Albemarle 10Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended June 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Transition Period from to .

Commission File Number 1-12658

ALBEMARLE CORPORATION

(Exact name of registrant as specified in its charter)


VIRGINIA		54-1692118
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

330 SOUTH FOURTH STREET RICHMOND, VIRGINIA		23219
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code - (804) 788-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

Number of shares of common stock, $.01 par value, outstanding as of July 31, 2005: 46,592,405

ALBEMARLE CORPORATION

INDEX


		Page Number(s)
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheets – June 30, 2005 and December 31, 2004	3-4

	Consolidated Statements of Income – Second Quarter and Six Months Ended June 30, 2005 and 2004	5

	Consolidated Statements of Comprehensive Income – Second Quarter and Six Months Ended June 30, 2005 and 2004	6

	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2005 and 2004	7

	Notes to the Consolidated Financial Statements	8-17

ITEM 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition and Additional Information	18-30

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	30-31

ITEM 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	32

ITEM 5.	Other Information	32

ITEM 6.	Exhibits	32

SIGNATURES		33

EXHIBITS		35-38

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)


	June 30, 2005		December 31, 2004
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	98,288	$	46,390
Trade accounts receivable, less allowance for doubtful accounts (2005 - $383; 2004 - $426)		309,706		300,010
Other accounts receivable, less allowance for doubtful accounts (2005 - $357; 2004 - $403)		37,169		41,541
Inventories:
Finished goods		274,782		248,253
Raw materials		91,215		59,198
Stores, supplies and other		30,829		31,306

		396,826		338,757
Deferred income taxes and prepaid expenses		15,569		20,712

Total current assets		857,558		747,410

Property, plant and equipment, at cost		2,068,336		2,064,585
Less accumulated depreciation and amortization		1,186,029		1,168,601

Net property, plant and equipment		882,307		895,984
Prepaid pension assets		188,751		189,833
Investments		128,027		170,957
Other assets and deferred charges		34,329		34,433
Goodwill		269,195		190,175
Other intangibles, net of amortization		165,760		213,953

Total assets	$	2,525,927	$	2,442,745

See accompanying notes to the consolidated financial statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except Share Amounts)


	June 30, 2005		December 31, 2004
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	184,437	$	202,410
Long-term debt, current portion		45,048		45,047
Accrued expenses		102,527		88,048
Dividends payable to shareholders		14,023		4,574
Income taxes payable		54,712		33,667

Total current liabilities		400,747		373,746

Long-term debt		839,238		899,584
Postretirement benefits		65,056		69,775
Pension benefits		54,856		54,989
Other noncurrent liabilities		80,158		84,525
Deferred income taxes		193,659		248,751

Commitments and contingencies (Note 17)

Shareholders’ equity:
Common stock, $.01 par value, issued and outstanding – 46,589,405 in 2005 and 41,898,201 in 2004		466		419
Additional paid-in capital		178,697		22,839
Accumulated other comprehensive income		36,186		46,203
Retained earnings		676,864		641,914

Total shareholders’ equity		892,213		711,375

Total liabilities and shareholders’ equity	$	2,525,927	$	2,442,745

See accompanying notes to the consolidated financial statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, Except Per-Share Amounts)

(Unaudited)


	Second Quarter Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net sales	$	502,754		$	326,759		$	1,012,719		$	648,768
Cost of goods sold		397,587			260,331			800,230			521,556

Gross profit		105,167			66,428			212,489			127,212
Selling, general and administrative expenses		53,669			32,649			110,695			63,003
Research and development expenses		10,342			5,088			21,322			9,667
Special items		(4,868	)		550			(4,868	)		5,057

Operating profit		46,024			28,141			85,340			49,485
Interest and financing expenses		(10,135	)		(1,359	)		(20,388	)		(2,918	)
Equity in net income of unconsolidated investments		11,067			681			18,459			668
Other (expenses) income, net including minority interest		(950	)		2,021			(1,946	)		951

Income before income taxes		46,006			29,484			81,465			48,186
Income taxes		13,948			8,716			25,088			13,811

Net income	$	32,058		$	20,768		$	56,377		$	34,375

Basic earnings per share	$	0.69		$	0.50		$	1.22		$	0.83

Diluted earnings per share	$	0.67		$	0.49		$	1.19		$	0.81

Cash dividends declared per share of common stock (Note 10)	$	0.31		$	0.145		$	0.46		$	0.435

See accompanying notes to the consolidated financial statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of Dollars)

(Unaudited)


	Second Quarter Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net income	$	32,058		$	20,768		$	56,377		$	34,375
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available for sale		10			(34	)		15			(26	)
Unrealized gain (loss) on hedging derivatives		119			—			406			(51	)
Realized (loss) on treasury lock agreements		—			—			(933	)		—
Amortization of realized loss on treasury lock agreements		35			—			58			—
Foreign currency translation adjustment		(138	)		(1,913	)		(9,563	)		(3,654	)

Other comprehensive income (loss)		26			(1,947	)		(10,017	)		(3,731	)

Comprehensive income	$	32,084		$	18,821		$	46,360		$	30,644

See accompanying notes to the consolidated financial statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(Unaudited)


	Six Months Ended June 30,
	2005			2004
Cash and cash equivalents at beginning of year	$	46,390		$	35,173

Cash flows from operating activities:
Net income		56,377			34,375
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization		57,692			42,962
Compensation payable in common stock and options		5,123			—
Working capital changes, net of the effects of acquisitions		(61,901	)		20,037
Equity in net income of unconsolidated investments		(18,459	)		(668	)
Decrease (increase) in prepaid pension assets		1,130			(2,329	)
Other, net		1,318			(8,431	)

Net cash provided from operating activities		41,280			85,946

Cash flows from investing activities:
Capital expenditures		(36,189	)		(19,634	)
Acquisitions		(7,553	)		(203	)
Investments in and advances to joint ventures and nonmarketable securities		(9,088	)		(5,030	)
Proceeds from the liquidation of equity method investment and sale of nonmarketable security		1,058			—
Proceeds from hedging of anticipated acquisition purchase price		—			2,989
Other		496			(503	)

Net cash used in investing activities		(51,276	)		(22,381	)

Cash flows from financing activities:
Proceeds from issuance of senior notes		324,665			—
Proceeds from issuance of common stock		147,862			—
Proceeds from borrowings		117,372			14,775
Proceeds from exercise of stock options		2,704			4,786
Repayments of long-term debt		(499,419	)		(66,474	)
Dividends paid to shareholders		(11,978	)		(11,874	)
Payment of financing costs		(2,306	)		—
Purchases of common stock		—			(827	)
Dividends paid to minority interest		(1,000	)		(1,669	)
Other		196			—

Net cash provided from (used in) financing activities		78,096			(61,283	)

Net effect of foreign exchange on cash and cash equivalents		(16,202	)		1,198

Increase in cash and cash equivalents		51,898			3,480

Cash and cash equivalents at end of period	$	98,288		$	38,653

See accompanying notes to the consolidated financial statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands of Dollars, Except Share and Per-Share Amounts)

(Unaudited)

1. In the opinion of management, the accompanying consolidated financial statements of Albemarle Corporation and its wholly owned and majority owned subsidiaries (“Albemarle” or the “Company”) contain all adjustments necessary for a fair presentation, in all material respects, of the Company’s consolidated financial position as of June 30, 2005 and December 31, 2004, the consolidated results of operations and comprehensive income for the second-quarter and six-month periods ended June 30, 2005 and 2004, and condensed consolidated cash flows for the six-month periods ended June 30, 2005 and 2004. All adjustments are of a normal and recurring nature. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K. The December 31, 2004 consolidated balance sheet data herein was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States. The results of operations for the second quarter ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the accompanying consolidated financial statements and the notes thereto to conform to the current presentation.

