--------- ---------
Operating loss - Industrial Chemicals as adjusted.. $ (2.3) $ (5.1)
========= =========
Operating income (loss) per GAAP - Synthetic
Elastomers....................................... $ 5.3 $ (1.2)
Non-GAAP adjustments (1)........................... - -
--------- ---------
Operating income (loss)- Synthetic Elastomers
as adjusted...................................... $ 5.3 $ (1.2)
========= =========
Operating income per GAAP - Mineral Products....... $ 13.6 $ 12.2
Non-GAAP adjustments (1)........................... - 0.2
--------- ---------
Operating income - Mineral Products as adjusted.... $ 13.6 $ 12.4
========= =========
Total segment operating income as adjusted......... $ 138.2 $ 103.9
Unallocated corporate office per GAAP.............. (0.1) 0.4
--------- ---------
Operating income as adjusted....................... $ 138.1 $ 104.3
========= =========
(1) Non-GAAP adjustments for the first nine months of 2003 represent an
other operating charge of $1.5 million for stock option payments related
to ISP's going private transaction.
Specialty Chemicals
Sales in the first nine months of 2004 were $533.0 million compared with
$470.4 million for the same period in 2003. The 13% increase in sales was mainly
attributable to higher unit volumes ($52.0 million), primarily in the personal
care and performance chemicals product lines. The favorable impact of
22
the weaker U.S. dollar ($19.3 million), primarily in Europe, also benefited
sales. The personal care product line experienced strong volume growth in each
of its skin care and oral care markets in Europe and North America. Sales for
the performance chemicals, food and personal care product lines also benefited
from the three acquisitions made during the first quarter of 2004.
Operating income for the specialty chemicals segment was $121.6 million for
the first nine months of 2004 compared with $96.7 million in the first nine
months of 2003. On a comparable basis, excluding the aforementioned other
operating charges pertaining to specialty chemicals, operating income for the
segment improved 24% to $121.6 million compared with $97.8 million in the first
nine months of 2003. The improved results were attributable to the favorable
effect of higher unit volumes ($31.3 million), primarily in the personal care
and performance chemicals product lines, and an improved product mix and
manufacturing efficiencies achieved in the fine chemicals product line.
Operating income for the specialty chemicals segment in the first nine months of
2004 was also favorably impacted by the weaker U.S. dollar ($13.0 million) and,
to a lesser extent, from the contribution to income from the three acquisitions
made during the first quarter of 2004. Partially offsetting these favorable
factors was unfavorable pricing ($8.7 million), higher manufacturing costs in
product lines other than fine chemicals (totaling $6.4 million) and higher
selling and distribution expenses ($7.4 million) resulting from the higher sales
levels.
Industrial Chemicals
Sales in the first nine months of 2004 were $148.3 million compared
with $128.5 million in the first nine months of 2003. The 15% increase in sales
was attributable to higher unit volumes ($12.7 million) and the favorable effect
of the weaker U.S. dollar ($6.5 million).
The industrial chemicals segment recorded an operating loss of $2.3 million
in the first nine months of 2004. Excluding the aforementioned other operating
charges in the first nine months of 2003 pertaining to industrial chemicals, the
operating loss in the first nine months of 2003 was $5.1 million. The lower
losses were attributable to the higher unit volumes and manufacturing
efficiencies (totaling $6.2 million), partially offset by the adverse impact of
the stronger Euro on European-based manufacturing costs ($4.2 million).
Synthetic Elastomers
Sales for the synthetic elastomers business segment were $116.8 million in
the first nine months of 2004 compared with $2.7 million in the portion of the
first nine months of 2003 after the date of its acquisition. The synthetic
elastomers business recorded operating income of $5.3 million in the first nine
months of 2004 compared with an operating loss of $1.2 million in the first nine
months of 2003 after its acquisition when the business was in its start-up
phase.
