ITEM 1 -- BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Witco Corporation (the 'Company' or 'Witco'), established in 1920, is a global manufacturer and marketer of specialty chemical products for use in a wide variety of industrial and consumer applications. Most of the Company's products are sold to industrial customers for use as additives, ingredients or intermediates that impart particular characteristics to such customers' end products. On December 31, 1998, the Company had approximately 5,700 employees worldwide.
On October 19, 1995, Witco completed the acquisition of OSi Specialties Holding Company, an entity engaged in the manufacture of silicone surfactants, organofunctional silanes, specialty fluids and amine catalysts, with manufacturing and blending facilities in West Virginia, Europe, Latin America and Asia.
In 1995, the Company completed the disposition of its Battery Parts and Carbon Black operations. These dispositions completed the Company's previously announced plan to dispose of all of the businesses of the Company's Diversified Products segment.
In September 1995, Witco announced its intention to divest its Lubricants Group. In November 1996, the Company disposed of its grease gun and motor oil portions of its Lubricants business. The Company completed the divestiture of its Lubricants Group by disposing its refinery in Bradford, Pennsylvania in the first quarter of 1997 and its Golden Bear Division in the third quarter of 1997. In addition, during the fourth quarter of 1995, a restructuring plan was initiated which addressed the shut-down of five facilities.
On December 12, 1996, the Company announced a restructuring plan to be implemented over a three year period (1997-1999). Elements of the plan include reducing fixed and variable costs, undertaking a $600 million three-year capital spending plan for new capacity, modernization, environmental and safety compliance and information systems and reducing the number of its manufacturing facilities, while consolidating related distribution, research and development and administrative centers. During 1997 and 1998, in connection with the divestiture of the Lubricants Group and the 1995 and 1996 restructuring plans, the Company closed or sold 14 manufacturing facilities, 41 warehouses and terminals, 20 sales and administrative offices and 5 research and development facilities. In addition, as part of the 1996 restructuring plan, the Company reduced its workforce by approximately 1,000 employees. At December 31, 1998, Witco conducted manufacturing operations at 36 plants worldwide, conducted sales and administrative activities at 53 sites worldwide, and was engaged in research and development activities at 21 locations worldwide.
On May 29, 1998, Witco and Ciba Specialty Chemicals Inc. swapped businesses. Witco acquired Ciba's worldwide polyvinyl chloride ('PVC') heat stabilizers business and related assets, including those located at Lampertheim, Germany. Ciba acquired Witco's global epoxy systems and adhesives business and related assets in Bergkamen, Germany, with minor production facilities in Singapore and Italy.
Effective on December 31, 1998, OSi Specialties, Inc., an indirect subsidiary of the Company, and OSi Specialties Holding Company, a direct subsidiary of the Company, merged with and into the Company.
On January 13, 1999, Witco announced the next phase of its strategic plan to become a more efficient and focused company. As a result, Witco will focus its resources on its market leadership, high growth businesses: Polymer Chemicals, OrganoSilicones and Industrial Specialties. The Refined Products business, a lower growth market leadership business, will continue as an important part of the Company's portfolio, providing cash generation. Other businesses will be operated as non-core portfolio businesses, which will be cultivated based on their success in meeting strategic and financial goals. Decisions with respect to continued ownership, disposition or other creative strategic alternatives to strengthen those businesses will be made on that basis.
On January 13, 1999, Witco also announced its intent to divest or seek a strategic alliance for its Oleochemicals and Derivatives Group. The investment banking firm of Deutsche Bank Securities was engaged in the third quarter of 1998 to assist in this effort and offering memoranda were circulated to
interested parties during January 1999. The Company expects to complete a transaction in 1999. In addition to completing the relevant operating improvement initiatives begun in 1997, Witco also announced plans to reduce non-manufacturing total operating expenses, including costs related to corporate infrastructure, consistent with the restructuring of the Witco portfolio and change in business emphasis. As of February 26, 1999, the Company has not yet determined the total expected employee reductions resulting from these actions.
The Company was incorporated in 1958 under the laws of Delaware 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. Its executive offices are located at One American Lane, Greenwich, Connecticut 06831-2559, telephone (203) 552-2000.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Reference is made to Note 17 of Notes to Financial Statements. See Item 8 -- Financial Statements and Supplementary Data following Part IV of this report.
(c) NARRATIVE DESCRIPTION OF BUSINESS
As of December 31, 1998, the Company's operations were divided among four business groups: the Polymer Chemicals Group, the OrganoSilicones Group, the Performance Chemicals Group and the Oleochemicals & Derivatives Group.
POLYMER CHEMICALS GROUP
Witco's Polymer Chemicals Group is a global leader in supplying additives and catalysts for the polymer industry. It manufactures stabilizers, lubricants, plasticizers, and peroxide catalysts, and markets UV stabilizers and anitstats, which products are used in the manufacture of PVC compounds and resins for such applications as pipes, fittings, siding and packaging materials. The Polymer Chemicals Group is also a supplier of lubricants, antioxidants and peroxide catalysts to polyolefin/polystyrene manufacturers. These resins are used extensively in a broad spectrum of applications ranging from packaging film to small appliance housings. The Polymer Chemicals Group is also a producer of aluminum alkyls, used as cocatalysts in the production of polyolefins (including polyethylene and polypropylene), which are among the world's largest volume plastics used in packaging, cars, furniture and appliances, and of organotin compounds for the production of PVC stabilizers and biocides for marine paints.
ORGANOSILICONES GROUP
The OrganoSilicones Group manufactures and sells over 500 silicone-based chemical intermediate products to manufacturers of fiberglass, reinforced plastics, polyurethane foam, textiles, coatings, automotive, adhesives, rubber, pharmaceuticals, thermoplastics, sealants, agricultural, electrical and personal care products throughout the world. In 1958, the OrganoSilicones Group (while part of Union Carbide Corporation) invented the use of silicone surfactants in the manufacture of urethane foam. This fundamental technological advance facilitated a lower-cost, continuous manufacturing method, resulting in accelerated growth in the urethane foam industry. The OrganoSilicones Group was also a pioneer in the silanes industry, and was instrumental in developing key technology for the reinforcement of plastics.
Regardless of form, most silicones share a combination of properties, including electrical resistance, ability to maintain performance across a broad range of temperatures, resistance to aging, water repellence, lubricating characteristics and relative chemical and physiological inertness. The versatility of silicone-based intermediates has led to a wide variety of applications across a broad spectrum of industries in all major countries. Examples of the OrganoSilicones Group's products include surfactants, catalysts, coupling agents, process aids and other silicone-based specialty chemicals. Surfactants also serve as wetting agents in a broad spectrum of applications and are used in personal care products (hair conditioning), coatings (for flow control and leveling) and agriculture (netting). Catalysts effect the
reaction rates and rise during the urethane foaming process. Coupling agents bond inorganic and organic materials and enhance the physical, mechanical and adhesion properties of a variety of products, including fiberglass, sealants, rubber and coatings. Process aides include foam control agents, which inhibit foam formation or reduce foam in such diverse applications as antacid tablets, fountain soda and pulp and paper processing.
PERFORMANCE CHEMICALS GROUP
The Company's Performance Chemicals Group consists of five business units: Refined Products, Petroleum Additives, Industrial Specialties, Urethane Chemicals and Baxenden, a 53.5% owned subsidiary of the Company.
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, petrolatums, microcrystalline waxes, cable compounds, and refrigeration oils, serving numerous global markets predominantly requiring food grade quality. The business' product lines serve as lubricants, emollients, moisture barriers, plasticizers and carriers and are characterized by their chemical inertness and high quality. The Refined Products business serves five major market segments: polystyrene, polymers (including polyolefin, thermoplastic elastomers and PVC applications), personal care, refrigeration oils and telecommunication cables, as well as additional minor markets.
As a result of its expanded relationship with Petro-Canada Lubricants of Mississauga, Ontario, Canada, announced on October 27, 1998, Petro-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. Refined Products' sales, marketing and distribution organization service Refined Products' and Petro-Canada's paraffinic white mineral oil customers for a variety of applications.
Petroleum Additives
The Petroleum Additives business is a manufacturer and marketer of sulfonates, primarily used as performance additives in transport and industrial lubricant applications, and as heavy fuel additives. The Witco sulfonate product line includes neutral and overbased calcium sulfonates, overbased magnesium sulfonates, neutral and overbased barium sulfonates and sodium sulfonates. These sulfonates are oil soluble surfactants, and their properties include detergency to help lubricants keep car, truck and ship engines clean with minimal wear; emulsification and corrosion protection for metalworking fluids; and corrosion protection for heavy fuels used in power generation.
Industrial Specialties
The Industrial Specialties business manufactures and sells a broad line of ethoxylated and sulfonated surfactants to a range of industries, primarily agriculture, oil field, emulsion (water based) polymers, paints and coatings; and, to a smaller extent, to personal care, soap and detergent, and textile markets. Surfactants change the surface tension (spreadability) of liquids. In agricultural applications, surfactants separate pesticides into small particles, thereby increasing their efficacy via dispersion and penetration; in the oil field, surfactants are used as demulsifiers that aid in the clean separation of oil from water.
Urethane Chemicals
The Urethane Chemicals 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 reinforcement and textiles. Polyurethane systems are used primarily by the shoe sole industry, and is a highly service intensive business.
Baxenden
Baxenden, a 53.5% owned Witco subsidiary (partner Croda Inc. at 46.5%) is engaged in the manufacture and marketing of isocyanate derivatives, polyesters and specialty polymer systems used in a wide range of applications. The major markets served by Baxenden are automotive, construction, surface coatings, leather and textile finishers. Sub-markets include coatings, adhesives, sealants, glastomers 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 isocyanate and acrylic chemistry but includes novel polyesters and esterification processes.
OLEOCHEMICALS & DERIVATIVES GROUP
The Oleochemicals & Derivatives Group is an integrated producer of surfactants based on natural fats and oils. Witco is one of North America's largest fatty acid producers, and a global leader in cationics ('quats'), amphoterics and specialty anionic and nonionic surfactants. The group supplies a myriad of industries, including personal care, home and fabric care, paper, textiles, rubber, coatings and plastic.
Basic Oleochemicals (fatty acids and glycerine) modify surfaces either as direct lubricants or emulsifiers or as intermediates for ingredients that modify surfaces. Examples of diverse applications of fatty acids include acting as lubricants in plastics; components of personal care products such as soaps, creams and lotions; and acting as curing systems for rubber.
Oleochemical derivatives are value added analogs of fatty acids produced through creative chemistry, modifying molecules to provide specialized solutions to customer performance requirements. Witco is one of the world's largest producers of quats, which are used as laundry softeners, in personal care as hair conditioners and in many other applications. Amphoteric surfactants combine detergency with natural mildness, making them ideal for shampoos, dishwashing detergents, and many other skin care, personal care and detergent products. Ethoxylated specialties, based on mono/diglycerides, like amphoteric surfactants, are based on natural compounds that clean without irritating the skin. They are used to make shampoos, body gels and similar products richer and creamier.
On January 13, 1999, the Company announced its intent to divest or seek a strategic alliance for the Oleochemicals and Derivatives Group. The investment banking firm of Deutsche Bank Securities was engaged in the third quarter of 1998 to assist in this effort and offering memoranda were circulated to interested parties during January 1999. The Company expects to complete a transaction in 1999.
RAW MATERIALS
The Company's businesses use many raw materials in the manufacture of their products. The important raw materials for each business group are as follows: the Polymer Chemicals Group: rape seed oil, tin, soybean oil and monochloroacetic and acetic acid; the OrganoSilicones Group: trichlorosilane, polyether fluids and dimethyl siloxane hydrolyzate; the Performance Chemicals Group: adipic acid, ethylene oxide, base oils, alkylates and ethylene glycol; and the Oleochemicals and Derivatives Group: tallow, lard, soybean oil and fatty acids.
Although many of the raw materials purchased by the Company are generally available from a large number of qualified suppliers, certain important raw materials are obtained from a sole-source or a few major suppliers. Major requirements for key raw materials are typically purchased pursuant to multi-year contracts. The Company is not dependent on any one supplier for a material amount of its raw material requirements; provided, however, the OrganoSilicones Group purchases, in the aggregate, approximately 40% of its raw materials from Dow Corning Corporation and Union Carbide Corporation under various long-term agreements, which terms expire at various times through 2010.
While temporary shortages of raw materials may occur occasionally, raw materials are currently readily available. However, their continuing availability and price are subject to domestic and world market and political conditions and regulations.
METHOD OF DISTRIBUTION; CUSTOMERS
Most of the Company's products are marketed directly through Witco's own sales force. Many of the Company's customers are supplied and serviced on a global basis. None of the Company's business groups are dependent to a significant extent upon a single customer or few customers and, due to the diversity of product lines in which the Company competes, no significant portion of the Company's sales or earnings is generated by a single customer.
COMPETITION
The Company operates in a highly competitive marketplace. The chemical industry has been historically competitive and these conditions are expected to continue. The Company competes worldwide on the basis of quality, price, product performance, product innovation and customer service and support.