2. Cost of goods sold includes foreign exchange transaction (losses) gains of ($652) and ($1,027), and ($25) and $367 for the second-quarter and six-month periods ended June 30, 2005 and 2004, respectively.

3. Special items for the second quarter ended June 30, 2005 include a curtailment gain amounting to $5,603 ($3,569 after income taxes, or seven cents per diluted share) that relates to a reduction in the Company’s accumulated postretirement benefit obligation (liability) at the June 29, 2005 remeasurement date associated with a change in coverage in the Company’s unfunded postretirement health care benefits plan for active employees’ future retiree medical premium payments effective December 31, 2005 (see Note 6). Second-quarter 2005 also includes a charge of $735 ($468 after income taxes, or one cent per diluted share) for the potential settlement of future legal claims by third parties related to certain asbestos premises liabilities with an offset in other noncurrent liabilities. During second-quarter 2005, the Company entered into an agreement with Ethyl Corporation (“Ethyl”) related to a dispute over the allocation of responsibility for certain past and future claims by third parties related to certain asbestos premises liability. In addition, Ethyl and Albemarle entered into an agreement with Travelers Indemnity Company that provides a procedure for allocating defense and indemnity costs with respect to certain future asbestos premises liability claims. Special items for the second quarter and six months ended June 30, 2004 included a second-quarter 2004 charge totaling $550 ($350 after income taxes, or one cent per diluted share) related to the cleanup of the Pasadena plant zeolite facility and a first-quarter 2004 charge totaling $4,507 ($2,871 after income taxes, or seven cents per diluted share) for the closure of the Pasadena plant zeolite facility and associated layoffs and a related curtailment charge.

4. Interest and financing expenses for the six-month period ended June 30, 2005 include a January 2005 write-off of deferred financing expenses totaling $1,386 ($883 after income taxes, or two cents per diluted share), associated with the 364-day bridge loan that was retired using the proceeds from the Company’s January 2005 public offerings of common stock and senior notes.

5. Other (expenses) income, net including minority interest includes a charge for minority interest for the Company’s majority-owned subsidiary, Stannica LLC, totaling ($1,028) and ($2,512), and ($1,041) and ($2,378) for the second-quarter and six-month periods ended June 30, 2005 and 2004, respectively. Other (expenses) income, net including minority interest for the second quarter and six months ended June 30, 2004 included a realized foreign exchange hedging gain of $2,864 ($1,824 after income taxes, or four cents per share on a diluted basis) associated with the contracts entered into by the Company to hedge the euro-denominated purchase price for the Company’s acquisition of the refinery catalysts business of Akzo Nobel N.V. (“Akzo Nobel”).

6. On June 29, 2005, the Company announced a change in its coverage for its unfunded postretirement health care benefits plan effective December 31, 2005. The change in coverage (“plan change”) affects Company paid retiree medical premium payments for future retirees and results in the recognition of a special item for the acceleration of a portion of current unrecognized prior service credits in the current period of $5,603 ($3,569 after income taxes, or seven cents per diluted share). The plan change special item is reflected as a curtailment gain in accordance with Statement of Financial Accounting Standards No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The plan change did not affect the medical premium subsidy of retired employees. The plan change will affect the Company’s future retiree medical premium subsidy in two ways: (1) active employees who are age 50 or older as of December 31, 2005 and who commence their retirement benefit after January 1, 2006 and otherwise meet all other eligibility requirements will be eligible to receive a revised fixed Company subsidy; and (2) active employees who are under the age of 50 on December 31, 2005 and who otherwise meet the eligibility requirements will remain eligible for retiree medical coverage, but will be responsible for 100% of the cost of their coverage.

The plan change noted above reduced the Company’s accumulated postretirement benefit obligation (“APBO”) under its postretirement health care benefits plan by $16,223; the reduction in APBO will be amortized to income over the remaining service life to full eligibility of affected employees, amounting to four years, beginning July 1, 2005. Other postretirement benefits expense for 2005 will be reduced by $2,348 on a prospective basis as a result of the plan change. This amount will be recognized into income in the third and fourth quarters of 2005.

7. Basic and diluted earnings per share for the second-quarter and six-month periods ended June 30, 2005 and 2004 are calculated as follows:


	Second Quarter Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Basic earnings per share

Numerator:
Income available to shareholders, as reported	$	32,058	$	20,768	$	56,377	$	34,375

Denominator:
Average number of shares of common stock outstanding		46,581		41,538		46,059		41,451

Basic earnings per share	$	0.69	$	0.50	$	1.22	$	0.83

Diluted earnings per share

Numerator:
Income available to shareholders, as reported	$	32,058	$	20,768	$	56,377	$	34,375

Denominator:
Average number of shares of common stock outstanding		46,581		41,538		46,059		41,451
Shares issuable upon exercise of stock options		1,390		744		1,369		790

Total shares		47,971		42,282		47,428		42,241

Diluted earnings per share	$	0.67	$	0.49	$	1.19	$	0.81

8. The following table reflects the changes in consolidated shareholders’ equity from December 31, 2004 through June 30, 2005:


	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings			Total Share- holders’ Equity
	Shares	Amounts		Additional Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings			Total Share- holders’ Equity
Balance at December 31, 2004	41,898,201	$	419	$	22,839	$	46,203		$	641,914		$	711,375
Net income	—		—		—		—			56,377			56,377
Foreign currency translation, net	—		—		—		(9,563	)		—			(9,563	)
Realized loss on treasury lock agreements, net	—		—		—		(933	)		—			(933	)
Amortization of realized loss on treasury lock agreements, net	—		—		—		58			—			58
Unrealized gain on securities available for sale, net	—		—		—		15			—			15
Unrealized gain on hedging derivatives, net	—		—		—		406			—			406
Cash dividends declared	—		—		—		—			(21,427	)		(21,427	)
Compensation payable in common stock	—		—		5,123		—			—			5,123
Issuance of common stock, net	4,573,000		46		147,816		—			—			147,862
Exercise of stock options	111,500		1		2,703		—			—			2,704
Issuance of restricted stock	6,704		—		216		—			—			216

Balance at June 30, 2005	46,589,405	$	466	$	178,697	$	36,186		$	676,864		$	892,213

On January 20, 2005, the Company concluded the public offering of 4,573,000 shares of common stock at a price of $34.00 per share.

9. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the second-quarter and six-month periods ended June 30, 2005 and 2004, respectively, are as follows:


	% of Income Before Income Taxes
	Second Quarter Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	0.3		0.3		0.3		0.5
Extraterritorial income exclusion	(1.2	)	(2.4	)	(1.3	)	(2.7	)
Depletion	(1.0	)	(1.5	)	(1.2	)	(1.9	)
Domestic production deduction	(0.2	)	—		(0.3	)	—
Other items, net	(2.6	)	(1.8	)	(1.7	)	(2.2	)

Effective income tax rate	30.3	%	29.6	%	30.8	%	28.7	%

10. Cash dividends declared for the six-month period ended June 30, 2005 totaled 46 cents per share. Cash dividends declared for the second quarter ended June 30, 2005 totaled 31 cents per share, which included a dividend of 15 cents per share declared on April 19, 2005, payable on July 1, 2005, as well as a dividend of 16 cents per share declared on June 29, 2005, payable October 1, 2005. Cash dividends declared for the six-month period ended June 30, 2004 totaled 43.5 cents per share, which included a dividend of 14.5 cents per share declared on January 30, 2004, paid April 1, 2004, a dividend of 14.5 cents per share declared March 31, 2004, paid July 1, 2004, as well as a dividend of 14.5 cents per share declared June 30, 2004, paid October 1, 2004. The primary reason for the three dividend declarations for the six-months periods ended June 30, 2005 and 2004, was the timing of the Board of Directors meeting dates.

11. On July 31, 2004, the Company completed the acquisition of the refinery catalysts business of Akzo Nobel for approximately $763,000, including expenses, at applicable exchange rates. During 2004 and 2005, the Company increased the purchase price by approximately $23,000 and $8,000, respectively, due primarily to payments to Akzo Nobel as part of the post-closing working capital adjustments. During 2005, significant progress was made in the determination of the final purchase price allocation versus the estimated allocation at December 31, 2004. However, none of the changes made to the December 31, 2004 allocation was material to the financial position or results of operations of the Company. As part of the acquisition, the Company acquired 50 percent ownership of non-consolidated joint ventures in Brazil (Fábrica Carioca de Catalisadores S.A.), Japan (Nippon Ketjen Co., Ltd,) and France (Eurecat S.A. with affiliates in the United States, Saudi Arabia and Italy).

The purchase price allocation is summarized below.


Cash	$	31,341
Accounts receivable		78,404
Inventory		108,117
Other current assets		5,048
Property, plant and equipment		402,252
Other assets, including investment in joint ventures		50,228
Goodwill and other intangibles		303,702
In-process research and development assets		3,235
Current liabilities		(53,487	)
Non-current deferred tax liabilities		(71,019	)
Other non-current liabilities		(27,377	)
Long-term environmental liabilities		(5,403	)

Net cash paid		825,041
Less: cash acquired		(31,341	)

Net cash paid less cash acquired	$	793,700

The following unaudited pro forma data summarizes the results of operations for the second quarter and six-month period ended June 30, 2004 as if the acquisition of the refinery catalysts business of Akzo Nobel had been completed as of the beginning of each of the periods presented. The pro forma data gives effect to actual operating results prior to the acquisition, and includes adjustments for tangible and intangible asset depreciation and amortization, interest expense, various other (expense) income statement accounts and related income tax effects associated with the acquisition. Additionally, non-recurring items associated with the acquisition, including acquired inventory step-up charges, in-process research and development charges and net losses associated with the contracts used to hedge the euro-denominated purchase price, are reflected in the pro forma data for each of the periods presented. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of the beginning of each of the periods presented or that may be obtained in the future.


	Second Quarter Ended June 30, 2004		Six Months Ended June 30, 2004
Net sales	$	456,581	$	897,793

Net income	$	7,058	$	25,946

Basic earnings per share	$	0.17	$	0.63

Diluted earnings per share	$	0.17	$	0.61

The above pro forma data includes pro forma amounts for depreciation and amortization, interest expense and income taxes as follows:


	Second Quarter Ended June 30, 2004			Six Months Ended June 30, 2004
Depreciation and amortization	$	29,556		$	59,207

Interest and financing expenses	$	8,021		$	15,109

Income taxes (benefits)	$	(104	)	$	6,845

12. At June 30, 2005, goodwill and other intangibles consist principally of goodwill, customer lists, trademarks, patents and other intangibles.


	Balances at Beginning of Year		Additions and Other Changes			Amortization Charged to Expense		Foreign Exchange			Balances at June 30, 2005
Changes by operating segment:

Goodwill:
Polymer Additives	$	24,322	$	—		$	—	$	(759	)	$	23,563
Catalysts		145,824		60,642	(a)		—		20,768			227,234
Fine Chemicals		20,029		—			—		(1,631	)		18,398

	$	190,175	$	60,642		$	—	$	18,378		$	269,195

Other intangibles:
Polymer Additives	$	75,275	$	—		$	2,300	$	(2,614	)	$	70,361
Catalysts		136,742		(39,021	)(b)		3,949		—			93,772
Fine Chemicals		1,936		—			242		(67	)		1,627

	$	213,953	$	(39,021	)	$	6,491	$	(2,681	)	$	165,760

(a)

The increase in goodwill in the Catalysts segment is associated with changes to the allocation of the purchase price of the refinery catalysts business of Akzo Nobel primarily in other assets $50,135, other intangibles $39,021, property, plant and equipment ($22,252), and other various items ($13,815) as well as additional cash payments made in 2005.

(b)

Other intangibles changes in the Catalysts segment are associated with changes to the allocation of the purchase price of the refinery catalysts business of Akzo Nobel as follows: trade name ($51,706), patents ($9,154), customer list and relationships $21,946, non-compete agreements ($5,423), and licenses and other $5,316. The estimated useful lives range from 2.5 to 22 years with a weighted average of approximately 14 years. These changes do not have a material impact on previously reported results. Consistent with previous disclosures, amortization for each of the next five years should approximate $8,800.

13. Long-term debt consists of the following:


	June 30, 2005		December 31, 2004
Variable-rate bank loans	$	541,950	$	923,624
Senior notes		324,680		—
Industrial revenue bonds		11,000		11,000
Foreign borrowings		5,791		9,095
Miscellaneous		865		912

Total		884,286		944,631
Less amounts due within one year		45,048		45,047

Long-term debt	$	839,238	$	899,584

On July 29, 2004, in connection with the acquisition of the refinery catalysts business, the Company entered into (1) a senior credit agreement, with a group of lenders, consisting of a $300,000 revolving credit facility ($80,000 outstanding at June 30, 2005) and a $450,000 five-year term loan facility ($405,000 outstanding at June 30, 2005), and (2) a $450,000 364-day loan agreement. The Company used the initial borrowings under the senior credit agreement and the $450,000 364-day loan agreement to consummate the acquisition, refinance the then-existing credit agreement and pay related fees and expenses incurred in connection therewith. The $450,000 five-year loan facility is payable in quarterly installments of $11,250 through June 30, 2008, with three final quarterly payments of $90,000 beginning September 30, 2008 through March 31, 2009. The revolving credit facility and the five-year term loan facility bore variable interest rates at June 30, 2005 of 3.95% and 4.28%, respectively. These credit facilities contain certain restrictive financial covenants, including fixed charge coverage, debt to capitalization and other covenants as set forth in the agreements.

