UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-29764
INTERNATIONAL SPECIALTY PRODUCTS INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0376469
(State of Incorporation) (I. R. S. Employer
Identification No.)
300 Delaware Avenue, Suite 303, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 427-5715
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 / /
As of May 10, 2002, 64,823,245 shares of International Specialty Products
Inc. common stock (par value $.01 per share) were outstanding.
Part I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Thousands, except per share amounts)
Quarter Ended
-----------------------
April 1, March 31,
2001 2002
--------- ----------
Net sales........................................ $ 203,197 $ 219,124
--------- ----------
Costs and expenses:
Cost of products sold.......................... 133,263 145,377
Selling, general and administrative............ 39,977 42,509
Gain on contract termination................... - (2,832)
Amortization of goodwill and intangibles....... 4,048 402
--------- ----------
Total costs and expenses................ 177,288 185,456
--------- ----------
Operating income................................. 25,909 33,668
Interest expense................................. (19,051) (22,846)
Investment income, net of investment-related
expenses of $1,031 and $1,140, respectively.... 34,677 15,239
Other expense, net............................... (6,178) (1,955)
--------- ----------
Income before income taxes....................... 35,357 24,106
Income taxes..................................... (12,402) (8,183)
--------- ----------
Income before extraordinary item and cumulative
effect of accounting change ................... 22,955 15,923
Extraordinary item - loss on early retirement of
debt, net of income tax benefit of $2,434...... - (4,725)
Cumulative effect of accounting change, net of
income tax benefit of $216..................... (440) -
--------- ----------
Net income....................................... $ 22,515 $ 11,198
========= ==========
1
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - (Continued)
(Thousands, except per share amounts)
Quarter Ended
---------------------
April 1, March 31,
2001 2002
--------- ----------
Earnings per common share:
Basic:
Income before extraordinary item and
cumulative effect of accounting change.. $ .35 $ .24
Extraordinary item........................ - (.07)
Cumulative effect of accounting change.... (.01) -
--------- ----------
Net income................................ $ .34 $ .17
========= ==========
Diluted:
Income before extraordinary item and
cumulative effect of accounting change.. $ .35 $ .24
Extraordinary item........................ - (.07)
Cumulative effect of accounting change.... (.01) -
--------- ----------
Net income................................ $ .34 $ .17
========= ==========
Weighted average number of common and common
equivalent shares outstanding:
Basic................................... 66,328 64,836
========= ==========
Diluted................................. 66,373 64,918
========= ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
March 31,
December 31, 2002
2001 (Unaudited)
------------ -----------
(Thousands)
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 79,509 $ 221,045
Investments in trading securities.............. 54,437 50,070
Investments in available-for-sale securities... 239,273 137,741
Other short-term investments................... 2,299 2,312
Restricted cash................................ 307,866 -
Accounts receivable, trade, net................ 86,574 98,039
Accounts receivable, other..................... 20,357 19,783
Receivable from related parties, net........... 9,009 17,453
Inventories.................................... 190,582 170,825
Other current assets........................... 41,564 42,015
---------- ----------
Total Current Assets......................... 1,031,470 759,283
Property, plant and equipment, net............... 560,844 555,686
Goodwill, net.................................... 502,607 502,607
Intangible assets, net........................... 15,167 14,765
Other assets..................................... 62,480 60,731
---------- ----------
Total Assets..................................... $2,172,568 $1,893,072
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................ $ 143 $ 83
Current maturities of long-term debt........... 310,265 2,360
Accounts payable............................... 49,088 46,823
Accrued liabilities............................ 97,659 84,206
Income taxes................................... 9,799 11,828
---------- ----------
Total Current Liabilities.................... 466,954 145,300
---------- ----------
Long-term debt less current maturities........... 919,557 911,190
---------- ----------
Deferred income taxes............................ 109,297 125,694
---------- ----------
Other liabilities................................ 72,703 70,969
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value per share;
20,000,000 shares authorized:
no shares issued............................. - -
Common stock, $.01 par value per share;
300,000,000 shares authorized: 69,546,456
shares issued ............................... 695 695
Additional paid-in capital..................... 487,156 487,426
Unearned compensation - restricted stock awards (1,166) (3,170)
Treasury stock, at cost - 4,831,939 and
4,733,590 shares, respectively............... (35,621) (35,092)
Retained earnings.............................. 214,095 225,293
Accumulated other comprehensive loss........... (61,102) (35,233)
---------- ----------
Total Stockholders' Equity................... 604,057 639,919