The Company competes against a number of other companies in each of its product lines. It is not practical to discuss the Company's numerous competitors because of the diversity of the Company's products, the markets served and the worldwide business of the Company, although none of such companies compete with the Company in all of its product lines. Overall, however, the Company regards its principal product groups to be highly competitive with many other products of other producers and believes that it is an important producer and market leader of many such product groups.
PATENTS AND TRADEMARKS
The Company owns and controls patents, trade secrets, trademarks, trade names, copyrights and confidential information, which in the aggregate, are of material importance to its business. However, the Company is not materially dependent upon any single patent or trademark. The Company's trademarks are registered in the United States and in a number of foreign countries, with renewable terms of registration expiring generally between 1999 and 2019. The Company intends to renew in a timely fashion those trademarks that are renewable and deemed important to its continuing business operations. Additionally, the Company currently has approximately 2,650 patents and pending patent applications worldwide related to its continuing business operations. The Company intends to continue to file patent applications on new and emerging technologies.
RESEARCH AND DEVELOPMENT
The Company is actively engaged in research and development programs designed to develop new products, manufacturing processes, systems and technologies to enhance existing products and processes. The Company believes its investments in research and development have been an important factor in establishing and maintaining its competitive position. Witco expended approximately $74.2 million in 1998, $71.8 million in 1997 and $73.1 million in 1996 on research and development of new products and services for its continuing operations, and for improvements and new applications of existing products and services for its continuing operations.
SEASONALITY; BACKLOG
Each of the Company's business groups do not experience seasonality to any significant extent. The nature of the business conducted by each of the Company's four business groups is such that customer orders are usually filled within 30 days. Accordingly, backlog is not significant to the Company's business.
ENVIRONMENTAL MATTERS
The industries in which Witco operates have experienced increased operating costs and capital investments due to statutes and regulations at the federal, state and local levels for the protection of the environment. Witco believes that expenditures for compliance with these statutes and regulations will continue to have a significant impact upon the conduct of its business. The trend for greater environmental awareness and more stringent environmental regulations is likely to continue and while Witco cannot accurately predict how this trend will affect future operations and earnings, Witco does not believe its costs will vary significantly from those of its competitors in the chemical industry.
The Company evaluates and reviews environmental reserves for future remediation and other costs on a quarterly basis to determine appropriate reserve amounts. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation efforts. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative clean-up methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology, and the identification of additional environmental sites.
Capital expenditures related to environmental matters amounted to $47.4 million in 1998. The Company estimates that approximately $20 million will be expended on similar matters in 1999.
Reference is made to the 'Environmental Matters' section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 7 -- 'Management's Discussion and Analysis of Financial Condition and Results of Operations.'
YEAR 2000 ISSUES
Reference is made to the 'Year 2000' section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 7 -- 'Management's Discussion and Analysis of Financial Condition and Results of Operations.'
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Sales of Witco's continuing non-U.S. operations were $833 million, or 42.9% of total sales from continuing operations, for the year ended December 31, 1998. Witco's foreign subsidiaries generally manufacture products similar to the principal products manufactured domestically. Manufacturing is conducted by subsidiaries in Belgium, Brazil, Canada, Denmark, England, Germany, Italy, Mexico, the Netherlands, Singapore and Spain. In addition, the Company operates producing and other facilities in Korea, Hong Kong, Malaysia, Thailand and Indonesia.
In accordance with normal market conditions, sales made outside the United States are generally made on longer terms of payment than would be normal within the United States. Foreign operations are subject to certain risks inherent in carrying on international business, including currency devaluations and controls, export and import restrictions, inflationary factors, product supply, economic controls, nationalization and expropriation. The likelihood of such occurrences varies from country to country and is not predictable. However, the Company's primary foreign operations are based in Western Europe and other stable areas, and, therefore, the Company does not believe these risks will have a significant impact upon the Company.
Reference is made to Note 17 of Notes to Financial Statements. See Item 8 -- Financial Statements and Supplementary Data following Part IV of this report.
ITEM 2
ITEM 2 -- PROPERTIES
At December 31, 1998, Witco conducted manufacturing and other operations at 37 principal facilities worldwide, of which 18 are in the United States and 19 are in other countries. Of these principal facilities, 7 are utilized for Polymer Chemicals product manufacturing; 14 are utilized for Performance Chemicals product manufacturing; 4 are utilized for OrganoSilicones product manufactur-
ing; 6 are utilized for Oleochemicals & Derivatives product manufacturing and 6 are utilized for administrative and research purposes. All of the facilities are in good operating condition.
PRINCIPAL MANUFACTURING PLANTS AND OTHER IMPORTANT PHYSICAL PROPERTIES RELATED TO CONTINUING OPERATIONS -- LOCATIONS BY INDUSTRY SEGMENT (OWNED IN FEE EXCEPT WHERE PARENTHETICAL DATES REFER TO LEASE EXPIRATION)
POLYMER CHEMICALS GROUP
United States Mapleton MOP, Illinois Taft, Louisiana Brooklyn, New York* Marshall, Texas
International Bergkamen, Germany (2091) Lampertheim, Germany Cuatitlan, Mexico
ORGANOSILICONES GROUP
United States Sistersville, West Virginia
International Antwerp, Belgium (2019) Itatiba, Brazil Termoli, Italy
PERFORMANCE CHEMICALS GROUP
United States Perth Amboy, New Jersey Houston, Texas Fort Worth, Texas Gretna, Louisiana Harahan, Louisiana* Petrolia, Pennsylvania
International West Hill, Canada Amsterdam, the Netherlands Haarlem, the Netherlands Koog aan de Zaan, the Netherlands Soro, Denmark (2005) Accrington, England Droitwich, England Singapore
OLEOCHEMICALS & DERIVATIVES GROUP
United States Mapleton, Illinois Memphis, Tennessee Janesville, Wisconsin
International Flimby, England Steinau, Germany Granollers, Spain
In addition, the Company operates production and other facilities in Korea, Hong Kong, Malaysia, Thailand and Indonesia.
- ------------ * Manufacturing plants, for which public announcements have been made regarding the Company's intention to close or sell as part of its asset consolidation plan.
OTHER FACILITIES
ITEM 3
ITEM 3 -- LEGAL PROCEEDINGS
The Company is a potentially responsible party ('PRP') or a defendant in a number of governmental (federal, state and local) and private actions associated with the release, or suspected release, of contaminants into the environment. As a PRP, the Company may be liable for costs associated with the investigation and remediation of environmental contamination, as well as various penalties and damages to persons, property and natural resources. As of December 31, 1998, the Company was a PRP, or a defendant, in connection with 53 sites at which it is likely to incur environmental response costs as a result of actions brought against the Company pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act ('CERCLA'), the federal Resource Conservation and Recovery Act ('RCRA') or similar state or local laws. With 21 exceptions, all of these sites involve one or more other PRPs, and in most cases there are numerous other PRPs in addition to the Company. CERCLA, RCRA and the state counterparts to these federal laws authorize governments to investigate and remediate actual or suspected damage to the environment caused by the release, or suspected release, of hazardous substances into the environment, or to order the responsible parties to investigate and/or remediate such environmental damage.
The Company evaluates and reviews environmental reserves for future remediation and other costs on a regular basis to determine appropriate reserve amounts. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation efforts. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative cleanup methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology and the identification of additional environmental sites.
The Company is a defendant in five similar actions arising out of the Company's involvement in the polybutylene resin manufacturing business in the 1970's. Four of the following cases are currently pending in California state courts and one is pending in Texas state court: East Bay Municipal Utility District v. Mobil Oil Corporation, et al., filed in November 1993, and pending in Superior Court for the County of San Mateo, California; City of Santa Maria v. Shell Oil Company, et al., filed in May 1994, and pending in Superior Court for the County of San Luis Obispo, California; Alameda County Water District v. Mobil Oil Corporation, et al., filed in April 1996, and Marin Municipal Water District v. Shell Oil Company, et al., filed in May 1996, both pending in Superior Court for the County of San Mateo; and City of Austin v. Shell Oil Company, et al., filed in June 1996, and pending in the District Court of Travis County, Texas. The actions generally allege that the Company and several other defendants negligently misrepresented the performance of polybutylene pipe and fittings installed in water distribution systems. Other allegations in the California and Texas actions include breach of the California Unfair Practices Act and the Texas Deceptive Practices Act, respectively; breach of warranty, fraud and strict liability. It is possible that the Company may be named as a defendant in future actions arising out of its past involvement in the polybutylene resin manufacturing business.
The Company is not a party to any legal proceedings, including environmental matters, which it believes will have a material adverse effect on its consolidated financial position or liquidity. However, the Company's operating results or cash flow could be materially affected in future periods by the resolution of contingencies.
ITEM 4
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth information regarding executive officers of the Company as of March 4, 1999, and is included in Part I in accordance with Instruction 3 of Item 401(b) of Regulation S-K.
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PART II
ITEM 5
ITEM 5 -- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Witco's Common Stock is listed on the New York Stock Exchange. The following table reflects the high and low sales prices, as reported on such exchange for each quarterly period during the past two years:
The approximate number of holders of record of the Company's Common Stock as of February 26, 1999, was 3,981.
Dividends on the Common Stock have been declared quarterly during the past two years as follows:
ITEM 6
ITEM 6 -- SELECTED FINANCIAL DATA
The data for this item are submitted as a separate section following Part IV of this report.
ITEM 7
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The data for this item are submitted as a separate section following Part IV of this report.
ITEM 7A
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the 'Market Risk and Risk Management Policies' section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 7 -- 'Management's Discussion and Analysis of Financial Condition and Results of Operations.'
ITEM 8
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company and its subsidiaries are included in a separate section following Part IV of this report.
ITEM 9
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(A) IDENTIFICATION OF DIRECTORS
Reference is made to pages 4 through 6 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999.
(B) IDENTIFICATION OF EXECUTIVE OFFICERS
Reference is made to Part I of this Form 10-K.
(C) BUSINESS EXPERIENCE
Reference is made to pages 4 through 6 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999 and Part I of this Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Reference is made to page 13 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999.
ITEM 11
ITEM 11 -- EXECUTIVE COMPENSATION
Reference is made to the information set forth under the captions 'Outside Directors' Compensation' and 'Executive Compensation' on pages 9 and 14, respectively, of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999.
ITEM 12
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information with respect to beneficial ownership of the Company's voting securities, and rights thereto, reference is made to the information set forth under the captions 'Security Ownership of Directors and Officers' and 'Principal Shareholders' on pages 12 and 11, respectively, of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999.
ITEM 13
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS
Reference is made to the information set forth under the caption 'Outside Directors' Compensation' and 'Transactions with Management' on pages 9 and 23, respectively, of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999.
(b) CERTAIN BUSINESS RELATIONSHIPS
Reference is made to the information set forth under the captions 'Certain Business Relationships' and 'Compensation Committee Interlocks and Insider Participation' on page 10 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1999.
PART IV
ITEM 14
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2 -- The response to this portion of Item 14 is submitted as a separate section of this report.
(a) 3 -- Exhibits:
(b) Reports on Form 8-K.
(i) No reports on Form 8-K were filed during the quarter ended December 31, 1998.
(c) The Exhibits filed with this report are listed in response to Item 14(a)3.
(d) The response to this portion of Item 14 is submitted as a separate section of this report.
(1) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 1994, and such Exhibit is hereby incorporated by reference.
(2) This Exhibit was included as an exhibit to the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on March 3, 1995, and such Exhibit is hereby incorporated by reference.
(3) This Exhibit was filed as an Exhibit to the Registration Statement on Form S-3, registration number 33-45865, filed February 20, 1992, Post Effective Amendment No. 2 to the Registration Statement on Form S-3, registration number 33-58066, filed March 19, 1993, and the Registration
(footnotes on next page)
(footnotes from previous page) Statement on Form S-3, registration number 33-65203, filed January 25, 1996 and such Exhibit is incorporated herein by reference.
(4) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 1997, and such Exhibit is hereby incorporated by reference.
(5) The 1986 Stock Option Plan, as amended, was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-10715, Post-Effective Amendment No. 1 to Form S-8 effective October 3, 1988, and Post-Effective Amendment No. 2 to Form S-8 effective June 23, 1992. Such Exhibit is incorporated herein by reference.
(6) The 1989 Stock Option Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-30995 effective October 2, 1989, and Post-Effective Amendment No. 1 to Form S-8 effective June 23, 1992, and such Exhibit is hereby incorporated by reference.
(7) The 1992 Stock Option Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-48806, effective June 23, 1992, and such Exhibit is hereby incorporated by reference.
(8) The 1995 Stock Option Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-60755, effective June 30, 1995, and such Exhibit is hereby incorporated by reference.
(9) Amendment No. 1 to the 1995 Stock Option Plan for employees was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-05509, effective June 7, 1996, and such Exhibit is hereby incorporated by reference.
(10) Amendment No. 1 to the 1992 Stock Option Plan for Employees was filed as an Exhibit to the Form 10Q for the quarter ended June 30, 1998, and such Exhibit is hereby incorporated by reference.
(11) Amendment to Witco Corporation Employee Retirement Savings Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 333-66033, effective October 23, 1998; and such Exhibit is hereby incorporated by reference.