On January 20, 2005, the Company concluded the sale of $325,000 aggregate principal amount of senior notes through a public offering at a price of 99.897% of par. The Company used the net proceeds from the sale of the senior notes along with the proceeds from its concurrent sale of common stock through a public offering to retire the $450,000 364-day bridge loan. The senior notes bear an interest rate of 5.10%, which is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2005. The notes mature on February 1, 2015.

On July 8, 2005, the Company amended its senior credit agreement (outlined above). Generally, the amendment (1) reduces the applicable borrowing rates and fees payable under the revolving credit facility and five-year term loan facility, based on the ratings of the Company’s senior unsecured long-term debt as rated by outside credit rating agencies, (2) eliminates certain conditions for borrowings under the revolving credit facility, and (3) provides an option to increase the amount available for borrowings under the revolving credit facility by up to $50,000.

14. The Company has the following recorded environmental liabilities primarily included in “Other noncurrent liabilities” at June 30, 2005:


Beginning balance at December 31, 2004	$33,739
Additions		1,632
Expenditures		(928	)
Change in estimate		(300	)
Foreign exchange		(2,954	)

Ending balance at June 30, 2005	$	31,189

The amounts recorded represent the Company’s future remediation and other anticipated environmental liabilities. Although it is difficult to quantify the potential financial impact of compliance with environmental protection laws, management estimates (based on the latest available information) that there is a reasonable possibility that future environmental remediation costs associated with the Company’s past operations, in excess of amounts already recorded, could be up to approximately $14,800 before income taxes.

The Company believes that any sum it may be required to pay in connection with environmental remediation matters in excess of the amounts recorded should occur over a period of time and should not have a material adverse effect upon results of operations, financial condition or cash flows of the Company on a consolidated annual basis, although any such sum could have a material adverse impact in a particular quarterly reporting period.

On another matter, the Company is awaiting a response from the arbitration panel in its arbitration against Aventis S.A., the predecessor in interest to Sanofi Aventis (“Aventis”), to confirm that Aventis is obligated to indemnify the Company pursuant to the terms of a stock purchase agreement for certain present and future claims asserted against the Company arising out of soil and groundwater contamination at the site of the Thann, France facility. See Note 17.

15. Effective January 1, 2005, the Company revised the way it evaluates the performance of its segment results by including the operating results of its joint ventures termed “equity in net income (losses) of unconsolidated investments” along with its operating profit (losses), which represents income (loss) before income taxes, and before interest and financing expenses and other (expenses) income, net including minority interest. The change to segment income versus segment operating profit resulted from the material effect of the joint ventures acquired from Akzo Nobel as part of our acquisition of Akzo Nobel’s refinery catalysts business on July 31, 2004 on the Company’s consolidated operating results. Prior year segment information has been restated to conform to this presentation. Segment data continues to include intersegment transfers of raw materials at cost and foreign exchange transaction gains and losses, as well as allocations for certain corporate costs.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. Corporate & Other expenses include corporate-related items not allocated to the reportable segments.


Second Quarter Ended June 30, 2005	Polymer Additives		Catalysts		Fine Chemicals		Corporate & Other			Total
Net sales	$	204,435	$	147,304	$	151,015		—		$	502,754

Operating profit (loss)	$	26,582	$	18,649	$	12,197	$	(11,404	)	$	46,024
Equity in net income (losses) of unconsolidated investments		2,793		5,697		2,653		(76	)		11,067

Segment income (loss)	$	29,375	$	24,346	$	14,850	$	(11,480	)		57,091

Interest and financing expenses											(10,135	)
Other (expenses) income, net including minority interest											(950	)

Income before income taxes										$	46,006


Second Quarter Ended June 30, 2004	Polymer Additives		Catalysts		Fine Chemicals		Corporate & Other			Total
Net sales	$	180,066	$	24,400	$	122,293		—		$	326,759

Operating profit (loss)	$	22,550	$	2,550	$	10,920	$	(7,879	)	$	28,141
Equity in net income of unconsolidated investments		43		64		534		40			681

Segment income (loss)	$	22,593	$	2,614	$	11,454	$	(7,839	)		28,822

Interest and financing expenses											(1,359	)
Other (expenses) income, net including minority interest											2,021

Income before income taxes										$	29,484


Six Months Ended June 30, 2005	Polymer Additives		Catalysts		Fine Chemicals			Corporate & Other			Total
Net sales	$	402,537	$	320,128	$	290,054			—		$	1,012,719

Operating profit (loss)	$	48,600	$	39,238	$	22,541		$	(25,039	)	$	85,340
Equity in net income (losses) of unconsolidated investments		4,573		10,167		3,859			(140	)		18,459

Segment income (loss)	$	53,173	$	49,405	$	26,400		$	(25,179	)		103,799

Interest and financing expenses												(20,388	)
Other (expenses) income, net including minority interest												(1,946	)

Income before income taxes											$	81,465


Six Months Ended June 30, 2004	Polymer Additives		Catalysts		Fine Chemicals			Corporate & Other			Total
Net sales	$	352,728	$	47,277	$	248,763		$	—		$	648,768

Operating profit (loss)	$	41,409	$	5,189	$	16,056		$	(13,169	)	$	49,485
Equity in net income (losses) of unconsolidated investments		1,545		140		(883	)		(134	)		668

Segment income (loss)	$	42,954	$	5,329	$	15,173		$	(13,303	)		50,153

Interest and financing expenses												(2,918	)
Other (expenses) income, net including minority interest												951

Income before income taxes											$	48,186

16. SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) encourages, but does not require, companies to record, at fair value, compensation cost for stock-based employee compensation plans. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. If compensation cost had been determined based on the fair value at the grant date under the plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:


	Second Quarter Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Stock based compensation expense, net of taxes
as reported	$	2,154	$	869	$	4,302	$	1,791
pro forma	$	2,272	$	1,404	$	4,623	$	2,951

Net income
as reported	$	32,058	$	20,768	$	56,377	$	34,375
pro forma	$	31,940	$	20,233	$	56,056	$	33,215

Basic earnings per share on net income
as reported	$	0.69	$	0.50	$	1.22	$	0.83
pro forma	$	0.69	$	0.49	$	1.22	$	0.80

Diluted earnings per share on net income
as reported	$	0.67	$	0.49	$	1.19	$	0.81
pro forma	$	0.66	$	0.48	$	1.17	$	0.78

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for options granted in the second-quarter and six-months periods ended June 30, 2005 and 2004.