---------- ----------
Total Liabilities and Stockholders' Equity....... $2,172,568 $1,893,072
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Quarter Ended
-------------------
April 1, March 31,
2001 2002
-------- ---------
(Thousands)
Cash and cash equivalents, beginning of period........... $ 18,181 $ 79,509
-------- --------
Cash provided by operating activities:
Net income............................................. 22,515 11,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item................................. - 4,725
Cumulative effect of change in accounting principle 440 -
Depreciation....................................... 12,959 13,753
Amortization of goodwill and intangibles........... 4,048 402
Deferred income taxes.............................. 7,701 4,215
Unrealized gains on trading securities and other
short-term investments........................... (20,612) (9,279)
Increase in working capital items...................... (23,869) (6,243)
Purchases of trading securities........................ (143,546) (154,685)
Proceeds from sales of trading securities.............. 153,241 166,999
Proceeds from sale of accounts receivable.............. 1,475 1,410
Increase in net receivable from related parties........ (5,731) (8,444)
Change in cumulative translation adjustment............ (4,557) 78
Other, net............................................. 5,585 (622)
-------- --------
Net cash provided by operating activities................ 9,649 23,507
-------- --------
Cash provided by (used in) investing activities:
Capital expenditures................................... (9,872) (8,778)
Purchases of available-for-sale securities............. (45,754) (65,012)
Proceeds from sales of available-for-sale securities... 12,291 207,292
Proceeds from sales of other short-term investments.... 236 -
-------- --------
Net cash provided by (used in) investing activities...... (43,099) 133,502
-------- --------
Cash provided by (used in) financing activities:
Decrease in short-term debt............................ (8,111) (60)
Increase (decrease) in borrowings under revolving
credit facility...................................... 67,100 (7,850)
Repayments of long-term debt........................... (28,180) (308,706)
Call premium on redemption of debt..................... - (4,621)
Decrease in restricted cash............................ - 307,866
Financing fees and expenses............................ - (745)
Repurchases of common stock............................ (1,219) (1,506)
Other, net............................................. 124 206
-------- --------
Net cash provided by (used in) financing activities...... 29,714 (15,416)
-------- --------
Effect of exchange rate changes on cash.................. (536) (57)
-------- --------
Net change in cash and cash equivalents.................. (4,272) 141,536
-------- --------
Cash and cash equivalents, end of period................. $ 13,909 $221,045
======== ========
4
INTERNATIONAL SPECIALTY PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)-- (Continued)
Quarter Ended
-------------------
April 1, March 31,
2001 2002
--------- ---------
(Thousands)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized)............. $ 16,228 $ 29,119
Income taxes..................................... 3,125 2,000
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for International Specialty Products
Inc. (the "Company") reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position of the Company and its
consolidated subsidiaries at March 31, 2002, and the results of operations and
cash flows for the periods ended April 1, 2001 and March 31, 2002. All
adjustments are of a normal recurring nature. These financial statements should
be read in conjunction with the annual financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (the "Form 10-K").
Note 1. Retirement of Debt
On January 14, 2002, the Company redeemed the remaining $307.9 million
aggregate principal amount of its 9% Senior Notes due 2003 (the "2003 Notes").
The 2003 Notes were redeemed at a redemption price of 101.5% of the principal
amount plus accrued and unpaid interest to the redemption date. As a result, the
Company recorded an extraordinary loss on the early retirement of debt of $4.7
million ($7.1 million before income tax benefit of $2.4 million), or $.07
diluted earnings per share. The extraordinary charge was comprised of $4.6
million of call premium, $0.2 million of remaining discount amortization and the
write-off of $2.3 million of unamortized deferred financing fees. The redemption
was funded utilizing a restricted cash escrow account which had been established
in 2001 in connection with the issuances of long-term debt.
Note 2. New Accounting Standard
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". With the adoption of SFAS No. 142, goodwill will no longer
be subject to amortization over its estimated useful life. However, goodwill
will be subject to at least an annual assessment for impairment and more
frequently if circumstances indicate a possible impairment. Companies must
perform a fair-value-based goodwill impairment test. The initial test for
impairment, as of January 1, 2002, must be completed by the end of the second
quarter of 2002. The Company is currently in the process of this valuation. The
Company has retained an outside appraisal firm to assist in the implementation
of SFAS No. 142. At this time, the Company has not finalized the allocation of
goodwill to its reporting units. Goodwill impairment, if any, has not been
determined. This assessment could result in a material future impairment charge.