(12) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1992, and such Exhibit is hereby incorporated by reference.
(13) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended September 30, 1996, and such Exhibit is hereby incorporated by reference.
(14) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1994, and such Exhibit is hereby incorporated by reference.
(15) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1997, and such Exhibit is hereby incorporated by reference.
(16) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1995, and such Exhibit is hereby incorporated by reference.
(17) This Exhibit was filed as an Exhibit to the Registration Statement on Form S-8, registration number 333-33221, effective August 8, 1997, and such Exhibit is hereby incorporated by reference.
(18) This Exhibit was included as an exhibit to the Proxy Statement dated March 21, 1997; and such Exhibit is hereby incorporated by reference.
(19) This Exhibit was included as an exhibit to the Proxy Statement dated March 21, 1997, and such Exhibit is hereby incorporated by reference.
(20) This Exhibit was included as an exhibit to the Proxy Statement dated March 25, 1996, and such Exhibit is hereby incorporated by reference.
(21) The Power of Attorney appears on the Signature Page.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 25th day of March, 1999.
WITCO CORPORATION
By /s/ E. GARY COOK ................................... E. GARY COOK CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints E. GARY COOK, CAMILLO J. DIFRANCESCO, or EDGAR J. SMITH, JR., acting severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ANNUAL REPORT ON FORM 10-K ITEM 6, ITEM 7, ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d) INDEX OF FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1998 WITCO CORPORATION GREENWICH, CONNECTICUT
INDEX ANNUAL REPORT ON FORM 10-K ITEM 6, ITEM 7, ITEM 8, ITEM 14(a)(1) AND (2), AND ITEM 14(d) DECEMBER 31, 1998
ITEM 14(a)(1) AND (2) AND ITEM 14(d)
The following consolidated financial statements of Witco Corporation and subsidiary companies, for the year ended December 31, 1998, are included in Item 8:
The following consolidated financial statement schedule of Witco Corporation and subsidiary companies is included in Part IV, Item 14(d):
All other schedules (Nos. I, III, IV and V) for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Financial statements (and summarized financial information) of 50% or less owned persons accounted for by the equity method have been omitted because they do not, considered individually or in the aggregate, constitute a significant subsidiary.
Witco Corporation and Subsidiary Companies
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(A) Includes restructuring credits of $34.8 ($21.1 after-tax or $.37 per common share - diluted) which are the result of the reversal of significant restructuring charges, which include severance and environmental closure costs of $28.1 related to the decision to continue operations at the Petrolia facility and $15.5 related to revisions of estimates for certain plant environmental closure costs. These credits are offset by charges of $8.8 primarily associated with the company's global systems implementation and charges related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes other non-recurring charges of $22.0 ($13.4 after-tax or $.23 per common share -diluted) for environmental remediation and compliance costs and gains of $1.1 ($0.7 after-tax or $.01 per common share - diluted) related to the disposition of businesses and $4.5 ($2.5 after-tax or $0.4 per common share - diluted) related to the disposition of an investment.
(B) Includes restructuring charges of $13.0 ($8.0 after-tax or $.14 per common share - diluted) primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes gains of $1.0 ($0.6 after-tax or $.01 per common share - diluted) as a result of settlements with certain of the Company's insurers, net of related legal and other costs and $2.0 ($1.2 after-tax or $.02 per common share - - diluted) from the disposition of businesses.
(C) Pursuant to Emerging Issues Task Force No. 97-13 issued on November 20, 1997, the Company changed its accounting policy in the fourth quarter of 1997 regarding the accounting for costs associated with projects that combine business process reengineering and information technology transformation. Previously, substantially all direct costs relating to these projects were capitalized, including the portion related to business process reengineering. Under the consensus, all future costs for the business process reengineering component must be expensed as incurred with the unamortized balance of these costs as of September 30, 1997 of $5.2 (net of income taxes) or $.09 per common share - diluted, written-off as a cumulative catch-up adjustment in the fourth quarter of 1997.
(D) Includes a restructuring charge of $345.1 ($239.3 after-tax or $4.23 per common share - diluted) which includes severance and related costs of $104.5, a write-down of property, plant and equipment of $96.9, environmental closure costs of $53.3, a write-down of goodwill and intangibles of $40.0, demolition costs of $26.2 and other costs of $24.2. Also includes other non-recurring charges of $91.0 ($71.3 after-tax or $1.26 per common share - diluted) which include provisions for litigation of $34.7, environmental remediation costs of $30.1 and other matters of $26.2. Also includes a gain of $4.3 ($2.6 after-tax or $.05 per common share -diluted) as a result of settlements with certain of the Company's insurers, net of related legal and other costs.
(E) Includes gains of $55.1 ($33.7 after-tax or $.59 per common share - diluted) as a result of settlements with certain of the Company's insurers, net of related legal and other costs and $54.0 ($33.0 after-tax or $.58 per common share - diluted) from the disposition of businesses. Also includes a restructuring charge of $33.8 ($20.6 after-tax or $.36 per common share - diluted) related to a write-down of property, plant and equipment of $21.8 and other costs of $12.0. Also includes $18.1 ($11.0 after-tax or $.20 per common share - diluted) related to provisions for environmental remediation costs and litigation.
(F) Includes the results of operations of OSi Specialties for the three months ended December 31, 1995.
(G) Includes a gain of $5.1 ($3.1 after-tax or $.05 per common share - diluted) from the disposition of businesses.
- -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND FINANCIAL RESOURCES
During 1998, the Company's cash flows from operations decreased $223.1 million to $58 million. The decline was primarily the result of a decrease in the Company's accounts payable and other current liabilities mainly due to the timing of payments associated with the 1996 restructuring plan and other initiatives, payments related to the incentive compensation plan and costs incurred to upgrade the Company's worldwide information systems. The decline in net sales of $245.9 million in 1998, as compared to 1997, also contributed to the decrease in cash generated from operations (see Results of Operations for additional details regarding the Company's operations). Additional details regarding operating, investing and financing activities can be found in the Consolidated Statements of Cash Flows.
Total debt increased $191.7 million to $889.6 at December 31, 1998, as compared to December 31, 1997. The increase in total debt is primarily due to financing capital expenditures and other costs associated with the 1996 restructuring plan and other initiatives, as a result of reduced operating cash flows.
The Company has a revolving credit agreement with various banks in the amount of $500 million, $180 million of which was outstanding at December 31, 1998. In addition, the Company has access to short-term uncommitted facilities based on current money market interest rates. As of December 31, 1998, the Company had $17.5 million outstanding on these uncommitted facilities. The Company also has, through certain of its international subsidiaries, arrangements with various banks for lines of credit. At December 31, 1998, these lines of credit aggregated $29.3 million, of which $1.8 million was utilized. The Company plans to utilize the credit agreement, uncommitted facilities and lines of credit periodically for its operating requirements and planned capital investment program. Based upon the existing covenants under the Company's revolving credit agreement, the Company can borrow up to an additional $330 million on its various borrowing arrangements as of December 31, 1998 (see Note 7 of Notes to Financial Statements for information regarding the Company's debt structure and the timing of cash payments).
On January 13, 1999, the Company announced the next phase of its strategic plan, which includes its intention to divest or seek a strategic alliance for its Oleochemical and Derivatives business (ODG). In the event of a transaction which generates proceeds, a substantial portion of the proceeds will be used to reduce short-term debt, with any residual amount utilized to support the business needs of the Company's core businesses. In addition to the ODG strategic alternatives, the Company will focus its resources on realigning its portfolio mix with an emphasis on its market leadership, high growth, core businesses. The Company also plans to reduce its non-manufacturing operating expenses, including costs related to the corporate infrastructure. It is management's belief that the enhanced profitability resulting from these initiatives will enhance the Company's ability to reduce debt and fund future growth with internally generated funds.
Beginning in 1997, the Company embarked on a three year restructuring plan intended to improve profitability, increase productivity and maximize shareholder value. The principal elements of the 1996 restructuring plan involve the implementation of cost savings programs, the closure or sale of fifteen production facilities and the consolidation of support infrastructure, and the elimination of approximately 1,800 positions worldwide by the end of 1999. During 1998, the Company made the decision to continue operations at its Petrolia, Pennsylvania and Ft. Worth, Texas facilities. As of December 31, 1998, as a result of the 1996 restructuring plan, the Company has sold seven plants and shut-down three others, which coupled with reductions in support infrastructure, resulted in the termination of approximately 1,000 employees. Cumulative expenditures of $51 million have been made as of December 31, 1998, associated with the 1996 restructuring charge. Three remaining plants are scheduled to be closed and approximately 400 employees terminated in 1999. The remaining restructuring accrual balance at December 31, 1998 is $65.2 million (see Note 2 of Notes to Financial Statements for additional details).
It is the Company's belief that annual cash flows from operations, along with the flexibility provided by the credit agreement, uncommitted facilities and lines of credit will be sufficient to fund, for the foreseeable future, operating requirements, the 1996 restructuring plan and other initiatives, capital investments, Year 2000 expenditures, dividend payments, and commitments on environmental remediation projects.
Currently, the Company's primary international operations are based in Western Europe. Although there are certain risks inherent in carrying on international business, including currency devaluations and controls, export and import restrictions, inflationary factors, product supply, economic controls, and nationalization and appropriation, the Company does not believe these factors will significantly affect its operations.
The Company continually evaluates, and periodically reviews with the Finance Committee of the Board of Directors, its liquidity requirements, capital needs and availability of external funds. As a result of this process, the Company has in the past and may in the future seek to restructure indebtedness, raise additional capital or take other steps to increase or manage its liquidity and financial resources.
CAPITAL INVESTMENTS AND COMMITMENTS
In 1996, the Company announced a three year restructuring plan that included a $600 million capital investment program to increase production capacity to support growth, modernize plants, replace capacity at closed facilities, improve environmental, safety and other items and upgrade its worldwide information systems. Total capital expenditures were $281.6 million for 1998 and $201.6 million for 1997. The Company plans to spend approximately $180 million in 1999, and approximately an additional $15 million in 2000 for projects which have been delayed. As a result, total capital expenditures related to the 1996 restructuring plan will exceed the plan by approximately $78 million.
- -------------------------------------------------------------------------------- Significant cost overruns on certain projects, most notably at the Company's Houston and Taft facilities, contributed to this overrun. In addition, certain projects that were planned as part of the original 1996 restructuring program were either canceled or delayed. Consequently, the Company will have higher depreciation expense in 1999 and future years than originally anticipated. Upon its completion, the capital investment program related to consolidation efforts is expected to generate a cumulative internal rate of return of approximately 26% versus the original target set forth in 1996 of 30%.
ENVIRONMENTAL MATTERS
The Company operates in an industry subject to extensive regulations related to the protection of the environment, including the health and safety of employees and others. Domestic operations are subject to a myriad of environmental statutes and regulations at the federal, state and local levels. The Company's international production facilities operate in an environmental regulatory framework in which governmental authorities typically are granted broad discretionary powers which require manufacturing facilities to obtain operating permits to continue operations.
The Company believes that expenditures for compliance with these statutes, regulations and permits will continue to have a significant impact upon the conduct of its business. The trend toward greater environmental awareness and more stringent environmental regulations is likely to continue, and while the Company cannot accurately predict how this will affect future operations and earnings, the Company does not believe its relative costs will vary significantly from those of its competitors. Consistent with the Company's concern for the protection and improvement of the environment worldwide, the Company continually monitors the environmental impact of past and present operating practices in light of changing environmental standards. Where remedial action is indicated, the Company assesses the probability and scope of potential remediation costs. To determine the appropriate reserve amounts, management reviews, on a quarterly basis, currently available information pertaining to each environmental site. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative cleanup methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology, and the identification of additional environmental sites. As a result, as remediation efforts proceed at existing sites and new sites are assimilated into the review process, charges against income for environmental reserves could have a material effect on results of operations or cash flows in a particular quarter or year. However, such charges are not expected to have a material adverse effect on the Company's consolidated financial position or liquidity.
Over the past three years, the Company has spent approximately $97.4 million on environmental capital expenditures. In fiscal years 1998, 1997 and 1996, approximately $47.4 million, $37.4 million and $12.6 million, respectively, were expended on environmental capital projects. Capital projects for environmental purposes are estimated to be approximately $20 million for 1999.
Reserves for environmental remediation and compliance costs, including sites identified for closure or sale as part of the 1996 restructuring plan and sites related to the operations of the former Lubricants Group, amounted to $122.5 million as of December 31, 1998 as compared to $186.6 million as of December 31, 1997 (see Notes 2 and 19 of Notes to Financial Statements for details regarding reserves related to the 1996 restructuring plan and the Lubricants Group, respectively).
Expenditures charged to environmental reserves, including sites identified for closure or sale as part of the 1996 restructuring plan and sites related to the operations of the former Lubricants Group, were $39.2 million in 1998 and include expenditures currently mandated as well as those not initiated by any regulatory authority or third party. In addition, the Company recorded a non-recurring charge of $22 million in 1998 to increase the environmental reserves for certain continuing sites due to revisions of estimates. The Company anticipates 1999 compliance and remediation expenditures to approximate $22 million.
