-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IzVbHE5wrF/dcJHRahYXPUCcUpAxMTpStexyQERRE0L8hDkZCeZMXQzU/YgOpW8z zCQHmiJQMrR5B5Mw1wDLFA== 0000891554-95-000185.txt : 19951119 0000891554-95-000185.hdr.sgml : 19951119 ACCESSION NUMBER: 0000891554-95-000185 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WITCO CORP CENTRAL INDEX KEY: 0000107889 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 131870000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04654 FILM NUMBER: 95591615 BUSINESS ADDRESS: STREET 1: ONE AMERICAN WAY CITY: GREENWICH STATE: CT ZIP: 06831 BUSINESS PHONE: 2126053800 MAIL ADDRESS: STREET 1: ONE AMERICAN LANE CITY: GREENWICH STATE: CT ZIP: 06831 FORMER COMPANY: FORMER CONFORMED NAME: WITCO CHEMICAL CORP DATE OF NAME CHANGE: 19851117 FORMER COMPANY: FORMER CONFORMED NAME: WITCO CHEMICAL CO INC DATE OF NAME CHANGE: 19681203 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995 Commission File Number 1-4654 WITCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-1870000 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One American Lane, Greenwich, Connecticut 06831-2559 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 552-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] The number of shares of common stock outstanding is as follows: Class Outstanding at October 31, 1995 ----- ------------------------------- Common Stock - $5 par value 56,433,979 WITCO CORPORATION FORM 10-Q September 30, 1995 CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed consolidated balance sheets at September 30, 1995 and December 31, 1994 2 Condensed consolidated statements of income for the three and nine months ended September 30, 1995 and 1994 3 Condensed consolidated statements of cash flows for the nine months ended September 30, 1995 and 1994 4 Notes to condensed consolidated financial statements 5 Independent accountants' report on review of interim financial information 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 PART I.FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
WITCO CORPORATION AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Per Share Data) September 30, December 31, 1995 1994 (a) --------------- -------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 307,084 $ 197,173 Accounts and notes receivable-net 361,937 395,547 Inventories Raw materials and supplies $ 79,740 $ 96,939 Finished goods 146,046 225,786 161,433 258,372 ------- ------- Prepaid and other current assets 42,845 45,737 ---------- ---------- TOTAL CURRENT ASSETS 937,652 896,829 ---------- ---------- PROPERTY, PLANT, AND EQUIPMENT - less accumulated depreciation of $567,749 and $696,043 573,619 719,966 INTANGIBLE ASSETS - less accumulated amortization of $55,212 and $43,760 194,561 191,422 OTHER ASSETS 111,675 111,128 NET ASSETS OF DISCONTINUED OPERATIONS 167,079 -- ---------- ---------- TOTAL ASSETS $1,984,586 $1,919,345 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes and loans payable $ 7,104 $ 1,795 Accounts payable and other current liabilities 300,821 343,414 ---------- ---------- TOTAL CURRENT LIABILITIES 307,925 345,209 ---------- ---------- LONG-TERM DEBT 345,365 346,545 DEFERRED FEDERAL AND FOREIGN INCOME TAXES 66,246 81,354 DEFERRED CREDITS AND OTHER LIABILITIES 216,643 206,231 SHAREHOLDERS' EQUITY $2.65 Cumulative Convertible Preferred Stock, par value $1 per share Authorized - 14 shares Issued and outstanding - 7 shares 7 7 Common Stock, par value $5 per share Authorized - 100,000 shares Issued - 56,434 and 56,312 shares 282,170 281,561 Capital in excess of par value 131,080 127,643 Equity adjustments: Foreign currency translation 22,276 (1,481) Pensions (2,063) (2,446) Retained earnings 614,937 537,199 Less cost of 165 shares of common stock in treasury -- (2,477) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 1,048,407 940,006 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,984,586 $1,919,345 ========== ==========
(a) The balance sheet at December 31, 1994, has been derived from the audited financial statements at that date. See accompanying notes. 2 WITCO CORPORATION AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ---------------------------- 1995 1994 1995 1994 ----------- --------- ----------- -------- (In Thousands Except Per Share Data) REVENUES Net sales $ 441,902 $ 457,388 $1,449,085 $1,389,804 Interest 5,074 2,500 11,204 7,149 --------- ---------- ---------- ---------- 446,976 459,888 1,460,289 1,396,953 --------- ---------- ---------- ---------- COSTS AND EXPENSES Cost of goods sold (exclusive of depreciation and amortization) 347,442 357,071 1,134,166 1,070,459 Selling and administrative expenses 45,351 44,927 139,665 141,322 Depreciation and amortization 22,523 21,572 70,909 66,822 Interest 9,402 7,125 26,146 21,965 Other income - net (8,502) (4,083) (94,702) (9,300) --------- ---------- ---------- ---------- 416,216 426,612 1,276,184 1,291,268 --------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL AND FOREIGN INCOME TAXES 30,760 33,276 184,105 105,685 FEDERAL AND FOREIGN INCOME TAXES 11,316 10,620 65,370 35,917 --------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 19,444 22,656 118,735 69,768 INCOME FROM DISCONTINUED OPERATIONS - (NET OF INCOME TAXES OF $2,657, $2,379, $3,751 AND $6,386) 4,466 4,342 6,304 11,653 --------- ---------- ---------- ---------- NET INCOME $ 23,910 $ 26,998 $ 125,039 $ 81,421 ========= ========== ========== ========== PER COMMON SHARE: PRIMARY Income From Continuing Operations $.34 $.40 $2.10 $1.25 Income from Discontinued Operations - net of income taxes .08 .08 .11 .21 ---- ---- ----- ----- Net Income $.42 $.48 $2.21 $1.46 ==== ==== ===== ===== PER COMMON SHARE: FULLY DILUTED Income from Continuing Operations $.34 $.40 $2.08 $1.25 Income from Discontinued Operations - net of income taxes .08 .08 .11 .21 ---- ---- ----- ----- Net Income $.42 $.48 $2.19 $1.46 ==== ==== ===== ===== Dividends declared $.28 $.28 $.84 $.78 ==== ==== ===== ===== Weighted average number of common shares and equivalents - primary 56,861 56,383 56,542 56,389 ====== ====== ====== ======