	Second Quarter Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Fair values of options granted	$	11.01		$	8.13		$	11.01		$	7.96
Dividend yield		1.97	%		2.37	%		1.97	%		2.37	%
Volatility		29.58	%		30.03	%		29.58	%		30.20	%
Average expected life (in years)		6			5			6			5
Risk-free interest rate		4.67	%		4.96	%		4.67	%		4.28	%

17. Commitments and Contingencies

The following table summarizes the Company’s contractual obligations and commitments at June 30, 2005:


	3Q 2005		4Q 2005		Sub-total 2005		2006		2007		2008		2009		2010		There- after
Long-term debt obligations	$	11,250	$	11,250	$	22,500	$	45,048	$	45,056	$	202,561	$	231,803	$	72	$	337,246
Expected interest payments on long-term debt obligations*		9,742		9,900		19,642		34,603		33,042		30,570		18,301		16,911		69,457
Operating lease obligations (rental)		2,897		2,897		5,794		7,747		5,440		4,170		3,016		3,005		25,791
Take or pay / throughput agreements		67,555		67,555		135,110		57,161		11,823		8,226		7,095		5,718		27,312
Letters of credit and guarantees		8,406		966		9,372		29,382		1,207		517		221		8		833
Capital projects		9,204		4,065		13,269		1,120		640		635		635		1,308		—
Other		2,149		196		2,345		—		—		—		—		—		—
Additional investment commitment payments		—		563		563		815		805		55		—		—		—

Total	$	111,203	$	97,392	$	208,595	$	175,876	$	98,013	$	246,734	$	261,071	$	27,022	$	460,639

These amounts are based on a weighted-average interest rate of 4.2% for term loans/credit facility, 3.5% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes for 2005. The weighted average rate for years 2006 and thereafter are 4.6% for term loans/credit facility, 3.7% for variable rate long-term debt obligations and an interest rate of 5.1% for the senior notes.

The Company executes, through financial institutions, contracts with certain of its customers that serve as guarantees on product delivery and performance according to customer specifications that can cover both shipments on an individual basis as well as blanket coverage of multiple shipments under customer supply contracts. The financial coverage provided by these guarantees is typically based on a percentage of net sales value.

In addition, the Company has commitments, in the form of guarantees, for 50% of the loan amounts outstanding (which at June 30, 2005, amounted to $33,285) of its 50%-owned joint venture company, Jordan Bromine Company Limited (“JBC”). JBC entered into the loans in 2000 to finance construction of certain bromine and derivatives manufacturing facilities on the Dead Sea. During the second quarter of 2005, the Company and its joint venture partner each advanced $6,000 to JBC for operating capital purposes.

On April 2, 2004, Albemarle Overseas Development Company (“AODC”), a wholly owned subsidiary of the Company, initiated a Request for Arbitration against Aventis through the International Chamber of Commerce, International Court of Arbitration, Paris, France. The dispute arises out of a 1992 Stock Purchase Agreement (“Agreement”) between a

predecessor to AODC, and a predecessor to Aventis under which 100% of the stock of Potasse et Produits Chimiques, S.A., now known as Albemarle PPC (“APPC”), was acquired by AODC. The dispute relates to a chemical facility in Thann, France owned by APPC. Under the terms of the Agreement, the Company believes that Aventis is obligated to indemnify AODC and APPC, and hold them harmless from certain claims, losses, damages, costs or any other present or prospective liabilities arising out of soil and groundwater contamination at the site in Thann.

Beginning in May 2000, the French government, with respect to the management of pollution risk on the site of active industrial installations, required APPC to conduct an environmental risk study of the Thann facility. In June 2002, the French government directed APPC to undertake a more detailed risk study of groundwater contamination. The administrative process of the French government is still ongoing as of the present date. AODC has demanded indemnification from Aventis for the cost of the studies, but Aventis has refused to pay.

The Request for Arbitration requests indemnification of AODC by Aventis for certain costs incurred by APPC, in connection with any environmental claims of the French government for the APPC facility and a declaratory judgment as to the liability of Aventis under the Agreement for costs to be incurred in the future by APPC in connection with such claims. Arbitration related to the question of liability took place in June 2005 and we currently expect a response from the arbitration panel or by the end of 2005.

On July 13, 2005, the French environmental authorities instructed APPC to conduct additional testing and take certain measures with respect to the containment of certain contamination at the Thann facility. At this time, it is not possible to predict what the French government will otherwise require, since this matter is in its initial stages and environmental matters are subject to many uncertainties. The Company believes, however, that it is entitled to be fully indemnified by Aventis for all liabilities arising from this matter, but no assurance can be given that it will prevail in this matter. If the Company does not prevail in the arbitration and the government requires additional remediation, the costs of remediation could be significant.

18. In accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106,” the following information is provided for interim domestic and foreign pension and postretirement benefit plans:


	Second Quarter Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net Periodic Pension Benefit Cost:
Service cost	$	4,761		$	2,464		$	9,612		$	4,997
Interest cost		7,439			6,112			14,931			12,755
Expected return of assets		(10,881	)		(10,295	)		(21,807	)		(20,677	)
Plan curtailment*		—			—			—			898

Amortization of Unrecognized Amounts:
Net transition obligation		9			5			18			11
Prior service cost		106			179			212			361
Net loss		2,084			876			4,168			1,514

Total expense (income)	$	3,518		$	(659	)	$	7,134		$	(141	)

Net Periodic Postretirement Benefit Expense:
Service cost	$	468		$	345		$	937		$	832
Interest cost		1,097			1,054			2,195			2,124
Expected return of assets		(120	)		(141	)		(240	)		(255	)
Plan curtailment*		(5,603	)		—			(5,603	)		—

Amortization of Unrecognized Amounts:
Prior service benefit		(358	)		(359	)		(716	)		(698	)
Net loss		96			51			192			147

Total (benefit) expense	$	(4,420	)	$	950		$	(3,235	)	$	2,150

During the second quarter ended June 30, 2005, a curtailment gain amounted to $5,603 relating to a reduction in the Company’s accumulated postretirement benefit obligation (liability) at the June 29, 2005 remeasurement date associated with a change in coverage in the Company’s unfunded postretirement heath care benefits plan for active employees’ future retiree medical premium payments effective December 31, 2005. During the first quarter ended March 31, 2004, a SFAS No. 88 pension curtailment charge was incurred totaling $898 due to the layoffs at the zeolite facility in Pasadena, Texas.

The Company did not make any contributions to its pension plans in the first six months of 2005.

19. Recently Issued Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handing costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB No. 43. In addition, this statement requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We believe that the adoption of SFAS No. 151 will not have an effect on the Company.

In December 2004, FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and its related implementation guidance. SFAS No. 123R will be effective as of the first annual reporting period that begins after June 15, 2005. SFAS No. 123R will result in the recognition of additional compensation expense relating to the Company’s incentive plans. This revision will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The Company currently uses the intrinsic value method from APB No. 25 to measure compensation expense for stock-based awards to its employees. Under this standard, the Company generally does not recognize any compensation related to stock option grants the Company issues under its incentive plans. Under the new rules, the Company is required to adopt a fair-value-based method for measuring the compensation expense related to incentive stock awards. The adoption of SFAS No. 123R is not expected to have a significant impact on the Company’s reported results of operations.