Direct recurring operating costs associated with managing environmental matters were approximately $41.3 million in 1998.
YEAR 2000
State of Readiness The Company is currently in the process of addressing date sensitive system issues associated with the Year 2000. The Company's Year 2000 project is led by the Group Vice President of Corporate Restructuring/Implementation and is managed by an executive steering committee of key management personnel. The Company has assigned business teams, regional and location coordinators and contracted third-party vendors to carry out the Company's Year 2000 compliance plan. The Company's Board of Directors is updated regularly regarding the Year 2000 compliance plan and its progress. The Company's approach to mitigating the Year 2000 issue involves the following five phases: awareness, assessment (including an inventory of hardware, software, process control equipment and monitoring devices for plants, safety systems and other non-information technology systems and equipment), repair/replacement, testing and implementation.
In connection with the Company's 1996 restructuring plan and other initiatives, the Company began a worldwide business process redesign and implementation project (Project EDGE). It is anticipated that the new systems implemented as part of Project EDGE, which are Year 2000 compliant, will replace substantially all of the Company's existing information technology (IT) business application systems. All other IT
- -------------------------------------------------------------------------------- business application systems, which are not part of Project EDGE, and all non-IT systems and equipment (collectively non-EDGE) will be made compliant through the efforts of internal resources and third-party vendors. In order to assess the readiness of its EDGE and non-EDGE systems and equipment with the Year 2000 issue, the Company has completed an inventory of hardware, software, process control equipment and monitoring devices for plants, safety systems and other non-IT systems and equipment. Regarding both the EDGE and non-EDGE projects, the Company has completed the awareness phase, is 95 percent complete with respect to the assessment phase, is 45 percent complete with respect to the repair/replacement phase and is 25 percent complete with respect to each of the testing and implementation phases. Completion of the assessment phase is expected during the first quarter of 1999, with completion of the repair/replacement, testing and implementation phases to be completed during the third quarter of 1999.
The Company has identified critical raw material suppliers, service providers and major customers and has initiated communications with these third parties in an effort to assess their plans and progress in addressing the Year 2000 issue. The Company is 50 percent complete with respect to its evaluation of critical raw material suppliers, service providers, and major customers. The Company has identified approximately 100 critical suppliers whose failure to deliver raw materials could cause disruption to operations and a loss of business. Of these suppliers, approximately 40 have been identified as high-impact suppliers. The Company has obtained information from its key service providers with respect to their Year 2000 readiness and is in the process of reviewing their Year 2000 compliance status. The Company has also surveyed its major customers regarding their Year 2000 compliance status and is in the process of reviewing the results of these surveys. The Company will closely monitor the Year 2000 readiness of its high-impact suppliers, key service providers and major customers throughout 1999.
Costs The total costs associated with Project EDGE and non-EDGE systems and equipment are expected to range from $100-$110 million (including $80-$85 million of capital expenditures), of which $77.7 million has been incurred ($63.1 million capitalized and $14.6 million expensed) as of December 31, 1998. Expenditures of $46.2 million were made during 1998 ($40.8 million capitalized and $5.4 million expensed). Substantially all of these costs are associated with Project EDGE. The costs associated with the third-party evaluation initiative are not expected to be significant.
Risks and Contingency Plans The Company has ascertained that failure to alleviate the Year 2000 issues within its EDGE and non-EDGE projects could result in possible system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, produce products and engage in similar normal business activities, with a corresponding impact on the Company's results of operations. The Company is in the process of developing contingency plans for its critical EDGE and non-EDGE activities, which involve, among other actions, manual and/or external processing and building inventories. The Company is 65 percent complete with respect to the development of such contingency plans and expects to be complete during the second quarter of 1999.
To the extent that the operations of critical raw material suppliers, service providers, and major customers are impacted by their failure to address their Year 2000 issues, such disruption may have a direct impact on the Company's results of operations. Contingency plans are being developed and will include, but will not be limited to, building inventories, switching suppliers, managing production levels and finding alternate methods of transportation. The Company is 45 percent complete with respect to the development of its third-party contingency plans, with preliminary plans targeted for completion by the end of the first quarter of 1999. Reviews and revisions of such plans will be made throughout 1999 as circumstances warrant.
The Company is confident that the Year 2000 issues will be resolved by the implementation of the EDGE and non-EDGE projects and the completion of the third-party initiative. If the measures associated with the EDGE and non-EDGE projects, as well as the efforts associated with critical raw material suppliers, service providers, and major customers, were to fail, the contingency plans currently being formulated will be implemented. The amount of potential liability and lost revenue associated with the failure to alleviate the Year 2000 issues or implement appropriate contingency plans cannot be reasonably estimated at this time.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union adopted the Euro as their common legal currency. Between January 1, 1999 and January 1, 2002, transactions may be conducted in either the Euro or the participating countries national currency. However, by July 1, 2002, the participating countries will withdraw their national currency as legal tender and complete the conversion to the Euro.
The Company conducts business in Europe and does not expect the conversion to the Euro to have an adverse effect on its competitive position or consolidated financial position. The Company believes that the implementation of Project EDGE will allow the Company to conduct business transactions in both the Euro as well as the participating countries national currency.
The Company has determined that failure to implement systems that are able to process both the Euro and participating countries national currency may cause disruptions to operations including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. These problems could be substantially alleviated with manual processing. However, this would cause delays in certain normal business activities.
- -------------------------------------------------------------------------------- CONTINGENCIES
The Company is a potentially responsible party (PRP) or a defendant in a number of governmental (federal, state and local) and private actions associated with the release, or suspected release, of contaminants into the environment. As a PRP, the Company may be liable for costs associated with the investigation and remediation of environmental contamination, as well as various penalties and damages to persons, property and natural resources.
The Company is not a party to any legal proceedings, including environmental matters, which it believes will have a material adverse effect on its consolidated financial position or liquidity. However, the Company's results of operations or cash flows could be materially affected in future periods by the resolution of contingencies (see Note 16 of Notes to Financial Statements).
INCOME TAXES
For information regarding income tax matters, see Note 13 of Notes to Financial Statements.
DISCONTINUED OPERATIONS
On September 11, 1995, the Company announced its intention to divest its Lubricants Group. This divestiture was completed in 1997 (see Note 19 of Notes to Financial Statements).
ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivatives be recorded on the balance sheet as an asset or liability measured at its fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivative will either be offset against the changes in fair market value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair market value will be immediately recognized in earnings. The Company has not yet determined what the effect of SFAS No. 133 will be on its earnings and financial position. Since the standard allows certain foreign currency transactions to be accounted for as hedges for financial reporting purposes that were not previously treated as hedges, the Company may change its policies towards the management of certain foreign currency exposures. Any changes that may occur would be to further reduce the Company's exposure to foreign currency risks. The Company is required to adopt the provisions of SFAS No. 133 by January 1, 2000, however, early application is permitted as of the beginning of any preceding fiscal quarter.
MARKET RISK AND RISK MANAGEMENT POLICIES
The operations of the Company are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The Company uses derivative financial instruments to mitigate its exposure to these risks. The objective of using derivative financial instruments is to limit the impact on earnings, equity and cash flows caused by adverse fluctuations in interest rates and foreign currency exchange rates by hedging the underlying economic risk. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company's primary interest rate risk exposures result from changes in the fair value of its long-term, U.S. dollar fixed rate debt and long-term interest rate swaps that convert foreign denominated variable rate debt to fixed rates, as well as cash flow risk associated with long-term variable rate debt. The Company manages cash flows on variable rate debt by using interest rate swap contracts to convert its long-term, variable rate foreign denominated debt to fixed rate debt. Each interest rate swap contract is designated with the principal balance and the term of the specific debt obligation. These contracts involve the exchange of interest payments over the life of the contract without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued as other liabilities or assets and recognized as an adjustment to interest expense. The fair value of the swap contracts and changes in the fair value due to changes in market interest rates are not recognized in the financial statements. Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss.
The following table provides information about the Company's derivative and other financial instruments that are sensitive to changes in interest rates. For long-term debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity date. Weighted average variable interest rates are based on the applicable floating rate index as of the reporting date. For interest rate swaps, the table presents the notional amount and weighted average interest rates by maturity date. The notional amounts are used to calculate the contractual cash flows to be exchanged under the respective contracts.
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AIBOR - Amsterdam Interbank Offered Rate
The Company's short-term exposure to changes in foreign currency exchange rates results from transactions entered into by the Company and its foreign subsidiaries in currencies other than their local currency (primarily trade payables and receivables). The Company manages these transactional currency risks on a consolidated basis, which allows it to net its trade payable and receivable exposure. The Company is also exposed to currency risk on intercompany transactions, including intercompany debt. The Company purchases foreign currency forward contracts, primarily denominated in German marks, Italian lira, French and Swiss francs, Hong Kong dollars and British pounds, to hedge its transaction exposure. Contracts to hedge its net payable/receivable transaction exposure are generally outstanding for one to six months and contracts to hedge intercompany transactions are settled on a monthly basis. Realized and unrealized gains and losses on foreign currency forward contracts that are designated and effective as hedges of recorded transactions are recognized in earnings to offset the impact of valuing recorded foreign currency trade payables, receivables and intercompany transactions. Unrealized gains and losses are cumulatively measured as the differential between the spot exchange rate at the contract's inception and the spot exchange rate as of the balance sheet date and are included in accounts and notes receivable on the Consolidated Balance Sheets. Discounts and premiums on foreign currency forward contracts that are designated and effective as hedges are recorded as a deferred asset and amortized over the respective contract life. Realized and unrealized gains and losses on contracts that do not satisfy the requirements of an effective hedge are reported as other expenses (income) - net. The fair value of the foreign currency forward contracts used to hedge the Company's intercompany loan, trade payable and trade receivable exposures are not significant.
The Company's long-term foreign currency exchange risk exposure results from its net investments in international subsidiaries (including long-term intercompany loans). The Company uses foreign currency swap contracts denominated in German marks, French francs, British pounds and Spanish pesetas to reduce its exposure to foreign currency risk from its net investments in its international subsidiaries. For foreign currency swap contracts designated and as effective hedges, realized and unrealized gains and losses, net of related taxes, are included in the accumulated other comprehensive income component of shareholders' equity. Discounts or premiums resulting from the differential between the contractual payments and receipts are amortized over the life of the contract. The related amounts due to or from counterparties are included in deferred costs and other assets on the Consolidated Balance Sheets.
The following table summarizes information on the foreign currency swap contracts, including the notional amounts and the related weighted average contract rates by contractual maturity date. The notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. The table does not include the net investments for which the foreign exchange translation adjustments would offset the realized and unrealized gains and losses on the related swap contracts. The swap contracts to buy U.S. dollars are held by European entities
- -------------------------------------------------------------------------------- whose functional currency is the foreign currency of the contract. The contract to buy German marks with Italian lira is held by an entity with the German mark as its functional currency.
RESULTS OF CONTINUING OPERATIONS 1998 VS. 1997
The Company reported income from continuing operations before cumulative effect of accounting change of $58.9 million in 1998 compared to $90.1 million in 1997. The inclusion of several non-recurring items in both years affect comparison. The following table shows the effect of these non-recurring items on continuing operations before cumulative effect of accounting change.
* Diluted basis
(A) The year ended December 31, 1998 includes restructuring credits - net of $34.8 ($21.1 after-tax or $.37 per common share) which are the result of the reversal of significant restructuring charges, including severance and environmental closure costs of $28.1 related to the decision to continue operations at the Petrolia facility and $15.5 related to revisions of estimates for certain plant environmental closure costs. These credits are offset by charges of $8.8 primarily associated with the Company's global systems implementation and charges related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. In addition, the year ended December 31, 1997 includes restructuring charges of $13.0 ($8.0 after-tax or $.14 per common share) primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized.
- -------------------------------------------------------------------------------- Consolidated 1998 net sales from continuing operations of $1.9 billion were $245.9 million, or 11%, lower than 1997. Of the total decline, approximately $107 million was attributable to the divestiture and closure of low margin, non-strategic, commodity businesses and product lines. Volume was down 14% from 1997, which, excluding planned divestitures and closures, was down 6%. The shortfall in volume was indicative of a general weakness in certain markets and an adverse economic climate that plagued much of the specialty chemicals industry throughout 1998. The economic crisis in the Asia/Pacific region, which was reflective of these conditions, accounted for approximately $50 million of the shortfall in revenue. An additional $26 million was attributable to the comparatively stronger U.S. dollar. These adverse factors were partially offset by a more favorable product sales mix.
Income from continuing operations before cumulative effect of accounting change, excluding non-recurring items, of $48.0 million in 1998 was $48.3 million, or 50%, lower than 1997. The decline was primarily due to lower margins resulting from reduced shipment volume, while an increase in costs attributable to business process improvement initiatives, unusually high maintenance and repair costs at one of the Company's facilities, and higher depreciation expense added to the shortfall. The adverse effect of these factors was partially offset by savings resulting from restructuring program initiatives and the absence of performance based compensation costs. More specifically, selling expense was down from 1997 primarily due to the absence of performance based compensation costs. In addition, 1998 aggregate general and administrative expenses were comparable with 1997, these expenses were up approximately 12% excluding the effects of changes in performance based compensation costs. This increase was mainly attributable to higher costs associated with business process improvement initiatives. Despite an increase in bank debt, net interest expense declined compared to 1997 due to higher capitalized interest of $7.8 million primarily attributable to the timing of, and increase in capital expenditures.