In addition, under SFAS No. 142, an acquired intangible asset should be
separately recognized if the benefit of the intangible is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged. Intangible assets will be amortized
over their useful lives. SFAS No. 142 was effective as of January 1, 2002.
Following is a reconciliation showing "Income before extraordinary item and
cumulative effect of accounting change," "Net income" and related earnings per
share, as reported for the quarters ended April 1, 2001 and March 31, 2002, and
as adjusted to exclude amortization of goodwill.
6
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. New Accounting Standard - (Continued)
Quarter Ended
---------------------
April 1, March 31,
2001 2002
--------- ----------
(Thousands, except per
share amounts)
Income before extraordinary item and cumulative
effect of accounting change, as reported....... $ 22,955 $ 15,923
Add back: goodwill amortization.................. 4,048 -
-------- --------
Adjusted income before extraordinary item and
cumulative effect of accounting change......... $ 27,003 $ 15,923
======== ========
Net income, as reported.......................... $ 22,515 $ 11,198
Add back: goodwill amortization.................. 4,048 -
-------- --------
Adjusted income before extraordinary item and
cumulative effect of accounting change......... $ 26,563 $ 11,198
======== ========
Earnings per common share:
Basic:
Net income, as reported...................... $ .34 $ .17
Goodwill amortization........................ .06 -
-------- --------
Net income, as adjusted...................... $ .40 $ .17
======== ========
Diluted:
Net income, as reported...................... $ .34 $ .17
Goodwill amortization........................ .06 -
-------- --------
Net income, as adjusted...................... $ .40 $ .17
======== ========
Note 3. Gain on Contract Termination
In December 2001, the Company entered into a letter agreement to
sell its pharmaceutical fine chemicals business, including its Haifa,
Israel-based FineTech Ltd. business and its Columbus, Ohio manufacturing
facility to Pharmaceutical Resources, Inc. ("PRI"). In February 2002, the
Company received a $250,000 payment from PRI in consideration of extending the
negotiations pursuant to the letter agreement. On March 14, 2002, the Company
announced that the sale would not be consummated due to the failure of PRI to
proceed with the transaction in a timely manner. Under the terms of the letter
agreement, the Company received a $3.0 million break-up fee. Accordingly, the
Company recognized a first quarter 2002 pre-tax gain of $2.8 million,
representing the total cash received in February and March of $3.25 million less
related expenses of $0.4 million. Also see Note 9.
7
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Comprehensive Income
Quarter Ended
--------------------
April 1, March 31,
2001 2002
--------- ---------
(Thousands)
Net income........................................ $ 22,515 $ 11,198
-------- --------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses)
on available-for-sale securities:
Unrealized holding gains (losses) arising
during the period, net of income tax
(provision) benefit of $22,867
and $(16,153)................................. (42,307) 33,781
Less: reclassification adjustment
for gains included in net income,
net of income taxes of $283 and $2,199......... 524 8,306
--------- ---------
Total change for the period..................... (42,831) 25,475
--------- ---------
Change in unrealized losses on derivative
hedging instruments - cash flow hedges:
Net derivative losses, net of income tax
benefit of $495 and $1........................ (914) (2)
Less: reclassification adjustment for losses
included in net income, net of income tax
benefit of $28 and $218....................... (51) (375)
--------- ---------
Total change for the period..................... (863) 373
Foreign currency translation adjustment......... (5,093) 21
--------- ---------
Total other comprehensive income (loss)........... (48,787) 25,869
--------- ---------
Comprehensive income (loss)....................... $ (26,272) $ 37,067
========= =========
8
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Comprehensive Income - (Continued)
Changes in the components of "Accumulated other comprehensive loss" for the
quarter ended March 31, 2002 are as follows:
Unrealized Unrealized Cumulative
Gains (Losses) Losses on Foreign Accumulated
On Available- Derivative Currency Other
for-Sale Hedging Translation Comprehensive
Securities Instruments Adjustment Income (Loss)
------------ ----------- ----------- -------------
(Thousands)
Balance, December 31, 2001.. $ (32,443) $ (964) $ (27,695) $ (61,102)
Change for the period....... 25,475 373 21 25,869
------------- ----------- ---------- ----------
Balance, March 31, 2002..... $ (6,968) $ (591) $ (27,674) $ (35,233)
============= =========== ========== ==========
Note 5. Business Segment Information
Quarter Ended