Mineral Products
Sales for the Mineral Products segment for the first nine months of
2004 were $100.1 million compared with $78.3 million for the first nine months
of 2003. The 28% increase was due to higher unit volumes ($19.6 million) as a
result of industry-wide growth and included 24% higher sales to BMCA.
23
Operating income for the mineral products segment was $13.6 million in the
first nine months of 2004. On a comparable basis, excluding other operating
charges in the first nine months of 2003 pertaining to mineral products,
operating income was $12.4 million for the first nine months of 2003. The 10%
improvement from the third quarter of 2003 was primarily due to the impact of
the higher unit volumes and favorable pricing (totaling $5.9 million), partially
offset by increased manufacturing costs and higher freight and distribution
expenses (totaling $4.7 million).
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
During the first nine months of 2004, our net cash outflow before
financing activities was $146.8 million, including $242.9 million of cash
utilized for net purchases of available-for-sale securities and the reinvestment
of $85.1 million for capital programs and acquisitions, partially offset by
$181.2 million of cash generated from operations.
Operating Activities. Net cash generated from operating activities totaled
$181.2 million for the first nine months of 2004 compared with $193.8 million in
the first nine months of 2003. The variation in cash flows from operating
activities was mainly attributable to activity related to purchases and sales of
trading securities in connection with our investment portfolio. In the first
nine months of 2004, there was a cash inflow of $57.8 million from net sales of
trading securities, while in the first nine months of 2003, there was a cash
inflow of $166.0 million from net sales of trading securities.
Cash from operations for the first nine months of 2004 also included a cash
investment of $41.9 million in additional working capital, including a $49.5
million increase in receivables as a result of higher sales, partially offset by
a $3.5 million decrease in inventories and a $3.9 million net increase in
payables and accrued liabilities. Operating activities also included a $4.7
million cash outflow from related party transactions, principally due to
increased receivables from BMCA as a result of higher sales of mineral products
to BMCA.
Investing Activities. Net cash used in investing activities in the first
nine months of 2004 totaled $327.9 million, primarily attributable to $242.9
million of cash used for net purchases of available-for-sale securities for our
investment portfolio. Although from time to time we may continue to make
investments in public companies, we no longer intend to pursue our prior
investment strategy which included investments primarily in international and
domestic securities of companies involved in acquisition or reorganization
transactions. As a result, we anticipate that in 2005 investment income will be
significantly lower than historical experience.
Capital expenditures in the first nine months of 2004 were $56.5 million
compared with $43.7 million in the first nine months of 2003. During the first
nine months of 2004, ISP Chemco completed three acquisitions in Europe to
further enhance our global specialty chemicals business. The purchase price of
these acquisitions totaled $27.3 million in cash.
Financing Activities. Net cash provided by financing activities in the
first nine months of 2004 totaled $56.1 million and included $9.7 million from
an increase in short-term borrowings, $31.2 million from a refinancing of ISP
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Chemco's senior secured credit facilities and $20.7 million in borrowings by ISP
Synthetic Elastomers LP under a credit facility entered into in April 2004 (see
discussion below).
On April 2, 2004, ISP Chemco and three of its wholly owned subsidiaries
amended and restated its June 2001 $450.0 million senior secured credit
facilities, which we refer to as the "Senior Credit Facilities" in order to
extend the term, increase future flexibility and reduce the effective interest
rate on borrowings. The Senior Credit Facilities provide a $250.0 million term
loan with a maturity in March 2011, which replaced the $225.0 million term loan
that was due to mature in June 2008. In connection therewith, ISP Chemco
borrowed an additional $31.2 million to bring the outstanding balance of the
term loan to $250.0 million. The Senior Credit Facilities reduced the
margin-based interest rate for term loan borrowings and amended financial
covenant ratios, including the elimination of the minimum adjusted net worth
covenant.