In December 2004, the FASB issued Staff Position SFAS 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP SFAS 109-1”) and FASB Staff Position SFAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP FAS 109-2”). The American Jobs Creation Act of 2004 (the “Act”), which was signed into law on October 22, 2004, provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase out of the existing extra-territorial income exclusion (“ETI”) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company does not expect the net effect of the phase out of the ETI and the phase in of this new deduction to result in a significant impact in the effective tax rate for fiscal years 2005 and 2006 based on current earnings levels. However, due to the complexity of the Act, the Company has entered into contractual arrangements with an external resource to evaluate the overall impact of the Act on the Company’s earnings forecast. Under the guidance in FSP SFAS 109-1, the deduction will be treated as a “special deduction” as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the Company’s tax return. The Act also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, currently, uncertainty remains as to how to interpret numerous provisions in the Act. The Company is still evaluating whether it can take advantage of this one-time benefit offered for repatriation of accumulated foreign earnings.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be recognized when incurred if their fair values can be reasonably estimated. FIN 47 is effective no later than December 31, 2005. The cumulative effect of initially applying FIN 47 will be recognized as a change in accounting principle. The Company is in the process of evaluating the expected effect of FIN 47 on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement is effective for fiscal years beginning after December 15, 2005.

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition and Additional Information

Forward-looking Statements

Some of the information presented in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and variations of such words and similar expressions to identify such forward-looking statements.

These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. There can be no assurance, therefore, that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:

•

the timing of orders received from customers;

•

the gain or loss of significant customers;

•

competition from other manufacturers;

•

changes in the demand for our products;

•

increases in the cost of raw materials and energy, and our inability to pass through such increases;

•

changes in our markets in general;

•

fluctuations in foreign currencies;

•

changes in laws and regulations;

•

the occurrence of claims or litigation;

•

the inability to maintain current levels of product or premises liability insurance or the denial of such coverage;

•

political unrest affecting the global economy, including adverse effects from terrorism or hostilities;

•

changes in accounting standards;

•

the integration of the refinery catalysts business into our operations;

•

the inability to achieve results from our global manufacturing cost reduction initiatives as well as our ongoing continuous improvement and rationalization programs;

•

changes in interest rates, to the extent they (1) affect our ability to raise capital or increase our cost of funds, (2) have an impact on the overall performance of our pension fund investments and (3) increase our pension expense and funding obligations; and

•

the other factors detailed from time to time in the reports we file with the Securities and Exchange Commission (“SEC”).

We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. The following discussion should be read together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

The following is a discussion and analysis of our results of operations and financial condition since December 31, 2004.

Change in Segment Reporting

Effective January 1, 2005, we revised the way we evaluate the performance of our segment results by including the operating results of our joint ventures, termed “equity in net income (losses) of unconsolidated investments,” along with our operating profit (losses). Segment results for the quarter ended June 30, 2004 have been recast to reflect the way the chief operating decision maker reviews our three segments. The change to segment income versus segment operating profit resulted from the material effect of the joint ventures acquired from Akzo Nobel N.V. (“Akzo Nobel”) as part of our acquisition of Akzo Nobel’s refinery catalysts business (“refinery catalysts business”) on July 31, 2004 on our consolidated operating results.

A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 28.

Overview

We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals. Our products and services enhance the value of our customers’ end-products by improving performance, providing essential product attributes, lowering cost and simplifying processing. We sell a highly diversified mix of products to a wide range of customers, including manufacturers of consumer electronics, building and construction materials, automotive parts, packaging, pharmachemicals and agrichemicals, and petroleum refiners. We believe that our commercial and geographic diversity, technical expertise, flexible, low-cost global manufacturing base, strong cash flows and experienced management team enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.

Growth of our Polymer Additives segment is expected to be derived from increasing demand for electrical and electronic equipment, new construction and increasingly stringent fire-safety regulations in many countries around the world. Growth in our Catalysts segment is expected to be driven by increasing demand for petroleum products, generally deteriorating quality of crude oil feedstock and implementation of more stringent fuel quality requirements as a part of anti-pollution initiatives. The Fine Chemicals segment continues to benefit from the continued rapid pace of innovation and the introduction of new products, coupled with a movement by pharmaceutical companies to outsource certain research, product development and manufacturing functions.

Outlook

Across the Company, we continue to work to contain costs and drive pricing to ensure we are delivering the margins we believe are necessary to support further growth. We have a new round of previously announced price increases taking effect on July 1 in a number of bromine, phosphorus and organometallic related products, which we believe should help continue to offset raw material price increases. We believe that we are on track to exceed our three-year, $50 million manufacturing cost savings program by the end of this year, the third year of the program.

As part of our continued emphasis on global growth, we recently announced our intent to construct a technology center with associated production and packaging facilities in Nanjing, China. Additionally, we have signed definitive agreements for a second China joint venture in polymer stabilizers and intermediates. These two developments represent a significant milestone in our Asia plans and we believe that they allow us to maintain the leading antioxidant position in China and increase our technical support to the rapidly developing polymer market throughout Asia.

As many U.S. companies have experienced, we are facing a challenge with regard to the growing obligations of our U.S. defined pension and post-retirement benefits plans. For the year, our net pension expense will increase approximately $8 million over 2004, a trend that has been significant since 2000. We have begun to take steps to moderate this cost. In addition, in the second quarter, we modified the Company’s retiree medical benefit plans to reduce future liabilities for unfunded medical premium subsidies.

As we previously reported, BP announced that it will close its linear alpha olefins plant in Pasadena, Texas by the end of 2005. We have negotiated an agreement with BP that transfers certain operating assets to us and will allow for a smooth transition as BP closes its plant.

Polymer Additives

Looking ahead, we believe we are still on pace to achieve a record year in both sales and profits. Despite high raw material pricing and a reduction in demand in certain end markets such as U.S. automotive demand and polyolefin production, we typically see an increase in consumer electronics in the third quarter as orders are filled for the holiday season. The next several months should provide a better indication of what to expect for the full second half. Pricing is, and will continue to be, an area of management focus. Our second quarter results demonstrate our successful execution in this area and the importance of maintaining this discipline as we move forward.

Catalysts

We have reached the first anniversary of the Akzo Nobel refinery catalysts business acquisition and continue to be pleased with the pace of business development, integration and overall synergies captured to date. During the second quarter of 2005, we announced a major expansion of our hydroprocessing catalysts (“HPC”) production capacity, which reinforces our commitment to this business as a global technology leader in HPC. We approved a new 10,000 metric ton catalyst plant at our Bayport, Texas facility to satisfy growing demand of HPC, with additional capacity expansions in the Netherlands and Japan. Production at the new Texas plant is expected to begin in late 2006.