---------------------
April 1, March 31,
2001 2002
--------- ---------
(Thousands)
Net sales:
Personal Care...................................... $ 56,261 $ 53,296
Pharmaceutical, Food and Beverage.................. 55,507 60,419
Performance Chemicals, Fine Chemicals and
Industrial....................................... 72,997 81,381
--------- ---------
Total Specialty Chemicals........................ 184,765 195,096
Mineral Products (1)............................... 18,432 24,028
--------- ---------
Net sales............................................ $ 203,197 $ 219,124
========= =========
Operating income(2):
Personal Care ..................................... $ 12,190 $ 7,519
Pharmaceutical, Food and Beverage.................. 12,903 13,528
Performance Chemicals, Fine Chemicals and
Industrial (3)................................... (147) 7,055
--------- ---------
Total Specialty Chemicals........................ 24,946 28,102
Mineral Products................................... 574 5,669
--------- ---------
Total segment operating income..................... 25,520 33,771
Unallocated corporate office....................... 389 (103)
--------- ---------
Total operating income............................... 25,909 33,668
Interest expense and other, net...................... 9,448 (9,562)
--------- ---------
Income before income taxes........................... $ 35,357 $ 24,106
========= =========
9
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Business Segment Information - (Continued)
(1) Includes sales to Building Materials Corporation of America, an affiliate,
and its subsidiaries, of $15.2 and $19.1 million for the first quarter of
2001 and 2002, respectively.
(2) Net sales and operating income for the first quarter of 2001 for the three
Specialty Chemicals business segments have been restated to conform to the
2002 presentation. In 2002, the Company realigned its Alginates business
based on the markets for its products. Sales and operating income for the
Alginates business are now included in the Personal Care, Pharmaceutical,
Food and Performance Chemicals businesses. Prior to 2001, the sales and
operating income of the Alginates business represented the Food business of
the Pharmaceutical, Food and Beverage business segment.
(3) Operating income for the first quarter of 2002 for the Performance
Chemicals, Fine Chemicals and Industrial segment includes a gain of $2.8
million on the termination of a contract related to the sale of the Fine
Tech business (see Note 3).
Note 6. Hedging and Derivatives
In June 2001, ISP Chemco Inc., an indirect wholly owned subsidiary of the
Company, entered into $450.0 million of Senior Credit Facilities, which include
a $225.0 million term loan. The Company has designated interest rate swaps, with
a notional amount of $100 million, as a hedge of its exposure to changes in the
eurodollar rate under the term loan. The interest rate swaps are structured to
receive interest based on the eurodollar rate and pay interest on a fixed rate
basis. A cash flow hedging relationship has been established whereby the
interest rate swaps hedge the risk of changes in the eurodollar rate related to
borrowings against the term loan. The interest rate swaps hedge exposure to
changes in the eurodollar rate through July 2002.
At March 31, 2002, the fair value of the interest rate swaps was $(2.2)
million and is included within "Accrued liabilities" on the Company's
Consolidated Balance Sheet. During the first quarter of 2002, $0.9 million
related to the interest rate swaps was reclassified and charged against interest
expense. In addition, interest expense was reduced by $0.3 million due to
recovery in hedge ineffectiveness. As of March 31, 2002, included in Accumulated
Other Comprehensive Loss is a $0.9 million pre-tax loss related to these
interest rate swaps.
10
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7. Inventories
Inventories comprise the following:
December 31, March 31,
2001 2002
------------ --------
(Thousands)
Finished goods................ $120,797 $102,824
Work-in-process............... 36,960 33,557
Raw materials and supplies.... 32,825 34,444
-------- --------
Inventories................... $190,582 $170,825
======== ========
At December 31, 2001 and March 31, 2002, $60.1 and $56.9 million,
respectively, of domestic inventories were valued using the LIFO method. If the
FIFO inventory method had been used for these inventories, the value of
inventories would have been $3.7 and $2.2 million higher at December 31, 2001
and March 31, 2002, respectively.
Note 8. Contingencies
Environmental Litigation
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims") under the Comprehensive Environmental Response Compensation and
Liability Act, Resource Conservation and Recovery Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites or
remedial obligations are imposed, a number of which Environmental Claims are in
the early stages or have been dormant for protracted periods.