On April 15, 2004, the $225.0 million revolving credit facility under the
Senior Credit Facilities, which was to terminate in June 2006, was reduced to
$200.0 million, including a borrowing capacity not in excess of $50.0 million
for letters of credit, and the maturity was extended to April 15, 2009. In
addition, the margin-based interest rate for revolving credit borrowings was
reduced.
In April 2004, ISP Synthetic Elastomers LP entered into a $25.0 million
financing agreement, which we refer to as the "Credit Facility," which can be
increased to $35.0 million at our option. The initial borrowings under the
Credit Facility were primarily used to partially repay intercompany advances and
for working capital purposes. The Credit Facility has a maturity date of April
13, 2009, subject to certain conditions, and is secured by a lien upon
substantially all of the assets of ISP Synthetic Elastomers LP. Availability
under the Credit Facility is based upon Eligible Accounts Receivable and
Eligible Inventory, as defined in the Credit Facility, and includes a borrowing
capacity not in excess of $10.0 million for letters of credit. The Credit
Facility bears interest at a floating rate based upon the Prime Rate or LIBOR,
each as defined in the Credit Facility. The Credit Facility does not contain any
required financial covenants as long as a minimum availability requirement is
met. Borrowings outstanding under the Credit Facility, which are included in
long-term debt, amounted to $20.7 million at October 3, 2004.
As a result of the foregoing factors, cash and cash equivalents decreased
by $90.8 million during the first nine months of 2004 to $66.8 million. In
addition, the consolidated balance sheet reflects $318.4 million of trading and
available-for-sale securities at October 3, 2004.
Current Maturities of Long-Term Debt
As of October 3, 2004, our current maturities of long-term debt, scheduled
to be repaid during the twelve month period ended September 2005, totaled $4.4
million, including $2.5 million related to the term loan under the Senior Credit
Facilities.
Related Party Transaction
In August 2004, we entered into a loan agreement with ISP pursuant to
which we will allow ISP to borrow from time to time up to $350.0 million with
interest at the rate of 3.74% per annum on the outstanding principal balance.
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Commencing in 2005, payment of interest is due in arrears on the outstanding
principal balance on January 31 and July 31 for each year thereafter. This
facility shall terminate August 2007, unless terminated earlier. ISP has also
agreed to enter into a loan agreement as the lender with an entity controlled by
Samuel J. Heyman on terms substantially the same as the loan agreement between
us and ISP. While, as of October 3, 2004, there were no borrowings outstanding
under either facility, during the third quarter there was an outstanding
balance as of any one time of as much as $27.4 million.
Operating Lease Obligation
We entered into an operating lease in 1998 for an equipment sale-leaseback
transaction related to equipment at our Freetown, Massachusetts facility. The
lease had an initial term of four years and, at our option, up to three one-year
renewal periods. The third and final renewal option was exercised during the
first quarter of 2004. The lease provides for a substantial guaranteed payment
by us, adjusted at the end of each renewal period, and includes purchase and
return options at fair market values determined at the inception of the lease.
We have the right to exercise a purchase option with respect to the leased
equipment, or the equipment can be returned to the lessor and sold to a third
party. It is our current intention to exercise the purchase option and to
maintain the Freetown plant and business, and we will be evaluating financing
alternatives in that regard. Upon exercise of the purchase option in the first
quarter of 2005, we will be obligated to pay a fixed purchase price of $33.6
million.
Contractual Obligations
A contract with a multinational supplier to supply a substantial amount of
our acetylene needs to our Texas City, Texas facility expired in March 2004. As
a result, we reduced our acetylene requirements at the Texas City plant by 50%
through shifting production of acetylene-consuming products to our Calvert City,
Kentucky plant. We also entered into a long-term supply contract for the
remaining Texas City plant requirements with a local producer. Under this
contract, we are obligated to purchase specified quantities of acetylene through
the end of 2013. Pricing under this contract is on a fixed basis with escalators
related to changes in the Producer Price Index.