SEGMENT INFORMATION
The Company's operating income from continuing operations for 1998 and 1997 included non-recurring items in both years which affect comparison. Excluding these items, operating income was $129.6 million in 1998 and $215.0 million in 1997. The following tables show the effect of these non-recurring items on operating income from continuing operations by industry segment.
POLYMER CHEMICALS
Polymer Chemicals' 1998 net sales of $481.7 million were $38.1 million, or 7%, lower than the prior year. The shortfall was attributable to an 11% decline in volume, partially offset by an increase in prices and a more favorable product sales mix. Approximately 44% of the decrease in volume was attributable to planned divestitures and pruning of low margin, non-strategic products and product lines, while a softness in PVC markets and the economic crisis in the Asia/Pacific region were primarily responsible for the balance.
- -------------------------------------------------------------------------------- Operating income of $52.9 million, excluding non-recurring items from both years, declined $22.1 million compared to 1997. The shortfall was primarily due to the resultant decline in margins attributable to lower shipment volume. In addition, lower margins associated with the second quarter 1998 swap of Witco's epoxy systems and adhesives business for Ciba Specialty Chemicals' PVC heat stabilizer business, which is an integral part of our long-term strategy, added to the shortfall. The disappointing margins were reflective of business conditions in PVC markets that inhibited the implementation of initiatives which will improve the financial performance of the acquired business.
ORGANOSILICONES
Segment 1998 net sales of $432.6 million were $39.9 million, or 8%, lower than 1997. The decline was due to a 9% decrease in volume and, to a lesser extent, the comparatively stronger U.S. dollar which contributed $15.7 million to the shortfall. A more favorable product sales mix partially offset the adverse effect of these factors. The impact on net sales from the economic crisis in the Asia/Pacific region and the corresponding impact on volume were most prevalent in this segment, accounting for approximately 70% of the currency adjusted decline in revenue. Market weakness and economic conditions in other geographic regions accounted for the remainder of the shortfall.
OrganoSilicones' 1998 operating income, excluding non-recurring items from both years, of $42.8 million, was down $29.8 million compared to 1997. This decline was primarily reflective of lower margins resulting from reduced shipment volume. A comparatively higher allocation of corporate charges and the comparatively stronger U.S. dollar added to the shortfall. These negative factors were partially offset by the absence of performance based compensation costs.
PERFORMANCE CHEMICALS
The segment's 1998 net sales of $663.5 million were down $118.3 million, or 15%, compared to 1997. The decline was attributable to a 19% decrease in volume, partially offset by a more favorable product sales mix. Planned divestitures and pruning of low margin, non-strategic, commodity businesses and product lines accounted for approximately 72% of the reduction in volume. The downturn in the Asia/Pacific economy and softness in certain markets added to the shortfall.
Performance Chemicals' 1998 operating income, excluding non-recurring items from both years, was down $24.2 million to $55.6 million, compared to 1997. The 30% decline was mainly due to reduced margins attributable to lower shipment volume and higher manufacturing costs associated with unusually high levels of maintenance and repairs at one of the segment's facilities. Positively impacting operating income were cost savings attributable to restructuring initiatives and the absence of performance based compensation costs.
OLEOCHEMICALS & DERIVATIVES
Oleochemicals and Derivatives' 1998 net sales of $363.8 million were $49.5 million, or 12%, below 1997. The decline was mainly attributable to a 7% reduction in volume, while lower prices and an unfavorable product sales mix added to the shortfall. Of the 7% reduction in volume, 1% was attributable to the 1997 divestiture of the Food Emulsifiers business. The balance was due to the economic crisis in the Asia/Pacific region and a general weakness in market conditions. Prices were adversely affected by a depressed glycerin market, lower tallow based formula contract pricing and intense competitive pressure, especially in Europe.
Segment 1998 operating income, excluding non-recurring items from both years, was $16.6 million below the $18.9 million reported in 1997. The decrease was primarily a result of lower margins attributable to reduced shipments, while lower glycerin prices added to the shortfall. These adverse factors were partially offset by restructuring generated cost savings and the absence of performance based compensation costs.
RESULTS OF CONTINUING OPERATIONS 1997 VS. 1996
The Company reported income from continuing operations before cumulative effect of accounting change of $90.1 million in 1997 compared to a loss of $247.2 million in 1996. The inclusion of several non-recurring items in both years affect comparison. The following table shows the effect of these non-recurring items on continuing operations before cumulative effect of accounting change.
- --------------------------------------------------------------------------------
* Diluted basis
(A) The year ended December 31, 1997 includes restructuring charges of $13.0 ($8.0 after-tax or $.14 per common share) primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. In addition, the year ended December 31, 1996 includes a restructuring charge of $345.1 ($239.3 after-tax or $4.23 per common share) which includes severance and related costs of $104.5, a writedown of property, plant and equipment of $96.9, environmental closure costs of $53.3, a writedown of goodwill and intangibles of $40.0, demolition costs of $26.2 and other costs of $24.2.
(B) The year ended December 31, 1996 includes other non-recurring charges of $91.0 ($71.3 after-tax or $1.26 per common share) which include provisions for litigation of $34.7, environmental remediation costs of $30.1 and other matters of $26.2.
Consolidated net sales from continuing operations decreased $75.9 million to $2.2 billion in 1997 compared to 1996. This decrease was primarily due to the comparatively stronger U.S. dollar which had an $84.9 million adverse effect on current year net sales. The impact of a more favorable product mix partially offset the effect of the stronger U.S. dollar and a 4% decline in volume. The favorable mix was a result of a year long focus on sales initiatives that fostered greater sales of higher margin products. Volume was down from 1996 primarily as a result of a first quarter fire and its lingering residual effects at the Company's Petrolia, Pennsylvania plant, and the exiting/divesting of non-strategic, non-specialty products and product lines.
Income from continuing operations before cumulative effect of accounting change, excluding non-recurring items, of $96.3 million in 1997 was up $35.5 million, or 58%, compared to 1996. Approximately 75% of the increase in income was attributable to an improvement in gross margin which rose 2.8 percentage points to 25.5%. This increase was attributable to lower material costs and restructuring related reductions in manufacturing costs, including depreciation expense. Also contributing to the increase in income was a decrease in net interest expense due to a reduction in bank debt and a decline in operating expenses which was achieved despite the inclusion of higher costs associated with performance based compensation plans.
SEGMENT INFORMATION
The Company's operating income from continuing operations for 1997 and 1996 included non-recurring items in both years which affect comparison. Excluding these items, operating income was $215.0 million in 1997 and $169.7 million in 1996. The following tables show the effect of these non-recurring items on operating income from continuing operations by industry segment.
- -------------------------------------------------------------------------------- POLYMER CHEMICALS
Polymer Chemicals' net sales for 1997 of $519.8 million represented a decrease of $14.1 million, or 3%, compared to 1996. Although the segment benefited from a more favorable product mix, attributable to the exiting/divesting of low margin products and product lines, and replacing much of the lost revenue with business that generated higher margins, a $33.9 million adverse effect of the comparatively stronger U.S. dollar and a 2% drop in volume caused net sales to decline.
Operating income for Polymer Chemicals, excluding non-recurring items from both years, was up 45% to $75.0 million in 1997 compared to 1996. This $23.1 million increase was attributable to the combination of lower material costs, a reduction in manufacturing costs and a more favorable product sales mix. The reduction in manufacturing costs was a result of restructuring related initiatives which centered around savings attributable to new service agreements, lower personnel costs and asset consolidation at the segment's Bergkamen, Germany facility. Partially offsetting the impact that these positive factors had on operating income were the adverse effect of the comparatively stronger U.S. dollar and higher costs associated with performance based compensation plans.
ORGANOSILICONES
Net sales for OrganoSilicones for 1997 of $472.5 million were $24.6 million, or 5%, greater than 1996. The net sales increase was a result of an 8% increase in volume and a more favorable product mix, which was partially offset by an $18.4 million negative impact caused by the comparatively stronger U.S. dollar.
OrganoSilicones' 1997 operating income of $72.6 million was $14.2 million greater than 1996. This 24% increase was primarily attributable to the aforementioned increase in shipment volume and a more favorable product sales mix, combined with restructuring driven reductions in costs. The major restructuring initiative was the silanes expansion at the Termoli, Italy plant which generated savings by providing the capability to manufacture materials which had previously been purchased and improving manufacturing processes. These favorable factors were partially offset by higher costs associated with performance based compensation plans.
PERFORMANCE CHEMICALS
Performance Chemicals' 1997 net sales of $781.8 million declined $62.9 million, or 7%, from 1996. This decrease was a result of an 8% decline in volume, which was primarily due to a fire at the segment's Petrolia, Pennsylvania plant and the exiting/divesting of certain products and product lines, and a comparatively stronger U.S. dollar which had an $18.5 million adverse effect on net sales.
Segment 1997 operating income, excluding non-recurring items from both years, was $79.8 million, representing an increase of $10.6 million, or 15%, compared to 1996. This increase was a result of lower material costs, restructuring driven reductions in manufacturing and operating costs, including depreciation, and a continued focus on selling higher margin products. These positive factors were partially offset by the aforementioned decline in shipment volume, higher costs associated with performance based compensation plans and the adverse effect of the comparatively stronger U.S. dollar.
OLEOCHEMICALS & DERIVATIVES
Segment 1997 net sales of $413.3 million were $11.5 million, or 3%, lower than the prior year. A 4% increase in volume bolstered current year net sales, while a $14.0 million adverse impact of a comparatively stronger U.S. dollar and the lowering of glycerine sales prices due to soft market conditions, accounted for the decline in net sales.
Operating income for this segment, excluding non-recurring items from both years, rose from $16.4 million in 1996 to $18.9 million in 1997. The 15% increase was attributable to comparatively strong fourth quarter results which were mainly due to higher sales volume and cost savings associated with closing the segment's Newark, New Jersey facility in 1996. The segment was impacted throughout the year with a soft glycerine market causing sales prices to drop below 1996 levels and higher costs associated with performance based compensation plans. The segment benefited from savings in manufacturing costs resulting from the consolidation of its Oleochemicals-Basics' operations into one facility and lower operating costs achieved through cost improvement initiatives.
OUTLOOK
During 1999, the Company will take steps to implement the next phase of its strategic plan focusing its resources on its market leadership, high growth, core businesses: Polymer Chemicals, OrganoSilicones and Industrial Specialties. Refined Products, a lower growth, but market leadership business, will continue as an important part of the Company's portfolio providing cash generation. The Company also intends to divest or seek a strategic alliance for its Oleochemicals and Derivatives Group during 1999. In the event of a transaction which generates proceeds, a substantial portion of the proceeds will be used to reduce short-term debt with any residual amount utilized to support the business needs of the Company's core businesses. The Company also intends to find strategic solutions for its non-core portfolio businesses. As a result, the Company will become a smaller but more efficient and focused company with higher quality earnings.
- -------------------------------------------------------------------------------- In connection with these portfolio changes, the Company also plans to reduce non-manufacturing operating expenses, including costs related to corporate infrastructure, consistent with the restructuring of its portfolio and change in business emphasis. As plans to achieve these reductions are better defined, additional restructuring charges will be taken during 1999 in conjunction with transitioning to the new business support structure.
During 1998, the Company experienced reduced net sales compared to 1997 due to the planned disposition of non-strategic businesses and product lines, a decrease in volume caused by market weakness and adverse economic conditions, and the effects of the stronger U.S. dollar. The Company believes that the economic uncertainty experienced by the chemical industry will continue for the foreseeable future and that 1999 will be a difficult year.
The Company plans to substantially complete the remaining elements of its three year restructuring program during 1999. However, in light of changes to the original program, it will take new cost reduction efforts to reach the original goals. The capital spending in 1998 was $281.6 million, the highest level of the three year restructuring plan. Capital spending is expected to be approximately $180 million during 1999, with approximately an additional $15 million to be spent in 2000 for projects which have been delayed. Total capital spending related to the 1996 restructuring plan will exceed original estimates by approximately $78 million. This will result in significantly higher depreciation expense in 1999 as compared to 1998. During 1998, the decline in net sales volume obscured the benefits achieved to date as some elements of the cost reduction program are volume sensitive. The high capital spending in 1998 combined with the decline in cash flows from operations caused total debt at the end of 1998 to be significantly above 1997.
During 1999, the Company will continue to take steps to improve net sales by focusing on customer service, error free delivery, expanding product lines and the global reach of its businesses, and bringing new products and applications to the market. Through these efforts, the Company believes that each of its businesses can increase their net sales in 1999, at which time the leverage built into its new cost structure will begin to become visible in the Company's earnings.