See accompanying notes. 3 WITCO CORPORATION AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, -------------------------------- 1995 1994 ----------- ----------- (In Thousands) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 74,450 $ 87,052 ---------- ---------- INVESTING ACTIVITIES Expenditures for property, plant, and equipment (73,615) (82,653) Proceeds from dispositions 146,026 24,194 Other investing activities (5,187) 2,384 ---------- ---------- Net Cash Provided by (Used in) Investing Activities 67,224 (56,075) ---------- ---------- FINANCING ACTIVITIES Dividends paid (47,220) (39,294) Other financing activities 6,528 (1,080) ---------- ---------- Net Cash Used in Financing Activities (40,692) (40,374) ---------- ---------- Effects of Exchange Rate Changes on Cash and Cash Equivalents 8,929 8,665 ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 109,911 (732) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 197,173 183,050 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 307,084 $ 182,318 ========== ==========
See accompanying notes. 4 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - Basis of Preparation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the three and nine month periods ended September 30, 1995, are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report on Form 10-K for the year ended December 31, 1994. The condensed consolidated financial statements at September 30, 1995, and for the three and nine month periods ended September 30, 1995 and 1994, have been reviewed in accordance with standards established by the American Institute of Certified Public Accountants, by independent accountants, Ernst & Young LLP, and their report is included herein. NOTE B - Accounting Change Effective January 1, 1995, the company changed its method of inventory valuation under dollar value LIFO from LIFO double extension to LIFO link chain. Management believes that the LIFO link chain method is preferable because it is the predominate method used in the industry and will mitigate the impact of volume fluctuations on results of operations. The change in accounting method had no material effect on income for the three and nine month periods ended September 30, 1995. It is not possible to determine the effect of the change on retained earnings as of January 1, 1995 or income as previously reported for the three and nine month periods ended September 30, 1994. NOTE C - Shareholder Rights Plan On March 2, 1995, the Board of Directors unanimously approved a Shareholder Rights Plan. The Plan has been 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 will entitle the holder in certain events to purchase one-one thousandth of a share of participating preferred stock at a purchase price of $110. 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 Shareholder Rights Plan, 300,000 shares of Series A participating cumulative preferred stock without par 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's 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 earlier redeemed by the company in whole, but not in part, at a price of $.01 per right. NOTE D - Subsequent Event On October 19, 1995, the company acquired OSi Specialties Holding Company and its wholly owned subsidiary, OSi Specialties, Inc., from an investor group led by DLJ Merchant Banking Partners, L.P. in a cash transaction which values 100 percent of OSi's equity at $486 million. OSi manufactures a full line of silicone surfactants, amine catalysts, organofunctional silanes and specialty fluids at key manufacturing facilities in the United States, Belgium, Italy and Brazil. The acquisition was financed with cash-on-hand, and short-term bank loans of $375 million under a credit agreement totalling $675 million with a consortium of banks. The acquisition will be accounted for as a purchase. 5 NOTE D - Subsequent Event (con't) In addition, the company has offered to purchase for cash any and all of OSi's 11 1/2% Senior Secured Discount Debentures due 2004 and any and all of OSi Specialties 9 1/4% Senior Subordinated Notes due 2003 for $875.26 per $1,000 in principal amount of the Debentures and $1,121.83 per $1,000 in principal amount of the Notes, plus accrued interest and unpaid interest to the payment date. A 100% acceptance of this offering would equate to a total cost of approximately $280 million. In conjunction with the Offer to Purchase, the company is soliciting consents to eliminate substantially all the restrictive covenants contained in each indenture. The company will fund the acquisition of the Debentures and Notes with additional short-term bank loans available under the $675 million credit agreement. The company intends to replace all or part of these short-term bank loans with long-term financing in the public markets. NOTE E - Discontinued Operations On September 11, 1995, the company announced its intention to divest its Lubricants Group. The Board of Directors has approved a plan and retained an investment banking