While the Company cannot predict whether adverse decisions or events can
occur in the future, in the opinion of the Company's management, the resolution
of the Environmental Claims should not be material to the business, liquidity,
results of operations, cash flows or financial position of the Company. However,
adverse decisions or events, particularly as to increases in remedial costs,
discovery of new contamination, assertion of natural resource damages, and the
liability and the financial responsibility of the Company's insurers and of the
other parties involved at each site and their insurers, could cause the Company
to increase its estimate of its liability in respect of those matters. It is not
currently possible to estimate the amount or range of any additional liability.
For further information regarding environmental matters, reference is made
to Note 19 to Consolidated Financial Statements contained in the Form 10-K.
11
INTERNATIONAL SPECIALTY PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8. Contingencies - (Continued)
Tax Claim Against G-I Holdings Inc.
The Company and certain of its subsidiaries were members of a consolidated
group for Federal income tax purposes that included G-I Holdings Inc., (the "G-I
Holdings Group") in certain prior years and, accordingly, would be severally
liable for any tax liability of the G-I Holdings Group in respect of those prior
years. Effective as of January 1, 1997, neither the Company nor any of its
subsidiaries are members of the G-I Holdings Group.
On September 15, 1997, G-I Holdings received a notice from the Internal
Revenue Service (the "IRS") of a deficiency in the amount of $84.4 million
(after taking into account the use of net operating losses and foreign tax
credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in the tax matter arising out of the surfactants partnership, although
there can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. On September 21, 2001,
the IRS filed a proof of claim with respect to such deficiency against G-I
Holdings in the G-I Holdings bankruptcy. On May 7, 2002, G-I Holdings filed an
objection to that proof of claim. If such proof of claim is sustained, the
Company and/or some of the Company's subsidiaries, together with G-I Holdings
and several current and former subsidiaries of G-I Holdings, would be severally
liable for such taxes and interest in the amount of approximately $250.0 million
should G-I Holdings be unable to satisfy such liability. In January 2001, G-I
Holdings filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code due to its asbestos-related bodily injury claims relating
to the inhalation of asbestos fiber. For additional information relating to G-I
Holdings, reference is made to Notes 8, 16 and 19 to Consolidated Financial
Statements contained in the Form 10-K.
Note 9. Subsequent Events
On April 19, 2002, the Company announced the sale of its Haifa,
Israel-based FineTech, Ltd. business to PRI for $32 million. The Company will
record a second quarter pre-tax gain, before expenses, of approximately $5.8
million related to this transaction. See also Note 3.
On April 26, 2002, the Company announced that it had acquired the roofing
granules manufacturing operations in Ione, California of Reed Minerals, a
division of Harsco Corporation. In a related transaction, the Company also
acquired the adjacent quarry operations and certain mining assets from Hanson
Aggregates Mid-Pacific, Inc.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations - First Quarter 2002 Compared With First Quarter 2001
Unless otherwise indicated by the context, "we," "us," "our," and "ISP"
refer to International Specialty Products Inc. and its consolidated
subsidiaries.
We recorded first quarter 2002 net income of $11.2 million ($.17 diluted
earnings per share) compared with $22.5 million ($.34 diluted earnings per
share) in the first quarter of 2001. First quarter 2001 results reflected $4.0
million of goodwill amortization. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized over its estimated useful life, but rather will
be subject to at least an annual assessment for impairment. See further
discussion in "-Liquidity and Financial Condition." Net income for the first
quarter of 2001, adjusted to exclude goodwill amortization, would have been
$26.6 million ($.40 diluted earnings per share). See Note 2 to Consolidated
Financial Statements.
Results for the first quarter of 2002 include a pre-tax gain of $2.8
million on a contract termination related to the sale of the FineTech business
(see Note 3 to Consolidated Financial Statements) and an after-tax extraordinary
charge of $4.7 million ($.07 diluted earnings per share) on the early retirement
of debt (see Note 1 to Consolidated Financial Statements). Results for the first
quarter of 2001 included an after-tax charge of $0.4 million ($.01 diluted
earnings per share), representing the cumulative effect of adopting SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." Excluding
the effects of such nonrecurring items and the goodwill amortization in 2001,
adjusted "Income before extraordinary item and cumulative effect of accounting
change" for the first quarter of 2002 was $14.1 million ($.22 diluted earnings
per share) compared with $27.0 million ($.41 diluted earnings per share) for the
first quarter of 2001. On a comparable basis, the lower results in the first
quarter of 2002 were attributable to $19.4 million lower investment income and
$3.8 million higher interest expense, partially offset by $7.8 million higher
operating income and $4.2 million lower other expense.