CAUTIONARY STATEMENTS
Certain statements made in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section are "forward looking statements" that involve certain risks and uncertainties. The factors that could cause the actual results to differ materially from those presented herein include, without limitation, the cost and timing of the implementation of the Company's EDGE and non-EDGE projects, the ability of the Company to implement its EDGE and non-EDGE projects before the calendar year 2000, the timely response to and correction by third parties, suppliers and customers to address Year 2000 problems, the ability of the Company to assess and implement contingency plans to its EDGE and non-EDGE projects, the Company's ability to generate sufficient cash flows, the cost and timing of the implementation of certain capital improvements, the cost and timing associated with the cost savings initiatives, the Company's ability to effectively divest certain businesses and enter into other strategic alternatives and transactions regarding other businesses, the amount of proceeds the Company receives as a result of any divestiture or other transaction, the ability of the Company to commercialize new products and bring them to the market place, the ability of the Company to improve its customer service and error free delivery rates, the ability of the Company to implement its sales initiatives, including, realizing cross-business group selling opportunities, account development and a process to track new opportunities, the cost of environmental remediation and compliance efforts, technological or competitive changes in any of the Company's businesses, the ability to reach agreement with third parties on planned business arrangements, the Company's ability to maintain price increases, changes in product mix, availability and pricing of raw material, shifts in market demand, price and product competition, certain global and regional economic conditions and other factors listed from time to time in the Company's other Securities Exchange Commission filings.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders Witco Corporation
We have audited the accompanying Consolidated Balance Sheets of Witco Corporation and Subsidiary Companies as of December 31, 1998 and 1997, and the related Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Witco Corporation and Subsidiary Companies at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, in 1997 the Company adopted the provisions of Emerging Issues Task Force Issue 97-13, 'Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation.'
/s/ ERNST & YOUNG LLP
Stamford, Connecticut February 1, 1999
Witco Corporation and Subsidiary Companies
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
Witco Corporation and Subsidiary Companies
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
Witco Corporation and Subsidiary Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
Witco Corporation and Subsidiary Companies
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
in thousands of dollars)
See accompanying notes.
Witco Corporation and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: Witco Corporation is a worldwide manufacturer of high quality specialty chemical products. The Company's products are used primarily as intermediates by other manufacturers in industries such as personal care and household products, agricultural, automotive, housing and construction, packaging, food and textiles. Information on the Company's operations by segment and geographic area are included in Note 17 of Notes to Financial Statements.
ACCOUNTING DEVELOPMENTS: As of January 1, 1998, the Company adopted for all periods presented Statement of Financial Accounting Standards (SFAS) Statement No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity (see Note 10 of Notes to Financial Statements).
For the year ended December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes new standards for the way that public business enterprises report information about operating segments and related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position (see Note 17 of Notes to Financial Statements).
For the year ended December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits." This Statement revises employers' disclosures about pension and other postretirement benefits plans, but does not result in any financial impact. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefits obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures (see Note 14 of Notes to Financial Statements).
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivatives be recorded on the balance sheet as an asset or liability measured at its fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivative will either be offset against the changes in fair market value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair market value will be immediately recognized in earnings. The Company has not yet determined what the effect of SFAS No. 133 will be on its earnings and financial position. Since the standard allows certain foreign currency transactions to be accounted for as hedges for financial reporting purposes that were not previously treated as hedges, the Company may change its policies towards the management of certain foreign currency exposures. Any changes that may occur would be to further reduce the Company's exposure to foreign currency risks. The Company is required to adopt the provisions of SFAS No. 133 by January 1, 2000, however, early application is permitted as of the beginning of any preceding fiscal quarter.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES: The consolidated financial statements include the accounts of all majority owned subsidiaries after the elimination of inter-company transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS: Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined on either the Last-In, First-Out (LIFO) or First-In, First-Out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost and depreciation is provided principally using the straight-line method based on estimated useful lives. Buildings and improvements; and machinery, fixtures and equipment are depreciated over periods not exceeding 25 years and 16 years, respectively.
LONG-LIVED ASSETS AND INTANGIBLE ASSETS: SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. As indicated in Note 2 of Notes to Financial Statements, the Company recognized impairment losses associated with the 1996 restructuring plan.
Intangible assets primarily include goodwill, the excess of purchase price over the estimated fair value of net assets acquired, and are being amortized over periods not in excess of forty years. The Company periodically evaluates the carrying value of intangible assets in relation to the estimated cash flows of the underlying businesses. An impairment loss may be recognized if the expected cash flow is less than book value. The Company recognized an impairment loss on certain intangible assets, as disclosed in Note 2 of Notes to Financial Statements, as part of the 1996 restructuring plan.
Witco Corporation and Subsidiary Companies
NOTES TO FINANCIAL STATEMENTS
(in thousands except per share data) - -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT COSTS: The Company's research and development costs are charged to expense as incurred and were $74,177 (1998), $71,756 (1997), and $73,088 (1996).
ENVIRONMENTAL REMEDIATION COSTS: Environmental remediation costs are charged to expense if the remediation is the result of past practices or events and the expenditures are not expected to benefit future operations. Projected costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Accruals are recorded at undiscounted amounts without regard to any third party recoveries, and are regularly adjusted as environmental assessments and remediation efforts proceed.
STOCK BASED COMPENSATION: The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock options granted since the exercise price of the option was the same as the market value of the Company's common stock. As prescribed under SFAS No. 123, "Accounting for Stock Based Compensation," the Company has disclosed in Note 11 of Notes to Financial Statements, the pro forma effects on net income (loss) and earnings (loss) per share of recording compensation expense for the fair value of the options granted.
INCOME TAXES: Income taxes have been provided using the liability method in accordance with SFAS No. 109 "Accounting for Income Taxes."
COMMON SHARE DATA: The Company calculates basic and diluted earnings per share in accordance with SFAS No. 128 "Earnings Per Share."
NOTE 2 RESTRUCTURING
In December 1996, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of approximately $345,130. The principal actions in the 1996 restructuring plan involved the closure or sale of fifteen production facilities (nine in Performance Chemicals, five in Polymer Chemicals and one in OrganoSilicones), consolidation of supporting infrastructure and the elimination of approximately eighteen hundred corporate staff and manufacturing positions. During 1998, the Company made the decision to continue operations at its Petrolia, Pennsylvania and Ft. Worth, Texas facilities (both in Performance Chemicals), which had previously been identified for closure or sale. The 1996 restructuring plan is expected to be substantially completed by the end of 1999.
In 1998, the Company recorded restructuring credits of $43,607 related to the reversal of restructuring accruals for severance, environmental closure costs and demolition costs related to the decision to continue operations at its Petrolia, Pennsylvania and Ft. Worth, Texas facilities, and for revisions of estimates related to certain plant environmental closure costs. These credits were partially offset by restructuring charges of $8,843 primarily associated with the Company's global systems implementation and expenditures for equipment at sites previously identified for closure or sale, which otherwise would have been capitalized.
In 1997, the Company recorded additional restructuring charges of $13,044, primarily related to expenditures for equipment, principally at Performance Chemicals sites previously identified for closure, which otherwise would have been capitalized.
The following table summarizes the major components of the restructuring charges (credits):
Included within the 1996 restructuring charge are $35,047 and $13,443 of curtailment charges for pension and other postemployment benefits, respectively. Such amounts represent the projected benefit costs for employees who have received, or will receive, retirement enhanced severance under the 1996 restructuring plan. As of December 31, 1998 and 1997, $9,898 and $4,114 of pension and other postemployment liabilities are included in the respective liability accounts for employees to be terminated in 1999 who will receive enhanced retirement severance benefits.
The 1996 write-down of property, plant and equipment; and goodwill and intangibles of $96,879 and $40,000, respectively, represents the reduction of the carrying value of the respective assets to their net realizable value based on the Company's estimate of the expected proceeds to be received upon sale of the related facility and operations.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- The following table summarizes the activity in the restructuring accruals during 1998 and 1997:
During 1998, the Company sold two plants and shut-down one other (all in Performance Chemicals). Included within this activity were the sale of the Company's SACI Anti-Corrosion and Coatings business and the assets of a portion of its commodity surfactants business, which resulted in an immaterial amount of proceeds. During 1997, the Company sold five plants (four in Performance Chemicals and one in Polymer Chemicals) and shut-down two others (one in OrganoSilicones and one in Polymer Chemicals). Included within this activity were the sale of the Company's Canadian Detergents and Aluminum Chloride businesses and portions of its Anionic Surfactants business for a total of approximately $29,000. The operating results individually and in the aggregate of these dispositions and shut-downs were not significant to the consolidated results of operations. The remaining three plants (two in Performance Chemicals and one in Polymer Chemicals) are expected to be closed during 1999. As of December 31, 1998, approximately 1,000 employees have been terminated as a result of the 1996 restructuring plan and approximately 400 employees are scheduled for termination in 1999.
As of December 31, 1998, $28,905 and $36,260 of the accrual balances associated with the 1996 restructuring plan are included in the accounts payable and other current liabilities caption and the deferred credits and other liabilities caption, respectively, of the Consolidated Balance Sheet.
NOTE 3 INVENTORIES
Inventories are classified as follows:
Work in progress included above is not significant.
Inventories valued on a LIFO basis, at December 31, 1998 and 1997, amounted to $79,814 and $76,615, respectively. Inventories would have been $30,693 and $32,334 higher than reported at December 31, 1998 and 1997, respectively, if the FIFO method (which approximates current cost) had been used by the Company for all inventories.
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS Depreciation expense, including amortization of assets under capital lease obligations, from continuing operations amounted to $95,101 (1998), $86,789 (1997), and $99,676 (1996).
At December 31, 1998 and 1997, buildings and improvements included approximately $10,400 and $12,500, respectively, related to an office/laboratory facility under a capital lease.
A director of the Company is also a director and senior officer of a third-party contractor which provides certain engineering, procurement, construction and project management services to the Company. During 1998, payments to this third-party contractor were $163.8 million, primarily related to expenditures for property, plant and equipment.
NOTE 5 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:
Amortization expense from continuing operations amounted to $20,518 (1998), $24,083 (1997), and $29,117 (1996).
NOTE 6 ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
Accounts payable and other current liabilities consist of the following:
NOTE 7 INDEBTEDNESS
During 1998, the Company refinanced borrowings under its 7.325% Notes and its 6.47% and 6.30% Bank Loans by entering into new Bank Loans aggregating $77,154 which are due in 2003.
On March 31, 1997, the Company entered into a five year revolving credit agreement totaling $500,000 with various banks, $180,000 and $10,000 of which was utilized at December 31, 1998 and 1997, respectively. Borrowings on this facility are at various rate options to be determined at the time of borrowing. The facility contains covenants which are customary in agreements of this nature. The Company is required to pay a facility fee of .075% per year on the total commitment. The interest rates on domestic credit facility borrowings outstanding at December 31, 1998 and 1997, were 5.40% and 6.12%, respectively. The Company also has access to short-term uncommitted facilities based on current money market interest rates, of which $17,500 was outstanding as of December 31, 1998. The interest rate on short-term uncommitted facilities outstanding at December 31, 1998 was 5.55%. These uncommitted facilities were not utilized as of December 31, 1997.
The Company has arrangements with various banks for lines of credit for its international subsidiaries aggregating $29,339, of which $1,815 and $1,374 was utilized by the Company's Brazilian subsidiary at December 31, 1998 and 1997, respectively, for import/export financing. The weighted average interest rates on the outstanding import/export financing at December 31, 1998 and 1997 were 12.6% and 16.7%, respectively.
Based upon the existing covenants under the Company's revolving credit agreement, the Company can borrow up to an additional $330 million on its various borrowing arrangements as of December 31, 1998.
At December 31, 1998, principal maturities of long-term debt, including capital lease obligations, through the year 2003 are $2,105 (1999), $2,265 (2000), $2,142 (2001), $2,009 (2002), and $244,322 (2003).
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- Following is a summary of long-term debt:
The Company has outstanding interest rate swap contracts with an aggregate notional amount of $77,154. These contracts are used to convert the Company's variable interest rate (AIBOR - Amsterdam Interbank Offered Rate) Dutch guilder denominated debt to fixed rate debt (5.2% weighted average interest rate). See Note 15 of Notes to Financial Statements.
Following is a summary of interest from continuing operations:
NOTE 8 SHAREHOLDERS' EQUITY
The Company has in place a Shareholder Rights Plan (the Plan). The Plan was implemented by the issuance of one preferred stock purchase right for each share of common stock outstanding at the close of business on March 2, 1995, or issued thereafter until the rights become exercisable. Each right entitles the holder in certain events to purchase one-one thousandth of a share of participating preferred stock at a purchase price of $110 per share. Each one-one thousandth of a share of participating preferred stock is intended to represent the economic equivalent of one share of common stock. Under the Plan, 300 shares of participating cumulative preferred stock without per value have been authorized.
The rights currently are not exercisable. If a person or group acquires more than 15% of the outstanding common stock, or at the Board of Directors election if a tender offer for more than 15% of the outstanding common stock is commenced, or if such person or group acquires the Company in a merger or other business combination, each right (other than those held by the acquiring person) will entitle the holder to purchase stock of the Company or stock or other property of the acquiring person having a value of twice the purchase price. The rights will expire on March 2, 2005, unless redeemed earlier by the Company in whole, but not in part, at a price of $.01 per right.