firm to assist in the disposal of these operations with a target date of mid 1996. These operations are reflected as discontinued operations for all periods presented in the company's income statements and as net assets of discontinued operations in the September 30, 1995 balance sheet. Cash flow from these operations for the nine months ended September 30, 1995 is approximately $3,712,000. Total revenues for the nine month periods ended September 30, 1995 and 1994 were $281,939,000 and $293,384,000, respectively. A summary of net assets of discontinued operations as of September 30, 1995 are as follows: Accounts and notes receivable - net $ 61,821 Inventories 36,257 Property, plant, and equipment - net 112,546 Accounts payable and other current liabilities (34,311) Other assets and liabilities - net (9,234) -------- Net assets of discontinued operations $167,079 ======== NOTE F - Other Matters The statements of income for the three and nine month periods ended September 30, 1995, include income of $4,700,000, or $.08 per common share, and $27,732,000, or $.48 per common share, respectively, as a result of settlements with certain of the company's insurance carriers, net of related legal and other costs. The settlements ended litigation with those carriers concerning whether policies they had issued covered certain environmental costs. The pre-tax income of $7,230,000 for the three month period, and $42,664,000 for the nine month period, are included in the caption "Other income-net". The statement of income for the nine month period ended September 30, 1995, includes a gain of $27,073,000, or $.48 per common share, from the sale of the company's Carbon Black business. The pre-tax gain of $41,651,000 is included in the caption "Other income-net". The statement of income for the nine month period ended September 30, 1995, includes a gain of $6,196,000, or $.11 per common share, from the sale of the company's Battery Parts business. The pre-tax gain of $9,532,000 is included in the caption "Other income-net". 6 NOTE F- Other Matters (con't) The statement of income for the nine month period ended September 30, 1994, includes a gain of $3,133,000, or $.06 per common share, from the sale of the metal finishing and metalworking businesses of the company's Allied-Kelite subsidiary. The pre-tax gain of $4,820,000 is included in the caption "Other income-net". NOTE G - Litigation and Environmental The company has been notified, or is named as a potentially responsible party ("PRP") or a defendant in a number of governmental (federal, state, and local) and private actions associated with environmental matters, such as those relating to hazardous wastes. These actions seek remediation costs, penalties and/or damages for personal injury or damage to property or natural resources. As of September 30, 1995, the company had been identified as a PRP in connection with 42 sites which are subject to the federal Superfund Program under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). The company has also been identified as a PRP in connection with 23 sites where state agencies have taken the lead role in overseeing site investigation or cleanup. With 11 exceptions, all the CERCLA and state controlled sites in which the company is involved are multi-party sites, and, in most cases, there are numerous other potentially responsible parties in addition to the company. CERCLA authorizes the federal government to remediate a Superfund site itself and to assess the costs against the responsible parties, or to order the responsible parties to remediate the site. 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 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 September 30, 1995, the company's reserves for environmental remediation and compliance costs amounted to $85,843,000 reflecting Witco's estimate of the costs which will be incurred over an extended period of time in respect of these matters which are reasonably estimable. The company has numerous insurance policies which it believes provide coverage at various levels for environmental liabilities. The company is currently in litigation with many of its insurers concerning the applicability and amount of insurance coverage for environmental costs under certain of these policies. Except for amounts reflected in executed settlement agreements, no provision for recovery under any of these policies is included in the company's financial statements. The company is a defendant in three similar actions pending in California state courts, which arise out of the company's involvement in the polybutylene resin manufacturing business in the 1970's: East Bay Municipal Utility District v. Mobil Oil Co., et al.; filed in November 1993, and pending in Superior Court for the County of San Mateo, City of Santa Maria v. Shell Oil Co., et al.; filed in May 1994, and pending in Superior Court for the County of San Luis Obispo, and Nipomo Community Services District v. Shell Oil Co., et al.; filed in May 1995, and pending in Superior Court for the County of San Luis Obispo. 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 include breach of warranty, fraud, strict liability, and breach of the California Unfair Practices Act. 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. 