Net sales for the first quarter of 2002 were $219.1 million compared with
$203.2 million for the same period in 2001. The 8% increase in sales in the
first quarter of 2002 resulted primarily from the contribution to sales from the
industrial biocides business ($7.7 million), which was acquired on December 31,
2001, and by higher unit volumes in the Mineral Products, Pharmaceutical and
Beverage, and Fine Chemicals businesses (totaling $18.4 million), partially
offset by lower unit volumes in the Industrial and Personal Care businesses
(totaling $4.7 million), lower pricing and mix in the Industrial business ($1.8
million) and by the adverse effect of the stronger U.S. dollar in Europe ($1.9
million).
13
Operating income for the first quarter of 2002 was $33.7 million compared
with $25.9 million for the first quarter of 2001. Excluding the one-time gain on
contract termination of $2.8 million in the first quarter of 2002 and $4.0
million of goodwill amortization in the first quarter of 2001, operating income
was $30.8 million for the first quarter of 2002, a 3% increase compared with
$29.9 million for the first quarter of 2001. On a comparable basis, the $0.9
million increase in operating income in the first quarter of 2002 was primarily
attributable to improvements in operating profits in the Mineral Products and
the Performance Chemicals, Fine Chemicals and Industrial business segments
(totaling $7.2 million), partially offset by $5.9 million lower operating
profits in the Personal Care business segment.
Interest expense for the first quarter of 2002 was $22.8 million versus
$19.1 million for the same period last year. The increase was primarily due to
higher average interest rates and, to a lesser extent, higher average
borrowings. Investment income in the first quarter of 2002 was $15.2 million
compared with $34.7 million in the same period last year, reflecting lower
realized and unrealized gains in this year's first quarter. Other expense, net,
for the first quarter of 2002 was $2.0 million compared with other expense, net,
of $6.2 million in last year's first quarter, with the lower expense due to a
$2.5 million provision for environmental liability in last year's first quarter
related to a discontinued location and also $1.6 million of foreign exchange
losses in last year's first quarter.
Business Segment Review
A discussion of operating results for each of our business segments
follows. We operate our Specialty Chemicals business through three reportable
business segments, in addition to the Mineral Products segment.
Personal Care
Sales in the first quarter of 2002 were $53.3 million compared with
$56.3 million for the same period last year, while operating income for the
first quarter of 2002 decreased to $7.5 million from $12.2 million in last
year's quarter. The decrease in sales reflected lower unit volumes ($2.3
million), mainly in North and Latin America, and the adverse effect of the
stronger U.S. dollar in Europe ($0.6 million). The lower operating income
primarily resulted from lower gross margins due to an unfavorable product mix
($2.1 million) and unfavorable manufacturing costs ($2.1 million).
Pharmaceutical, Food and Beverage
Sales for the Pharmaceutical, Food and Beverage segment were $60.4
million for the first quarter of 2002, a 9% increase compared with $55.7 million
for the first quarter of 2001. Sales for the Pharmaceutical and Beverage
business increased by 13% in the first quarter of 2002, reflecting higher unit
volumes ($6.1 million), primarily higher Pharmaceutical unit volumes in the
excipients and oral care markets in Europe and North America. Sales for the
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alginates food business decreased by 13% due to lower unit volumes ($0.9
million) in North America and Europe.
Operating income for the Pharmaceutical, Food and Beverage segment was
$13.5 million in the first quarter of 2002 compared with $12.9 million in the
same period last year. Operating income for the Pharmaceutical and Beverage
business increased 12% in the first quarter of 2002 compared with the same
period in 2001. The improvement reflected the higher unit volumes, partially
offset by an unfavorable product mix ($1.0 million) and higher administrative
and selling expenses ($1.7 million). Operating results for the alginates food
business decreased by $0.9 million in the first quarter of 2002 due to
unfavorable manufacturing costs.