Fine Chemicals

Our Fine Chemistry Services business continues to accelerate, built on successes from our new product pipeline. We recently announced the establishment of a program to provide enhanced research capabilities at our Orangeburg, South Carolina site, as well as plans to upgrade our cGMP facilities there, to enable larger scale production for multiple commercial products emerging from this pipeline. We now have 99 new products in our pharmaceutical-related pipeline, up from 96 in the first quarter. Additionally, we have 48 non-pharmaceutical products under various stages of development. New product revenues are accelerating, and as a result, we expect a 45 percent increase in sales from new products introduced in the last five years versus 2004. We will continue our focus for profit improvement and remain on track to deliver expanded margins in our bromine business. We are also evaluating the best options for increasing bromine capacity as demand continues to outstrip supply. In addition, we are evaluating various asset rationalization plans to reduce operating costs.

Industry Conditions

We conduct our business in many regions of the world including the United States, Europe and Asia. As a result, our business is subject to economic cycles. In addition, because many of our customers are in industries, including the consumer electronics, building and construction, and automotive industries, that are cyclical in nature and sensitive to changes in general economic conditions. Our results are impacted by the effect on our customers of economic upturns and downturns, our own costs to produce our products and changes in our customers supply chains. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices.

Additional Information:

Set forth below is a reconciliation of net income excluding special items, a financial measure that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (GAAP”) to net income, the most directly comparable financial measure calculated and reported in accordance with GAAP, for the second-quarter and six-months periods ended June 30, 2005 and 2004, respectively. This information is included to provide further support of the fluctuations discussed in the results of operations below. We believe this measure is more reflective of our operations, provides transparency to investors and enables period-to-period comparability of financial performance.

ALBEMARLE CORPORATION AND SUBSIDIARIES

(In Thousands, Except Per-Share Amounts)

(Unaudited)


	Second Quarter Ended June 30, 2005									Second Quarter Ended June 30, 2004
	As Reported			Special Items			Excluding Special Items			As Reported			Special Items			Excluding Special Items
Net sales	$	502,754		$	—		$	502,754		$	326,759		$	—		$	326,759
Cost of goods sold		(397,587	)		—			(397,587	)		(260,331	)		—			(260,331	)
Selling, general and administrative expenses (including SFAS No. 2 R&D)		(64,011	)		—			(64,011	)		(37,737	)		—			(37,737	)
Special items		4,868			(4,868	)(a)		—			(550	)		550	(b)		—

Operating profit		46,024			(4,868	)		41,156			28,141			550			28,691
Interest and financing expenses		(10,135	)		—			(10,135	)		(1,359	)		—			(1,359	)
Equity in net income of unconsolidated investments		11,067			—			11,067			681			—			681
Other (expenses) income, net including minority interest		(950	)		—			(950	)		2,021			(2,864	)(b)		(843	)

Income before income taxes		46,006			(4,868	)		41,138			29,484			(2,314	)		27,170
Income tax expense		(13,948	)		1,767	(a)		(12,181	)		(8,716	)		840	(b)		(7,876	)

Net income	$	32,058		$	(3,101	)	$	28,957		$	20,768		$	(1,474	)	$	19,294

Diluted earnings per share	$	0.67		$	(0.07	)	$	0.60		$	0.49		$	(0.03	)	$	0.46


	Six Months Ended June 30, 2005									Six Months Ended June 30, 2004
	As Reported			Special Items			Excluding Special Items			As Reported			Special Items			Excluding Special Items
Net sales	$	1,012,719		$	—		$	1,012,719		$	648,768		$	—		$	648,768
Cost of goods sold		(800,230	)		—			(800,230	)		(521,556	)		—			(521,556	)
Selling, general and administrative expenses (including SFAS No. 2 R&D)		(132,017	)		—			(132,017	)		(72,670	)		—			(72,670	)
Special items		4,868			(4,868	)(a)		—			(5,057	)		5,057	(b)		—

Operating profit		85,340			(4,868	)		80,472			49,485			5,057			54,542
Interest and financing expenses		(20,388	)		1,386	(c)		(19,002	)		(2,918	)		—			(2,918	)
Equity in net income of unconsolidated investments		18,459			—			18,459			668			—			668
Other (expenses) income, net including minority interest		(1,946	)		—			(1,946	)		951			(2,864	)(b)		(1,913	)

Income before income taxes		81,465			(3,482	)		77,983			48,186			2,193			50,379
Income tax expense		(25,088	)		1,264	(a,c)		(23,824	)		(13,811	)		(796	)(b)		(14,607	)

Net income	$	56,377		$	(2,218	)	$	54,159		$	34,375		$	1,397		$	35,772

Diluted earnings per share	$	1.19		$	(0.05	)	$	1.14		$	0.81		$	0.04		$	0.85

(a)

Special items for the second quarter ended June 30, 2005 include a curtailment gain amounting to $5,603 ($3,569 after income taxes, or seven cents per diluted share) that relates to a reduction in the Company’s accumulated postretirement benefit obligation (liability) at the June 29, 2005 remeasurement date associated with a change in coverage in the Company’s unfunded postretirement health care benefits plan for active employees’ future retiree medical premium payments effective December 31, 2005. Second-quarter 2005 also includes a provisional charge of $735 ($468 after income taxes, or one cent per diluted share) for the potential settlement of future legal claims.

(b)

Special items for the second quarter and six months ended June 30, 2004 included a second-quarter 2004 additional charge totaling $550 ($350 after income taxes, or one cent per diluted share) related to the cleanup of the Pasadena plant zeolite facility and a first-quarter 2004 charge totaling $4,507 ($2,871 after income taxes, or seven cents per diluted share) for associated layoffs and a related curtailment charge. Other (expenses) income, net including minority interest for the second quarter and six months ended June 30, 2004, included a $2,864 realized foreign exchange hedging gain ($1,824 after income taxes, or four cents per diluted share) associated with the contracts entered into by us to hedge the euro-denominated purchase price for the Company’s acquisition of the refinery catalysts business.

(c)

Interest and financing expenses include a January 2005 write-off of deferred financing expenses totaling $1,386 ($883 net of income taxes, or two cents per diluted share) that were associated with a 364-day bridge loan that was retired with the net proceeds of the Company’s January 2005 public offerings of shares of common stock and senior notes.

Additional information regarding the Company, our products, markets and financial performance is provided at our web site,www.albemarle.com. Our web site is not a part of this document nor is it incorporated herein by reference.

Results of Operations

The following data and discussion provide an analysis of the significant factors affecting our results of operations during the periods included in the accompanying condensed consolidated statements of income.

Second-Quarter 2005 Compared with Second-Quarter 2004

Net Sales

Net sales by operating segment for the second-quarter periods ended June 30, 2005 and 2004 are as follows:


	Net Sales
	Second Quarter
	2005		2004
	(In Thousands of Dollars)
Polymer Additives	$	204,435	$	180,066
Catalysts		147,304		24,400
Fine Chemicals		151,015		122,293

Segment totals	$	502,754	$	326,759

Net sales for second-quarter 2005 of $502.8 million were up $176 million (53.9%) from second-quarter 2004 net sales of $326.8 million.

Polymer Additives’ net sales increased $24.4 million (13.5%) due mainly to improved pricing ($21.4 million) offset, in part, by lower shipments ($6.1 million) in flame retardants (primarily ATH which is used in automotive wire and cable) and improved pricing ($4.5 million) and higher shipments ($1.1 million) in stabilizers and curatives. Polymer Additives’ net sales were also favorably impacted by foreign exchange ($3.4 million).