Each share of $2.65 Cumulative Convertible Preferred Stock is entitled to one vote and has a minimum liquidating preference of $66 per share. Each share is subject to redemption at the Company's option at $66 per share and is convertible into 16.8075 shares of the Company's common stock. At December 31, 1998, 99 shares of unissued common stock of the Company were reserved for issuance in accordance with the $2.65 Cumulative Convertible Preferred Stock.
The Company has authorized 8,300 shares of series preferred stock, which, when issued, will have such rights, power, and preferences as shall be fixed by the Company's Board of Directors.
Quarterly dividends declared of $.28 per share on the Company's common stock amounted to $1.12 for 1998, 1997 and 1996.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS Common and preferred stock transactions were as follows:
NOTE 9 EARNINGS PER SHARE
The following is an illustration of the reconciliation of the numerators and denominators of basic and diluted EPS computations and other related disclosures required by SFAS No. 128.
The average number of options to purchase shares of common stock excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares, therefore, having an antidilutive effect, were 4,113 and 89 for fiscal 1998 and 1997, respectively. Due to the antidilutive impact of the Company's 1996 loss from continuing operations, the impact of all options to purchase shares of common stock and the conversion of 6 shares of convertible preferred stock have not been included in the computation of diluted earnings per share.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 10 COMPREHENSIVE INCOME
Components of other comprehensive income are as follows:
Components of accumulated other comprehensive income are as follows:
NOTE 11 STOCK BASED COMPENSATION PLANS
The Company has fixed option plans for certain employees. Under the 1992 Incentive Stock Option Plan, the Company may grant options to its employees for up to 179 and 184 shares of common stock at December 31, 1998 and 1997, respectively. Under the 1995 Incentive Stock Option Plan, the Company may grant options to its employees for up to 528 and 477 shares of common stock at December 31, 1998 and 1997, respectively. Under the 1997 Incentive Stock Option Plan, the Company may grant options to its employees for up to 957 and 1,828 shares of common stock at December 31, 1998 and 1997, respectively. These plans provide that shares granted come from the Company's authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant.
These options are exercisable in installments within a period not to exceed ten years from the date of grant. The options outstanding at December 31, 1998 and 1997, expire on various dates through December 2008. At December 31, 1998 and 1997, unissued common stock of the Company reserved for issuance in accordance with the stock option plans are 7,737 and 7,921 shares, respectively.
In 1997, shareholders approved a Shareholder Value Incentive Plan (the "SVIP") under which 200 shares of convertible preferred stock may be issued to selected officers and employees. Each share of preferred stock is convertible into common stock at a ten to one ratio if certain performance criteria are achieved by March 4, 2002. At December 31, 1998 and 1997, rights outstanding were 185 and 171 shares, respectively.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS
The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Under APB No. 25, the Company does not recognize compensation expense when the exercise price of the options granted is equal to the market value of the Company's common stock at the date of grant. Statement of Financial Accounting Standard No. 123 "Accounting for Stock Based Compensation" (SFAS No. 123) requires the Company to disclose the pro forma impact on net income (loss) and net income (loss) per share as if compensation expense associated with employee stock options had been calculated under the fair value method of SFAS No. 123 for employee stock options granted subsequent to December 31, 1994.
The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively; dividend yield of 3%, 3% and 4%; expected volatility of .256, .245 and .214; risk-free interest rates of 5.6%, 5.9% and 6.1%; and weighted-average expected lives of 9.0, 2.1 and 5.5 years.
The Company's net income (loss) and net income (loss) per common share have been adjusted to the pro forma amounts indicated below. These pro forma effects may not be representative of the effects on future years because of the subjective assumptions used in the fair value estimate calculated under the Black-Scholes model and that new grants are generally made each year.
Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999 since certain options granted prior to January 1, 1995, vest over five years.
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
In 1997 and 1996, restricted stock awards were granted to two key employees pursuant to certain employment agreements between the Company and such employees. In 1997, two restricted common stock awards totaling 29 shares were granted and 21 shares have vested for these awards as of December 31, 1998.
In 1996, an award of 19 shares of restricted common stock was granted and were fully vested as of December 31, 1998. In 1996, two additional restricted common stock awards totaling 40 shares were granted and will vest if certain performance-based criteria are met. Unless these performance criteria are met, these restricted stock awards shall terminate on either September 9, 2001, or June 13, 2002, according to the terms of the awards. As of December 31, 1998, 13 shares have vested for these awards.
The weighted-average fair value of the restricted stock on the date of grant was $36 and $32 with a weighted-average remaining contractual life as of December 31, 1998 of .34 and 3.26 years for 1997 and 1996 grants, respectively.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - --------------------------------------------------------------------------------
NOTE 12 OTHER EXPENSES (INCOME) - NET
The components of other expenses (income) - net from continuing operations are as follows:
NOTE 13 INCOME TAXES
The components of income (loss) from continuing operations before income taxes and cumulative effect of accounting change are:
The provision for income taxes (benefit) from continuing operations consists of the following:
The effective income tax rate from continuing operations varied from the statutory federal income tax rate as follows:
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The components of deferred income taxes are as follows:
No federal or state income taxes have been provided on approximately $235,000 of unremitted earnings of the Company's international subsidiaries at December 31, 1998. Based on the expected ability to utilize resulting foreign tax credits, no significant tax charges would result if these earnings were repatriated to the United States.
At December 31, 1998, non-current deferred tax assets include $22,554 (recorded in connection with purchase accounting associated with the acquisition of OrganoSilicones, formerly OSi Specialties) for a net operating loss carry forward and $10,000 for excess foreign tax credits. The Company has concluded that it is more likely than not that the net operating loss carry forward will be used based upon continued profitability combined with the income generated from existing taxable temporary differences; and that excess foreign tax credits will be utilized based upon the generation of domestic and foreign source income.
The Company's federal net operating losses of approximately $56,800 are subject to certain limitations and expire as follows: $8,500 (2008), $33,300 (2009), and $15,000 (2010). The Company's excess foreign tax credits of approximately $10,000 expire in 2002.
Cash payments (refunds) for income taxes amounted to $(2,510) (1998), $11,852 (1997), and $24,716 (1996).
NOTE 14 PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has various non-contributory defined benefit pension plans covering substantially all of its domestic employees and certain international employees. Benefits are primarily based upon levels of compensation and/or years of service. The Company's funding policy is based upon funding at the minimum annual amounts required by applicable federal laws and regulations plus such additional amounts as the Company may determine to be appropriate from time to time. Plan assets consist of publicly traded securities and investments in commingled funds administered by independent investment advisors.
Employees of international subsidiaries are covered by various pension benefit arrangements, some of which are considered to be defined benefit plans for financial reporting purposes. Assets of the plans are comprised primarily of insurance contracts and equity securities. Benefits under these plans are primarily based upon levels of compensation. Funding policies are based on legal requirements, tax considerations and local practices.
Certain union employees of the Company participate in multi-employer plans which provide defined benefits to these employees. The Company makes contributions primarily based upon hours worked. Such contributions amounted to $338, $559 and $473 during 1998, 1997 and 1996, respectively, for these plans. In addition, certain union employees of the Company participate in multi-employer plans that provide defined postretirement health and life insurance benefits. The net periodic postretirement benefit cost for these employees is not distinguishable. The Company's costs associated with these plans on a cash basis is not significant.
The Company provides health and life insurance to certain domestic retired employees, most of whom contribute to its cost. Substantially all employees presently become eligible for retiree benefits after reaching retirement age while working for the Company. The cost of the retiree medical plan is provided by retiree contributions that are adjusted annually to reflect current health costs. For domestic employees subject to collective bargaining arrangements, the cost is shared by the Company in accordance with the bargained agreements. Life insurance benefits for certain retired employees are provided with the Company assuming the cost. The Company's policy is to fund the plans at the discretion of management.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - --------------------------------------------------------------------------------
Change in benefit obligation:
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS
Components of net periodic benefit cost:
The weighted-average assumptions as of December 31, used in the measurement of the Company's benefit obligation are shown in the following table:
For measurement purposes, a 5.75% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease to 4.75% for 2000 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
The Company sponsors a defined contribution savings plan, the Witco Corporation Employee Retirement Savings Plan, which is organized under sections 401(k) and 401(a) of the Internal Revenue Code. The Plan allows domestic salary and hourly non-bargaining employees to contribute up to a maximum of 15% of their base pay with the Company providing a matching contribution of 50% up to 6%. In addition, the Company sponsors the OSi Specialties, Inc. 401(k) Savings and Investment Plan which covers all full time domestic employees of OSi Specialties, Inc. The Plan allows employees to contribute a maximum of 17.5% of eligible compensation and the Company provides a matching contribution of 50% up to 7.5%. The Plans permit employees to make contributions on both a pre-tax and after-tax basis. Participants are immediately vested in their contributions and become fully vested in the matching contribution upon meeting certain service requirements. Union employees' participation, provisions, contributions and employer match are based upon terms of their respective collective bargaining agreement. The Company's matching contributions to these plans were $4,300, $3,400 and $4,200 for 1998, 1997 and 1996, respectively.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 15 FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward and swap contracts to hedge the effect of foreign currency fluctuations on the financial statements. The Company also enters into interest rate swap contracts to modify the interest characteristics of its outstanding debt.
The Company purchases foreign currency forward contracts that are designated and effective as hedges of recorded transactions (principally foreign currency trade receivables and payables, as well as intercompany debt), which otherwise would expose the Company to foreign currency risk. Realized and unrealized gains and losses on foreign currency forward contracts (including open, matured and terminated contracts) that are designated and effective as hedges of recorded transactions are recognized in earnings and offset the impact of valuing recorded foreign currency trade payables and receivables. Unrealized gains or losses are cumulatively measured as the differential between the spot exchange rate at the contract's inception and the spot exchange rate as of the balance sheet date. Discounts or premiums (the difference between the current spot exchange rate and the contract exchange rate at the inception of the contract) on foreign currency forward contract designated and effective as hedges of recorded transactions are amortized over the respective contract lives. Realized and unrealized gains and losses on foreign currency forward contracts that are not designated and effective as hedges are included in income as other expenses (income) - net. The net asset or liability representing the fair value of open positions are included in accounts and notes receivables on the Consolidated Balance Sheet.
The Company uses foreign currency swap contracts that are designed to reduce its exposure to foreign currency risk from its net investment (including long-term intercompany loans) in its international subsidiaries. For foreign currency swap contracts that are designated and effective as hedges, realized and unrealized gains and losses (including those from open, matured and terminated contracts), net of related taxes, are included in the accumulated other comprehensive income component of shareholders' equity (the deferral accounting method). Discounts or premiums are amortized over the respective contract lives. The related amounts due to or from counterparties are included in deferred costs and other assets or deferred credits and other liabilities on the Consolidated Balance Sheet.
At December 31, 1998 and 1997, the Company had outstanding foreign currency forward contracts with aggregate notional amounts of approximately $237,000 and $287,000 respectively, to hedge foreign currency risk on accounts receivable and payable and intercompany debt. These forward contracts are generally outstanding for one to six months and are primarily denominated in German marks, Italian lira, Dutch guilders, Swiss and French francs, Hong Kong dollars, and British pounds.
At December 31, 1998 and 1997, the Company had outstanding foreign currency swap contracts with aggregate notional amounts of approximately $205,000 and $247,000 respectively, to hedge its foreign net investments. At December 31, 1998 the swap contracts are primarily in German marks, which expire in March 2003.
At December 31, 1998, the Company had outstanding interest rate swap contracts with an aggregate notional amount of approximately $77,000. These contracts are used to convert the Company's variable interest rate Dutch guilder denominated debt to fixed rate debt. Each interest rate swap contract is designated with the principal balance and the term of the specific debt obligation. These contracts involve the exchange of interest payments over the life of the contract without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued as other liabilities or assets and recognized as an adjustment to interest expense. The fair value of the swap contracts and changes in the fair value due to changes in market interest rates are not recognized in the financial statements. Gains and losses on terminations of interest rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss.
All contracts have been entered into with major financial institutions. The risk associated with these transactions is the cost of replacing, at current market rates, agreements in the event of default by the counterparties. Management believes the risk of incurring such losses is remote.
The Company had outstanding standby letters of credit totaling $52,691 and $43,329 at December 31, 1998 and 1997, respectively, primarily related to environmental remediation commitments and self-insurance security deposits. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the marketplace. Therefore, the Company does not believe it is practical to estimate their fair value and does not believe exposure to loss is likely.
The following summarizes the major methods and assumptions used in estimating the fair values of financial instruments.
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value due to the short maturity of these instruments.
NOTES RECEIVABLE: The fair value is estimated by discounting the future cash flows using the interest rates at which similar loans would be made under current conditions.