7 Independent Accountants' Review Report The Board of Directors Witco Corporation We have reviewed the accompanying condensed consolidated balance sheet of Witco Corporation and Subsidiary Companies as of September 30, 1995, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1995 and 1994, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Witco Corporation and Subsidiary Companies as of December 31, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated January 26, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Stamford, Connecticut November 10, 1995 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND FINANCIAL RESOURCES Cash and cash equivalents have increased since year end primarily as a result of the completion of the divestiture of the company's Diversified Products Segment for $146 million and favorable exchange rate fluctuations, which added $8.9 million. Proceeds of $20 million were also received from a structured settlement agreement in connection with insurance coverage of certain environmental costs. In addition, accounts receivable increased $51.3 million, primarily the result of higher net sales. On October 19, 1995, the company acquired OSi Specialties Holding Company for approximately $486 million. To finance the acquisition, the company will utilize existing cash-on-hand, and short-term financing of $375 million under a one year credit agreement totalling $675 million with a consortium of banks. On November 6, 1995, the company commenced offers to purchase for cash any and all of the outstanding 11 1/2% debentures and 9 1/4% notes of OSi and its primary operating subsidiaries. If the company acquires all of the debentures and notes in the offering, the total cost will be approximately $280 million. The company will fund the acquisition of the debentures and notes through additional borrowings under the credit agreement. Refer to Note D to the Condensed Consolidated Financial Statements for further information. CAPITAL INVESTMENTS AND COMMITMENTS Capital expenditures during the first nine months of 1995 amounted to $73.6 million, as compared to $82.7 million during the same period of 1994. The company anticipates that capital expenditures for 1995 will approximate $100 million. The company also acquired through its 53.5% owned subsidiary in the United Kingdom, Baxenden Chemicals Ltd., the prepolymers business of Akcros Chemicals. The purchase included technology, tradenames, manufacturing equipment and inventory. Baxenden is a major European producer of polyurethane prepolymers and specialty isocyanates used in the manufacture of coatings, adhesives, sealants and textile treatments. The acquisition of OSi will not only add strategic research and development capabilities along with a full line of silicone surfactants, amine catalysts, organofunctional silanes and specialty fluids, but provides the base for acceleration of growth of the company's existing products in Asia, South America and Eastern Europe. During 1996, the company will be committed to the successful integration of this acquisition. CONTINGENCIES The company has been notified, or is a named or a potentially responsible party in a number of governmental (federal, state, and local) and private actions associated with environmental matters, such as those relating to hazardous wastes, including certain sites which are on the United States EPA National Priorities List. These actions seek cleanup costs, penalties and/or damages for personal injury or damage to property or natural resources. The company is not a party to any legal proceedings or environmental matters which it believes will have a material adverse effect on its consolidated financial position. It is possible, however, that future results of operations and cash flows, for any particular quarterly or annual period, could be materially affected by such legal proceedings or environmental matters. However, the company does not expect the results of such proceedings or environmental matters to materially affect its competitive position. DISCONTINUED OPERATIONS On September 11, 1995, the company announced its intention to divest its Lubricants Group. As of September 30, 1995, the company restated its income statements and the September 30, 1995 balance sheet to reflect the classification of its Lubricants Group as discontinued operations. See Note E to the Condensed Consolidated Financial Statements for further information. 9 RESULTS OF CONTINUING OPERATIONS Third quarter sales of $441.9 million were 3 percent behind the same quarter of 1994. The absence of the Diversified Product Segment caused sales to decline $28.8 million. This decline was partially offset by improved Chemical Segment sales which rose $13.7 million due primarily to favorable foreign currency exchange rates, coupled with increased sales prices. Net Income of $19.4 million for the current quarter included a non-recurring gain of $4.7 million from settlements with certain of the company's insurers, net of related legal and other costs, ending litigation with those carriers concerning coverage of certain environmental costs. Excluding the non-recurring gain, third quarter 1995 net income was $7.9 million below the $22.7 million recorded during the same quarter of 1994. The company continues to experience an erosion in gross profit margins resulting from higher raw material costs which cannot be fully passed through in increased sales prices. Lower margins, combined with a decline in net sales, accounted for approximately half of the shortfall in earnings, before the non-recurring gain. The balance of the decline results from the reduction in "Other income - net", excluding the non-recurring gain, on the Condensed Consolidated Statements of Income, and an increase in the effective tax rate