We also have an acetylene supply contract for our requirements of acetylene
delivery via pipeline to our Calvert City facility. The current term of this
contract expires December 31, 2009 and allows us, at our sole option, to extend
the agreement for two additional terms of five years each. We are required by
the contract to pay a monthly non-cancelable facility fee. Pricing under the
contract is on a fixed basis with escalators related to changes in the Producer
Price Index.
The annual unconditional purchase obligation related to the long-term
acetylene supply contract at the Texas City plant, together with the
non-cancelable facility fee associated with the Calvert City plant acetylene
contract is $5.1 million.
Contingencies
See Note 14 to consolidated financial statements for information regarding
contingencies.
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New Accounting Standards
In December 2003, the Financial Accounting Standards Board issued a revised
FASB Interpretation No. 46R, which we refer to as "FIN 46R," "Consolidation of
Variable Interest Entities," replacing FIN 46 which had originally been issued
in January 2003. FIN 46R addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. We will be
required to apply FIN 46R to variable interests in variable interest entities
created after December 31, 2003. Our company does not currently have an interest
in a variable interest entity. Therefore, FIN 46R will not have an immediate
impact on our consolidated financial statements.
In May 2004, the FASB issued FASB Staff Position, which we refer to as
"FSP," No. FAS 106-2 to provide guidance on accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, which we
refer to as the "Act" for employers that sponsor postretirement health care
plans which provide prescription drug benefits. In addition, the FSP requires
those employers to provide certain disclosures in their financial statements
regarding the effect of the Act and the related subsidy on postretirement health
obligations and net periodic postretirement benefit cost. We adopted the
provisions of FSP FAS No. 106-2 effective for the quarterly period beginning
July 5, 2004. The impact on our financial statements was insignificant.
* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or
phrases of similar import. Similarly, statements that describe our objectives,
plans or goals also are forward-looking statements. Our operations are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
The forward-looking statements included herein are made only as of the date of
this Quarterly Report on Form 10-Q and we undertake no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances. No assurances can be given that projected results or events will
be achieved.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 for a discussion of "Market-Sensitive
Instruments and Risk Management." As of December 31, 2003, equity-related
financial instruments employed by us to reduce market risk included long
contracts with a notional value of $282.1 million and short contracts with a
notional value of $201.7 million. At October 3, 2004, the notional value of long
contracts was $101.5 million and there were no short contracts. Such instruments
are marked-to-market each month, with unrealized gains and losses included in
the results of operations. The unrealized gains on equity-related long contracts
at December 31, 2003 and October 3, 2004 were $35.6 and $5.2 million,
respectively. The unrealized gains on equity-related short contracts was $1.5
million at December 31, 2003.
During 2003, we entered into interest rate swaps with a notional value of
$23.0 million in order to economically hedge interest rate risk associated with
investments in securities for which the market value is correlated with interest
rate changes. The interest rate swaps are marked-to-market each month, with
unrealized gains and losses included in the results of operations. At December
31, 2003 and October 3, 2004, the unrealized gains related to the interest rate
swaps were $48,000 and $165,000, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of our Chief Executive Officer (principal executive officer) and
Vice President and Controller (principal financial officer), conducted an
evaluation of the effectiveness of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the
period covered by this report. Based on this evaluation, our Chief Executive
Officer and Vice President and Controller have each concluded that, as of the
end of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act.
Internal Control Over Financial Reporting: There have not been any
changes in our internal control over financial reporting during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits:
Exhibit Number
--------------
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Principal
Executive Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Principal
Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL SPECIALTY HOLDINGS INC.
DATE: November 17, 2004 BY: /s/Sunil Kumar
----------------- --------------
Sunil Kumar
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: November 17, 2004 BY: /s/Kenneth M. McHugh
----------------- --------------------
Kenneth M. McHugh
Vice President and Controller
(Principal Financial and Chief
Accounting Officer)
30