Performance Chemicals, Fine Chemicals and Industrial
Sales in the first quarter of 2002 were $81.4 million compared with
$73.0 million in the first quarter of 2001. The 11.5% higher sales were
primarily attributable to the industrial biocides business ($7.7 million), which
was acquired on December 31, 2001. In addition, Fine Chemicals sales increased
by $6.2 million in the first quarter of 2002 compared with last year's first
quarter due to higher sales volumes. Industrial business sales decreased by $4.7
million (12%) in the first quarter versus the same period last year, primarily
due to lower unit volumes ($2.4 million) and unfavorable pricing and mix ($1.8
million). Market selling prices of butanediol decreased by approximately 20% in
the first quarter of 2002 compared with average 2001 levels due to weakening
demand and in anticipation of new capacity coming on stream in Europe later in
2002.
Operating results for the Performance Chemicals, Fine Chemicals and
Industrial segment reflected an operating profit of $7.1 million in the first
quarter of 2002 compared with a loss of $0.1 million for the first quarter of
2001. Excluding the $2.8 million gain on contract termination, operating income
for the first quarter of 2002 was $4.2 million. The improvement was attributable
to a $4.0 million improvement in the Industrial business primarily resulting
from favorable manufacturing efficiencies due to consolidation of our butanediol
production at our Marl, Germany facility, together with lower methanol and
natural gas prices, partially offset by unfavorable pricing, mix and volumes
(totaling $3.7 million). Operating income was also favorably impacted by the
contribution to income of the industrial biocides business acquired on December
31, 2001. Operating income for the Performance Chemicals and Fine Chemicals
businesses declined by a total of $0.8 million in the first quarter of 2002
primarily due to unfavorable manufacturing costs ($2.7 million) and, to a lesser
extent, higher operating expenses ($0.8 million), partially offset by the impact
of the higher Fine Chemicals volumes ($2.6 million).
Mineral Products
Sales for the Mineral Products segment for the first quarter of 2002
were $24.0 million compared with $18.4 million for the first quarter of 2001.
The $5.6 million (30%) increase reflected $3.9 million (26%) of higher sales to
Building Materials Corporation of
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America, an affiliate, and $1.7 million (53%) of higher third party sales. The
increased sales reflected higher unit volumes ($6.3 million) resulting from an
increased demand for roofing granules. Operating income for the first quarter of
2002 was $5.7 million compared with $0.6 million for the first quarter of 2001,
reflecting favorable manufacturing efficiencies as well as the impact of the
higher volumes.
Liquidity and Financial Condition
During the first quarter of 2002, our net cash inflow before financing
activities was $157.0 million, reflecting $23.5 million of cash generated from
operations, the reinvestment of $8.8 million for capital programs and $142.3
million of cash generated from net sales of available-for-sale securities.
Cash generated from operations in the first quarter of 2002 included a
$3.0 million net cash inflow related to investments in trading securities.
Excluding this cash inflow, cash provided from operations totaled $20.5 million.
Cash invested in additional working capital totaled $6.2 million during the
first quarter of 2002, reflecting a $14.0 million decrease in payables and
accrued liabilities, primarily due to payments of accrued interest, and a $12.3
million increase in receivables, partially offset by a $19.8 million decrease in
inventories. The higher receivables resulted from $27.0 million higher sales in
the first quarter versus the fourth quarter of 2001 and the reduced inventories
resulted from our inventory reduction program that was substantially completed
in the first quarter of 2002.
Net cash used in financing activities during the first quarter of 2002
totaled $15.4 million, primarily reflecting a $7.9 million decrease in
borrowings under our bank revolving credit facility and a $4.6 million call
premium on the redemption of debt. On January 14, 2002, we redeemed the
remaining $307.9 million aggregate principal amount of our 9% Senior Notes due
2003, which we refer to as the "2003 Notes." The 2003 Notes were redeemed at a
redemption price of 101.5% of the principal amount plus accrued and unpaid
interest to the redemption date. The redemption was funded utilizing a
restricted cash escrow account which had been established in 2001 in connection
with the issuances of long-term debt. In addition, financing activities included
a $1.5 million cash outlay for repurchases of 177,600 shares of our common stock
pursuant to our repurchase program. At March 31, 2002, 771,462 shares of common
stock remained available for purchase under our repurchase program.
As a result of the foregoing factors, cash and cash equivalents
increased by $141.5 million during the first quarter of 2002 to $221.0 million,
excluding $190.1 million of trading and available-for-sale securities and other
short-term investments.