attributable to the mix of subsidiary pre-tax earnings together with a prior year release of income tax reserves that were no longer needed. The decrease in other income resulted from recording in 1994 a gain on an insurance settlement and a reduction of various reserves that were adjusted based upon favorable experience. Although offsetting, both interest income and interest expense rose sharply during the current quarter compared to the third quarter of 1994. The investment at higher interest rates of additional funds that became available from the completion of the divestiture of the Diversified Products Segment generated greater interest income, while unfavorable international interest rates caused interest expense to rise. Sales for the first nine months of 1995 of $1,449.1 million increased $59.3 million over the same period of 1994, despite a $46.5 million decline attributable to the Diversified Products Segment, the divestiture of which was completed during the second quarter of 1995. Sales for the Chemical and Petroleum segments rose 8 percent on higher sales prices and favorable foreign currency exchange rates. While volume remained flat, sales prices were raised in an attempt to recover the higher costs of raw materials. Net income for the nine months ended September 30, 1995 was $118.7 million compared to $69.8 million for the same period of 1994. The inclusion of significant non-recurring items in both periods affect comparison. Current year results include $33.3 million for the gain on the disposition of businesses and $27.7 million resulting from settlements with certain of the company's insurers, net of related legal and other costs, while 1994 results benefited from the disposition of a business that resulted in a gain of $3.1 million. Excluding non-recurring items, net income for the first nine months of 1995 of $57.7 million was $8.9 million lower than the corresponding nine months of 1994. Of this decline, approximately 50 percent can be attributed to margin erosion, partly offset by the higher reported net sales. Competitive pressures in many of the company's key markets have made it difficult to raise sales prices to the level necessary to recover increased raw material costs, causing gross profit margins to lag 1 to 2 percent behind the prior year. In addition, the third quarter decline in other income and the change in income taxes, previously noted, contributed to the decline in current year reported net income. Interest income and interest expense rose by offsetting amounts during the nine month period. Additional funds invested at more favorable rates caused interest income to rise, while interest expense increased due primarily to higher international interest rates. Segment net sales and operating income for the third quarter and first nine months of 1995 and 1994 are set forth in the following table. Income and expenses of a general nature are not allocated to industry segments in computing operating income. These include general corporate expenses, interest income and expense, and certain other income and expenses. 10 RESULTS OF CONTINUING OPERATIONS - (con't)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------------ 1995 1994 1995 1994 --------------- --------------- ---------------- ---------------- Net Sales Chemical $349.5 $335.8 $1,102.7 $1,007.2 Petroleum 95.9 96.2 295.9 285.0 Diversified products -- 28.8 61.5 107.9 Intersegment elimination (3.5) (3.4) (11.0) (10.3) -------------- ---------------- ---------------- ---------------- Total Net Sales $441.9 $457.4 $1,449.1 $1,389.8 =============== =============== ================ ================ Operating Income Chemical $26.9 $27.1 $ 87.0 $ 91.3 Petroleum 7.4 8.8 22.1 32.0 Diversified products -- 1.2 62.7 11.4 -------------- ---------------- ---------------- ---------------- Total Operating Income $34.3 $37.1 $171.8 $134.7 =============== =============== ================ ================
The company's international operations account for a greater portion of both sales and operating income as a result of the company's Lubricants Group, primarily a domestic business, being reflected as a discontinued operation (excluded from industry segment and geographic area data) and the divestiture of the Diversified Products Segment, a domestic business. International sales and operating income were up from the prior year, mainly as a result of favorable foreign currency exchange rates, while domestic sales and operating income, excluding non-recurring items, were below prior year levels. The company's international operations were responsible for 41 percent of sales and 50 percent of operating income, excluding the Diversified Products Segment and non-recurring items, for the first nine months of the current year as compared to 38 percent and 42 percent, respectively, for the corresponding period of 1994. The geographic mix for the third quarter was comparable with the nine months percentages for both years. CHEMICAL SEGMENT Segment third quarter 1995 sales of $349.5 million were $13.7 million greater than the same quarter of 1994. Favorable international currency exchange rates accounted for approximately two-thirds of the higher sales with the balance due to higher sales prices, partly offset by a 2 percent decline in volume. Third quarter 1995 operating income of $26.9 million for the Chemical Segment was comparable to the operating income reported for the same quarter of 1994. Current quarter earnings of the Polymer Additives Group were behind those reported in 1994. Income