LONG-TERM PAYABLE: The fair value is estimated by discounting the future cash flows using the Company's incremental borrowing rate.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS
LONG-TERM DEBT, INCLUDING CURRENT PORTION: The fair value for the 6.60% and the 6.125% Notes and the 7.75% and the 6.875% Debentures were based on quoted market values. For all other long-term debt which have no quoted market price, the fair value is estimated by discounting projected future cash flows using the Company's incremental borrowing rate.
INTEREST RATE SWAP AND FOREIGN CURRENCY FORWARD AND SWAP CONTRACTS: The fair value is the amount at which the contracts could be settled based on quotes provided by investment banking firms.
The following table presents the carrying amounts and estimated fair values of material financial instruments used by the Company in the normal course of its business.
NOTE 16 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: At December 31, 1998, minimum rental commitments related to continuing operations under noncancelable operating leases amounted to $21,545 (1999), $18,951 (2000), $17,277 (2001), $16,449 (2002), $15,428 (2003), and $113,266 (2004 and thereafter).
Rental expenses under operating leases from continuing operations were $22,588 (1998), $19,549 (1997) and $22,725 (1996).
CAPITAL LEASE: The Company has a capital lease for an office/laboratory facility located in Meyrin, Switzerland. The lease contains purchase options and expires in 2007.
Future minimum lease payments at December 31, 1998, were as follows:
The lease contains a sublease agreement for one-third of the facility over the length of the lease with the lessee providing a pro rata share of the minimum lease payments.
CAPITAL COMMITMENTS: At December 31, 1998, the estimated costs to complete authorized projects under construction amounted to $143,623.
LITIGATION, CLAIMS AND CONTINGENCIES: The Company is a potentially responsible party (PRP) or a defendant in a number of governmental (federal, state and local) and private actions associated with the release, or suspected release, of contaminants into the environment. As a PRP, the Company may be liable for costs associated with the investigation and remediation of environmental contamination, as well as various penalties and damages to persons, property and natural resources. As of December 31, 1998, the Company was a PRP, or a defendant, in connection with 53 sites at which it is likely to incur environmental response costs as a result of actions brought against the Company pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act (CERCLA), the federal Resource Conservation and Recovery Act (RCRA) or similar state or local laws. With 21 exceptions, all of these sites involve one or more other PRPs, and in most cases there are numerous other PRPs in addition to the Company. CERCLA, RCRA and the state counterparts to these federal laws authorize governments to investigate and remediate actual or suspected damage to the environment caused by the release, or suspected release, of hazardous substances into the environment, or to order the responsible parties to investigate and/or remediate such environmental damage.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - --------------------------------------------------------------------------------
The Company evaluates and reviews its environmental reserves for future remediation and other costs on a quarterly basis to determine appropriate reserve amounts. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation efforts. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative cleanup methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology, and the identification of additional environmental sites.
At December 31, 1998 and 1997, the Company's reserves for environmental remediation and compliance costs, including sites identified for closure or sale as part of the 1996 restructuring plan and sites related to the operations of the former Lubricants Group, amounted to $122,546 and $186,587, respectively, reflecting the Company's estimate of the costs to be incurred over an extended period of time in respect of those matters which are reasonably estimable. At December 31, 1998 and 1997, $95,546 and $149,215, respectively, of the reserves are included in Deferred Credits and Other Liabilities on the Consolidated Balance Sheets. The Company believes it has provided adequate reserves for these commitments.
The Company is a defendant in five similar actions arising out of the Company's involvement in the polybutylene resin manufacturing business in the 1970's. Four of the following cases are currently pending in California state courts and one is pending in Texas state court: East Bay Municipal Utility District v. Mobil Oil Corporation, et al., filed in November 1993, and pending in Superior Court for the County of San Mateo, California; City of Santa Maria v. Shell Oil Company, et al., filed in May 1994, and pending in Superior Court for the County of San Luis Obispo, California; Alameda County Water District v. Mobil Oil Corporation, et al., filed in April 1996, and Marin Municipal Water District v. Shell Oil Company, et al., filed in May 1996, both pending in superior Court for the County of San Mateo; and City of Austin v. Shell Oil Company, et al., filed in June 1996, and pending in the District Court of Travis County, Texas. The actions generally allege that the Company and several other defendants negligently misrepresented the performance of polybutylene pipe and fittings installed in water distribution systems. Other allegations in the California and Texas actions include breach of the California Unfair Practices Act and the Texas Deceptive Practices Act, respectively; breach of warranty, fraud and strict liability. It is possible that the Company may be named as a defendant in future actions arising out of its past involvement in the polybutylene resin manufacturing business.
The Company is not a party to any legal proceedings, including environmental matters, which it believes will have a material adverse effect on its consolidated financial position or liquidity. However, the Company's operating results or cash flows could be materially affected in future periods by the resolution of contingencies.
NOTE 17 OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
Witco is a global manufacturer of specialty chemicals. It generates revenues from four business segments: Polymer Chemicals, OrganoSilicones, Performance Chemicals, and Oleochemicals & Derivatives. The Polymer Chemicals segment produces catalysts and additives, organotin and mixed metal stabilizers, organic peroxides, amide and stearate lubricants, tin stabilizer intermediates, metal organic products, aluminum alkyls, and methyl aluminum oxane, which are used primarily by the construction, automotive plastics packaging and marine paint industries. The OrganoSilicones segment produces organofunctional silanes, silicone surfactants, specialty silicone fluids, and amine catalysts which have uses in the plastics, personal and health care, construction, automotive, and a variety of other specialty industries. The Performance Chemicals segment produces a variety of oils, lubricants surfactants, and additives which are used in cosmetics, pharmaceuticals, plastics, motor and marine oils, paints and metal working fluids, adhesives and coatings, agricultural herbicides and latex systems. The Oleochemicals & Derivatives segment produces fatty acids, glycerines, esters, fatty amines, quaternaries, amphoteric surfactants, and specialty anionic and nonionic surfactants which are used in the personal care, home care, and functional specialties markets.
The Company evaluates performance and allocates resources based on operating income from continuing operations, not including income and expenses that are of a general corporate nature. Accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of Notes to Financial Statements. Inter-segment sales, which were not significant, are accounted for on the same basis used to price sales to similar non-affiliated customers and such sales are eliminated in arriving at consolidated amounts. The Company's reportable segments are business units that offer different products. The reportable segments are each managed separately because they manufacture and distribute distinct products with different production processes and production assets.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - --------------------------------------------------------------------------------
With the exception of operations based in the United States, no individual countries net sales or long-lived assets are significant.
Inter-area sales are accounted for on the same basis used to price sales to similar non-affiliated customers and such sales are eliminated in arriving at consolidated amounts.
The following tables present a reconciliation of operating income (loss) from continuing operations on a segment basis detailing unusual or infrequently occurring items which affect comparability between years:
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS The Company does not allocate income and expenses that are of a general corporate nature to segments in computing operating income. These include general corporate expenses, interest income and expense, and certain other income and expenses not directly attributable to a specific segment.
In 1997, corporate and unallocated included charges of $1,484 related to restructuring charges and gains of $950 as a result of settlements with certain of the Company's insurers, net of related legal and other costs.
In 1996, corporate and unallocated included charges of $53,375 related to a restructuring of the Company's operations and $49,328 of non-recurring items related to provisions for litigation and other matters.
Foreign currency translation and transaction gains and losses included in net income are not significant.
OrganoSilicones purchases, in the aggregate, approximately 40% of its raw materials from Dow Corning Corporation and Union Carbide Corporation under various long-term agreements, which expire at various times through 2010.
NOTE 18 ACQUISITIONS AND DISPOSITIONS
On May 29, 1998 the Company swapped its epoxy and adhesives business for Ciba Specialty Chemicals' PVC heat stabilizer business. The PVC heat stabilizer business had an appraised value of approximately $31,000. The acquisition was accounted for as a purchase and results of operations have been included in the consolidated financial statements from the date of the acquisition. A preliminary allocation of the purchase price (the appraised value of $31,000) resulted in no goodwill. The disposition of the Company's epoxy systems and adhesives business resulted in a gain of $362 ($221 after-tax; with no earnings per share effect). The pro-forma net sales and results of operations for this acquisition, had the acquisition occurred at the beginning of 1998 and 1997, are not significant, and accordingly, have not been provided.
NOTE 19 DISCONTINUED OPERATIONS
On September 11, 1995, the Company announced its intention to divest its Lubricants Group. These operations are reflected as discontinued operations for all periods presented in the Company's statements of operations. Net sales for discontinued operations amounted to $53,225 (1997) and $332,930 (1996). During 1997, the Company recorded an adjustment of $9,990, or $.17 per common share, reducing the estimated net loss on disposal of $68,253, or $1.21 per common share, recorded in 1996 associated with the divestiture of the Lubricants Group. The adjustment is primarily the result of revised estimates from the sale of the various Lubricants businesses.
On November 1, 1996, the Company sold certain assets of its Kendall/Amalie business and certain assets of its grease and grease gun manufacturing businesses for approximately $120,689.
On February 28, 1997, the Company sold its refinery in Bradford, Pennsylvania to American Refining Group, Inc. for approximately $17,000.
On July 18, 1997, the Company completed the Lubricant's Group divestiture with the sale of the Golden Bear Division to Golden Bear Acquisition Corporation for approximately $50,000.
Additional liabilities of the Lubricants Group which were retained by the Company as of December 31, 1998, amounted to $19,688 and are included in the accounts payable and other current liabilities caption of the Consolidated Balance Sheet including $14,888 principally for litigation and other matters and $4,800 for environmental remediation and compliance costs. Additionally, $23,116 is included in the deferred credits and other liabilities caption of the Consolidated Balance Sheet for environmental remediation and compliance costs.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (UNAUDITED)
(A) Includes restructuring charges of $1,380, or $.02 per common share - diluted, related to costs associated with the Company's global systems implementation and expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $2,466, or $.04 per common share - diluted, as a result of the disposition of an investment. (B) Includes restructuring charges of $1,696, or $.03 per common share - diluted, related to costs associated with the Company's global systems implementation and expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $221, with no per common share effect, as a result of the disposition of a business. (C) Includes restructuring charges of $903, or $.02 per common share - diluted, related to costs associated with the Company's global systems implementation and expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $244, with no per common share effect, as a result of the disposition of a business. (D) Includes restructuring credits of $25,186, or $.44 per common share - diluted, which are the result of the reversal of significant restructuring charges, which include severance and environmental closure costs related to the decision to continue operations at the Petrolia facility and revisions of estimates for certain plant environmental closure costs. These credits are offset by charges primarily associated with the Company's global systems implementation and charges related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes other non-recurring charges of $13,435, or $.23 per common share - diluted, for environmental remediation and compliance costs and a gain of $215, with no per common share effect, related to the disposition of a business. (E) Includes restructuring charges of $2,158, or $.04 per common share - diluted, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $580, or $.01 per common share - diluted, as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (F) Includes restructuring charges of $1,964, or $.03 per common share - diluted, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. (G) Includes restructuring charges of $1,254, or $.02 per common share - diluted, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $2,334 or $.04 per common share - diluted related to the disposition of businesses. (H) Includes restructuring charges of $2,581, or $.04 per common share - diluted, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a loss of $1,110 or $.02 per common share - diluted, related to the disposition of businesses. (I) Per share amounts for the quarter are computed independently; and, due to the computation formula, the sum of the quarters may not equal the year-to-date period.
Witco Corporation and Subsidiary Companies
(in thousands except per share data) - -------------------------------------------------------------------------------- RESPONSIBILITY FOR FINANCIAL STATEMENTS
Witco Corporation (Witco) is responsible for the integrity of the financial data reported by it and its subsidiary companies. This requires preparing financial statements and other financial data which fairly reflect Witco's consolidated financial position and results of operations in accordance with generally accepted accounting principles, including certain data that is based on management's best estimates and judgment.
In the preparation of its financial data and to safeguard its assets against unauthorized acquisition, use, or disposition, Witco establishes and maintains accounting and reporting systems supported by internal accounting controls. Witco believes that a high level of internal accounting control is maintained by the selection and training of qualified personnel, by appropriate delegation of authority and division of responsibilities, by the establishment and communication of accounting and business policies, and by conducting internal audits including follow-up procedures that require responsive action by management. In establishing systems of internal accounting control, Witco weighs the cost of such systems against the benefits that it believes can be derived.
Ernst & Young LLP, independent auditors, are engaged to audit and render an opinion as to whether Witco's financial statements present fairly Witco's consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Their audits are conducted in accordance with generally accepted auditing standards, and their report is included herein.
The Audit Committee of the Board of Directors, consisting of four non-employee directors, reviews Witco's accounting and auditing policies, practices and the services to be performed by the independent auditors. The Audit Committee meets with management, with the internal auditors and with the independent auditors in the exercise of its responsibilities.
SCHEDULE II
WITCO CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS)
- ------------
Notes:
(a) Amount principally consists of a purchase accounting adjustment of $3.0 million associated with the acquisition of OSi Specialties, Inc.
(b) Uncollectible receivables charged against the allowance provided.
S-1
WITCO CORPORATION INDEX TO EXHIBITS
STATEMENT OF DIFFERENCES ------------------------
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