On June 30, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." With the adoption of SFAS No. 142, goodwill will no longer
be subject to amortization over its estimated useful life. However, goodwill
will be subject to at least an annual
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assessment for impairment and more frequently if circumstances indicate a
possible impairment. Companies must perform a fair-value-based goodwill
impairment test. The initial test for impairment, as of January 1, 2002, must be
completed by the end of the second quarter of 2002. We are currently in the
process of this valuation. We have retained an outside appraisal firm to assist
in the implementation of SFAS No. 142. At this time, we have not finalized the
allocation of goodwill to our reporting units. Goodwill impairment, if any, has
not been determined. This assessment could result in a material future
impairment charge. In addition, under SFAS No. 142, an acquired intangible asset
should be separately recognized if the benefit of the intangible is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented, or exchanged. Intangible assets will be
amortized over their useful lives. SFAS No. 142 was effective as of January 1,
2002.
On April 19, 2002, we announced the sale of our Haifa, Israel-based
FineTech, Ltd. business to Pharmaceutical Resources Incorporated, which we refer
to as "PRI," for $32 million. We will record a second quarter pre-tax gain,
before expenses, of approximately $5.8 million related to this sale. In December
2001, we entered into a letter agreement to sell our pharmaceutical fine
chemicals business to PRI, including the Haifa-based business and our Columbus,
Ohio manufacturing facility. In February 2002, we received a $250,000 payment
from PRI in consideration of extending the negotiations pursuant to the letter
agreement. On March 14, 2002, we announced that the sale would not be
consummated due to the failure of PRI to proceed with the transaction in a
timely manner. Under the terms of the letter agreement, we received a $3.0
million break-up fee, which was recorded as income in the first quarter of 2002
(see Note 3 to Consolidated Financial Statements).
As part of our acquisition of our Freetown, Massachusetts plant in 1998, we
entered into a multi-year agreement to supply the imaging dyes and polymers used
by Polaroid Corporation in its instant film business. In October 2001, Polaroid
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In April
2002, an announcement was made regarding the possible sale of Polaroid that
could negatively impact our ongoing relationship with Polaroid and the
utilization of our Freetown plant. As a result of the Polaroid announcement, the
sale of the FineTech business and the retention of the Columbus facility (as
discussed above), we currently have excess production capacity at the Freetown
and Columbus facilities. We are in the process of evaluating the optimal
utilization of these facilities. Depending upon the results of this study, an
impairment charge related to one or both of these facilities may be necessary.
We expect that our evaluation will be completed in the second quarter of this
year.
See Note 8 to Consolidated Financial Statements for information
regarding contingencies.
On April 26, 2002, we announced that we had acquired the roofing
granules manufacturing operations in Ione, California of Reed Minerals, a
division of Harsco Corporation. In a related transaction, we also acquired the
adjacent quarry operations and certain mining assets from Hanson Aggregates
Mid-Pacific, Inc.
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* * *
Forward-looking Statements
This Quarterly Report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee" or other words or
phrases of similar import. Similarly, statements that describe our objectives,
plans or goals also are forward-looking statements. Our operations are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those contemplated by the relevant forward-looking statement.
The forward-looking statements included herein are made only as of the date of
this Quarterly Report on Form 10-Q and we undertake no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances. No assurances can be given that projected results or events will
be achieved.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, for a discussion of "Market-Sensitive
Instruments and Risk Management." As of December 31, 2001, equity-related
financial instruments employed by us to reduce market risk included long
contracts valued at $13.5 million and short contracts valued at $7.2 million. At
March 31, 2002, the value of long contracts was $1.7 million and the value of
short contracts was $3.9 million. Such instruments are marked-to-market each
month, with unrealized gains and losses included in the results of operations.
The unrealized gain on equity-related long contracts at December 31, 2001 and
March 31, 2002 was $176,000 and $111,000, respectively, and the unrealized gain
(loss) on equity-related short contracts was $45,000 and $(94,000),
respectively.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number
--------------
10.1 Amendment No.4 to the Amended and Restated Management
Agreement, dated as of January 1, 2002 by and among G-I
Holdings Inc., Merick Inc., International Specialty Products
Inc., GAF Broadcasting Company, Inc., Building Materials
Corporation of America and ISP Management Company Inc., as
Assignee of ISP Chemco Inc. (incorporated by reference to
Exhibit 10.5 to International Specialty Products Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 31,
2001).
(b) Reports on Form 8-K filed during the current quarter:
No Reports on Form 8-K were filed during the quarter ended March 31,
2002.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL SPECIALTY PRODUCTS INC.
DATE: May 15, 2002 BY: /s/Neal E. Murphy
------------ -----------------
Neal E. Murphy
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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