was down in the group's Vinyl business as a result of a downturn in the housing and business construction markets and lower material margins resulting from increased raw material costs and the use of higher priced feedstocks to produce alternatives to cadmium based stabilizers. The company made a decision in June 1994 to deplete its remaining stock of these stabilizers and then exit the U.S. market. The Oleo/Surfactants Group reported an increase in operating earnings. The increase was attributable to a modest improvement in shipment volume and cost savings initiatives, including the consolidation of sales functions that resulted in the closure of regional sales offices, partly offset by additional costs attributable to the purchase of intermediate products necessitated by unplanned production outages. Resin Group current quarter earnings were up over 1994, principally reflecting a change in product sales mix within the Epoxy/Hardeners business to a higher concentration of specialty products. Segment sales for the nine months ended September 30, 1995 were $1,102.7 million, an increase of $95.5 million compared to the same period of 1994. The weakening of the U.S. dollar against many international currencies, particularly the German mark, added approximately $38 million to current year sales. Sales were also favorably affected by higher selling prices and a 1 percent increase in shipment volume. Chemical Segment operating income for the first nine months of 1995 of $87 million was $4.3 million lower than the same period of the prior year. The group as a whole continues to experience difficulties in fully recovering increased raw material feedstock costs through higher sales prices due to competitive marketplace conditions. The Oleo/Surfactants Group and Polymer Additives Group shared equally in the segment's lower earnings, while the Resins Group continues to report operating income that exceeds the prior year. Higher raw material feedstock costs and extremely competitive market conditions have caused the Oleo/Surfactants earnings to decline. Products that ultimately reach the 11 CHEMICAL SEGMENT - (con't) consumer market have been the most adversely affected, where shipment volume is down and margins have eroded. Unexpected production outages have forced the group to purchase intermediate products to meet customer demand, which lowered group earnings. It is expected that production levels will return to normal during the fourth quarter of 1995. The Polymer Additives Group's earnings continue to reflect the effect of the slowdown in the overall construction industry, current year increases in raw material costs and the higher prices paid for cadmium alternative feedstocks. The group's German operations reported an improvement in operating earnings, benefiting from a dollar that weakened against the German mark. Resins Group operating earnings were up compared to 1994. The group benefited from a 3 percent increase in shipment volume, the recovery of increased raw material costs through higher sales prices, and a favorable sales mix of specialty versus commodity products. PETROLEUM SEGMENT Commencing with the current quarter, the Petroleum Segment consists solely of the Petroleum Specialties Group. This was a result of the company's decision to sell the Lubricants Group, which operating results have been reported as discontinued operations. Segment sales for the third quarter 1995 of $95.9 million were $.3 million lower than the same quarter of 1994. The effect of a favorable rate of currency exchange against the Dutch guilder was offset by a 3 percent decline in shipment volume. Operating income for this segment was $7.4 million for the third quarter of 1995 compared to $8.8 million for the corresponding quarter of 1994. Costs associated with start up inefficiencies and the commencement of depreciation charges for two major capital projects continue to hold down current year earnings. Feedstock shortages have also affected earnings through higher costs for alternative products and lost sales. Compared to the same period of 1994, current year segment sales for the first nine months of 1995 rose 4 percent to $295.9 million. The increase was primarily attributable to a favorable foreign currency exchange rate and higher selling prices, partly offset by a 1 percent decline in volume shipped. Petroleum Segment operating income for the nine months ended September 30, 1995 of $22.1 million, was $9.9 million below the same nine month period of 1994. Shortages of key raw material feedstocks at various times throughout 1995, costs associated with the start up of the group's Extracted Sulfonic Acid Unit in the U.S. and Calcium Sulfonates Plant in Holland, and lower shipment volume were the major factors leading to the decline in reported earnings. The lack of available feedstocks resulted in lost sales opportunities and higher prices paid for substituted, sometimes lower yield, raw materials. DIVERSIFIED PRODUCTS SEGMENT The divestiture of the Diversified Products Segment was completed during the second quarter of 1995. Segment operating earnings for the first nine months of 1995 and 1994 included gains of $51.2 million and $4.8 million, respectively, from the sale of the segment's businesses. OUTLOOK The company continues the implementation of the strategy of becoming more focused as a specialty chemical and petroleum product manufacturer and marketer. The acquisition of OSi Specialties and the divestiture of the Lubricants Group are important steps in this strategic implementation. The company has also completed a program to cut costs in several areas, including $4.7 million in annual salary costs. In addition, the company continues to review the possibility of consolidating manufacturing operations through plant closures. The primary factor which will influence the likelihood that the company can increase earnings in the coming quarter and year is the ability of the company to increase product margins through reducing raw material costs, increasing product sales prices, or a combination of the two. 12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The company has been notified, or is named as a potentially responsible party ("PRP") or a defendant in a number of governmental (federal, state, and local) and private actions associated with environmental matters, such as those relating to hazardous wastes. These actions seek remediation costs, penalties and/or damages for personal injury or damage to property or natural resources. As of September 30, 1995, the company had been identified as a PRP in connection with 42 sites which are subject to the federal Superfund Program under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). The company has also been identified as a PRP in connection with 23 sites where state agencies have taken the lead role in overseeing site investigation or cleanup. With 11 exceptions, all the CERCLA and state controlled sites in which the company is involved are multi-party sites, and, in most cases, there are numerous other potentially responsible parties in addition to the company. CERCLA authorizes the federal government to remediate a Superfund site itself and to assess the costs against the responsible parties, or to order the responsible parties to remediate the site. 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 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 has numerous insurance policies which it believes provide coverage at various levels for environmental liabilities. The company is currently in litigation with many of its insurers concerning the applicability and amount of insurance coverage for environmental costs under certain of these policies. Except for amounts reflected in executed settlement agreements, no provision for recovery under any of these policies is included in the company's financial statements. The company is a defendant in three similar actions pending in California state courts, which arise out of the company's involvement in the polybutylene resin manufacturing business in the 1970's: East Bay Municipal Utility District v. Mobil Oil Co., et al.; filed in November 1993, and pending in Superior Court for the County of San Mateo, City of Santa Maria v. Shell Oil Co., et al.; filed in May 1994, and pending in Superior Court for the County of San Luis Obispo, and Nipomo Community Services District v. Shell Oil Co., et al.; filed in May 1995, and pending in Superior Court for the County of San Luis Obispo. 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 include breach of warranty, fraud, strict liability, and breach of the California Unfair Practices Act. 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. 13 ITEM 5. Other Information On October 19, 1995, the company acquired OSi Specialties Holding Company and its wholly owned subsidiary, OSi Specialties, Inc., from an investor group led by DLJ Merchant Banking Partners, L.P. in a cash transaction which values 100 percent of OSi's equity at $486 million. The acquisition will be accounted for as a purchase. The purchase price was determined by submitting a competitive bid to DLJ along with other interested parties. To finance the acquisition, the company will utilize cash-on-hand, and short-term financing of $375 million under a one year credit agreement with a syndicate of 10 banks with the Morgan Guaranty Trust Company of New York, as agent. The credit agreement, which contains the customary covenants inherent in such agreements, is for a total of $675 million of which $375 million was utilized for the acquisition. In addition, the company has offered to purchase for cash any and all of OSi's 11 1/2% Senior Secured Discount Debentures due 2004 and any and all of OSi Specialties 9 1/4% Senior Subordinated Notes due 2003 for $875.26 per $1,000 in principal amount of the Debentures and $1,121.83 per $1,000 in principal amount of the Notes, plus accrued interest and unpaid interest to the payment date. A 100% acceptance of this offering would equate to a total cost of approximately $280 million. In conjunction with the Offer to Purchase, the company is soliciting consents to eliminate substantially all the restrictive covenants contained in each indenture. The company will fund the acquisition of the Debentures and Notes with additional short-term bank loans available under the $675 million credit agreement. The company intends to replace all or part of these short-term loans with long-term financing in the public markets. The assets of the acquired business include property, plant, and equipment which are used to manufacture silicone surfactants, amine catalysts, organofunctional silanes and specialty fluids. OSi has manufacturing facilities in the United States, Europe and South America with 1994 sales of approximately $400 million. The company intends to continue to operate the business acquired. It is not practical to provide the required financial statements with this filing; therefore, such statements will be filed under cover of Form 8-K/A as soon as practicable, but not later than January 2, 1996. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 2 (a) Agreement and Plan of Merger dated as of September 10, 1995 filed with Form 8-K dated September 25, 1995 2 (b) Amendment dated as of October 18, 1995 filed with Form 8-K dated October 31, 1995 4 Not applicable 10 Credit Agreement dated as of October 18, 1995 filed with Form 8-K dated October 31, 1995 11 Statement re computation of per share earnings 15 Letter re unaudited interim financial information 18 Not applicable 19 Not applicable 22 Not applicable 23 Not applicable 24 Not applicable 27 Financial Data Schedule (b) Reports on Form 8-K The company filed two Current Reports on Form 8-K, the first dated September 25, 1995, pertained to the agreement for the sale to Witco of OSi Specialties Holding Company and the second dated October 31, 1995, pertained to the closing of the acquisition. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WITCO CORPORATION (Registrant) Date: November 10, 1995 /s/ MICHAEL D. FULLWOOD --------------------------------------- Michael D. Fullwood Executive Vice President and Chief Financial Officer Date: November 10, 1995 /s/ DUSTAN E. MCCOY --------------------------------------- Dustan E. McCoy Vice President - General Counsel and Corporate Secretary 16 EX-11 2 COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11 WITCO CORPORATION AND SUBSIDIARY COMPANIES COMPUTATION OF PER SHARE EARNINGS (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- -------------------------------- 1995 1994 1995 1994 -------------- --------------- ------------- ----------- (In Thousands Except Per Share Data) PRIMARY Income from Continuing Operations $ 19,444 $ 22,656 $ 118,735 $ 69,768 Interest on convertible subordinated debentures (net of tax) -- -- -- 1,109 Dividend requirements of preferred stock (5) (5) (14) (15) --------- --------- ---------- --------- Total 19,439 22,651 118,721 70,862 Income from Discontinued Operations - net of income taxes 4,466 4,342 6,304 11,653 --------- --------- ---------- --------- Net Income $ 23,905 $ 26,993 $ 125,025 $ 82,515 ========= ========= ========== ========= Weighted average shares outstanding 56,401 56,111 56,271 54,363 Assumed conversions: Convertible subordinated debentures -- -- -- 1,692 Stock options 460 272 271 334 --------- --------- ---------- --------- Total 56,861 56,383 56,542 56,389 ========= ========= ========== ========= Per share amounts: Income from Continuing Operations $.34 $.40 $2.10 $1.25 Income from Discontinued Operations - net of income taxes .08 .08 .11 .21 ---- ---- ----- ----- Net Income $.42 $.48 $2.21 $1.46 ==== ==== ===== ===== FULLY DILUTED Income from Continuing Operations $ 19,444 $ 22,656 $118,735 $ 69,768 Interest on dilutive debentures (net of tax) -- -- -- 1,109 --------- --------- ---------- --------- Total 19,444 22,656 118,735 70,877 Income from Discontinued Operations - net of income taxes 4,466 4,342 6,304 11,653 --------- --------- ---------- --------- Net Income $ 23,910 $ 26,998 $ 125,039 $ 82,530 ========= ========= ========== ========= Weighted average shares outstanding 56,401 56,111 56,271 54,363 Assumed conversions: Convertible subordinated debentures -- -- -- 1,692 Stock options 554 272 611 334 Preferred stock 116 125 118 131 --------- --------- ---------- --------- Total 57,071 56,508 57,000 56,520 ========= ========= ========== ========= Per share amounts: Income from Continuing Operations $.34 $.40 $2.08 $1.25 Income from Discontinued Operations - net of income taxes .08 .08 .11 .21 ---- ---- ----- ----- Net Income $.42 $.48 $2.19 $1.46 ==== ==== ===== =====
EX-15 3 ACKNOWLEDGEMENT LETTER EXHIBIT 15 LETTER RE: UNAUDITED FINANCIAL INFORMATION ACKNOWLEDGMENT LETTER November 10, 1995 The Board of Directors Witco Corporation We are aware of the incorporation by reference in the Registration Statement (Form S-3, No. 33-45865) and the Post-effective Amendment No. 2 to the Registration Statement (Form S-3, No. 33-58066), each pertaining to the issuance of debentures, the Post-effective Amendment No. 1 to the Registration Statement (Form S-3, No. 33-58120) pertaining to the issuance of common stock, the Post-effective Amendment No. 2 to the Registration Statement (Form S-8, No. 33-10715), Post-effective Amendment No. 1 to the Registration Statements (Form S-8, Nos. 33-30995 and 33-45194), each pertaining to stock option plans of Witco Corporation, the Registration Statement (Form S-8, No. 33-48806), pertaining to an employee benefit plan of Witco Corporation, and the Registration Statement (Form S-8, No. 33-60755), pertaining to the 1995 Stock Option Plan for Employees of Witco Corporation and its Subsidiaries, of our report dated November 10, 1995 relating to the unaudited condensed consolidated interim financial statements of Witco Corporation and Subsidiary Companies which is included in its Form 10-Q for the quarter ended September 30, 1995. Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not part of the registration statements prepared or certified by accountants within the meaning of Sections 7 or 11 of the Securities Act of 1933. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Stamford, Connecticut EX-27 4 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS DEC-31-1995 SEP-30-1995 307,084 0 372,241 10,304 225,786 937,652 1,141,368 567,749 1,984,586 307,925 345,365 282,170 0 7 766,230 1,984,586 1,449,085 1,460,289 1,205,075 1,205,075 0 2,178 26,146 184,105 65,370 118,735 6,304 0 0 125,039 2.21 2.19
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