Catalysts’ net sales increased $122.9 million due mainly to the impact of the refinery catalysts business acquisition ($121.6 million), higher shipments of polyolefin catalysts ($1.3 million) and the favorable impact of foreign exchange ($0.3 million).

Fine Chemicals’ net sales increased $28.7 million (23.5%) primarily due to higher shipments ($11.9 million) and improved pricing ($6.0 million) in fine chemistry services and intermediates, improved pricing ($7.4 million) and shipments ($4.0 million) in performance chemicals and unfavorable pricing ($3.0 million) and shipments ($0.4 million) in pharmaceutical and agricultural actives. Fine Chemicals’ net sales were also favorably impacted by foreign exchange ($2.8 million).

Operating Costs and Expenses

Cost of goods sold in the second quarter of 2005 increased $137.3 million (52.7%) from the corresponding 2004 period. The increase resulted primarily from the impact of the refinery catalysts business acquisition shipments as well as higher raw material and energy costs ($21.5 million) for our heritage businesses in the 2005 period. Our gross profit margin increased approximately 60 basis points to 20.9% in second-quarter 2005 from 20.3% for the corresponding period in 2004.

Selling, general and administrative (“SG&A”) expenses and research and development (“R&D”) expenses increased $26.3 million (69.6%) in the second quarter of 2005 versus second quarter of 2004. The increase is primarily due to higher SG&A and R&D costs related to acquisitions ($17.9 million), higher employee incentive costs ($2.7 million) and pension costs ($1.5 million) as well as higher outside legal costs ($1.5 million) and the unfavorable impact of foreign exchange ($0.5 million). As a percentage of net sales, SG&A and R&D were 12.7% in 2005 versus 11.5% in the 2004 quarter.

Special items in the second quarter of 2005 include a June 2005 curtailment gain ($5.6 million) associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments and a provisional charge of $0.7 million for potential settlement of future legal claims. Special items for the second quarter of 2004 included a charge totaling $0.6 million related to the cleanup of the Pasadena plant zeolite facility.

Segment Income

Segment income by reportable operating segment for the six-month periods ended June 30, 2005 and 2004 is as follows:


	Segment Income
	Second Quarter
	2005			2004 **
	(In Thousands of Dollars)
Polymer Additives	$	29,375		$	22,593
Catalysts		24,346			2,614
Fine Chemicals		14,850			11,454

Segment totals		68,571			36,661
Corporate and other expenses		(11,480	)		(7,839	)

Segment income	$	57,091		$	28,822

**	Second-quarter 2004 has been recast to include the operating results of our joint ventures.

Polymer Additives’ second-quarter 2005 segment income increased $6.8 million (30%) from second-quarter 2004 due mainly to improved pricing in flame retardants ($21.4 million) and stabilizers and curatives ($4.5 million), an increase in the net income of unconsolidated investments (“joint ventures”) ($2.8 million) and the overall favorable net effects of foreign exchange ($0.8 million) offset, in part, by unfavorable raw material and energy costs ($12.1 million), unfavorable costs ($11.7 million) and lower shipments ($6.1 million) in flame retardants (primarily ATH which is used in automotive wire and cable). In addition, Polymer Additives results for second-quarter 2005 benefited $2.2 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

Catalysts’ second-quarter 2005 segment income was up significantly ($21.7 million) from second-quarter 2004 primarily due to the impact of the July 2004 acquisition of the refinery catalysts business ($21.2 million), including our change in equity in the refinery catalysts business joint ventures of $5.6 million. Catalysts’ results for second-quarter 2005 benefited $0.6 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

Fine Chemicals’ second-quarter 2005 segment income increased $3.4 million (29.6%) from second-quarter 2004, including the benefit of $2.2 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments. Second-quarter 2004 included a special item charge of $0.6 million that related to cleanup costs at our Pasadena plant zeolite facility. Excluding the special items in both periods, Fine Chemicals’ segment income increased $0.6 million (5.0%) from 2004 primarily due to higher income from our Jordan Bromine Company Limited (“JBC”) joint venture ($2.1 million). Higher overall raw material and energy costs ($7.9 million) primarily in performance chemicals, lower pricing ($3.0 million) and shipments ($0.4 million) in pharmaceutical and agricultural actives and a higher allocation of SG&A and R&D costs ($2.3 million) were offset, for the most part, by improved pricing ($7.4 million) and higher shipments ($4.0 million) in performance chemicals.

Corporate and other expenses for the second-quarter 2005 increased $3.6 million (46.4%) from second-quarter 2004 primarily due to higher employee incentive costs ($3.0 million) and higher pension costs. Corporate and other expenses for second-quarter 2005 includes two special items: (1) a provisional charge of $0.7 million for the potential settlement of future legal claims and (2) a $0.6 million allocation from a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

Interest and Financing Expenses

Interest and financing expenses for second-quarter 2005 amounted to $10.1 million, an increase of $8.8 million from second-quarter 2004 due to higher average outstanding debt in the 2005 period related to the July 2004 acquisition of the refinery catalysts business.

Other (Expenses) Income, Net Including Minority Interest

Other (expenses) income, net including minority interest for second-quarter 2005 amounted to ($1.0 million), up $0.1 million from the 2004 corresponding period, excluding a second-quarter 2004 realized foreign exchange gain of $2.9 million associated with our July 2004 acquisition the refinery catalysts business. Other (expenses) income, net including minority interest includes a charge for minority interest for our majority-owned subsidiary, Stannica LLC, totaling ($1.0 million) for the second-quarters ended June 30, 2005 and 2004, respectively.

Income Taxes

The effective income tax rate for second-quarter 2005 was 30.3% including special items; up from 29.6% for the corresponding period in 2004 primarily due to the new geographical mix of income after the refinery catalysts business acquisition. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the second quarters ended June 30, 2005 and 2004, respectively, are as follows:


	% of Income before Income Taxes
	For the Second Quarter Ended June 30,
	2005		2004
Federal statutory rate	35.0	%	35.0	%
State taxes, net of federal tax benefit	0.3		0.3
Extraterritorial income exclusion	(1.2	)	(2.4	)
Depletion	(1.0	)	(1.5	)
Domestic production deduction	(0.2	)	—
Other items, net	(2.6	)	(1.8	)

Effective income tax rate	30.3	%	29.6	%

Results of Operations

Six-Months 2005 Compared with Six-Months 2004

Net Sales

Net sales by operating segment for the six-months periods ended June 30, 2005 and 2004 are as follows:


	Net Sales
	Six Months
	2005		2004
	(In Thousands of Dollars)
Polymer Additives	$	402,537	$	352,728
Catalysts		320,128		47,277
Fine Chemicals		290,054		248,763

Segment totals	$	1,012,719	$	648,768

Net sales for the first six-months 2005 of $1.0 billion were up $364.0 million (56.1%) from the first six-months 2004 net sales of $648.8 million.

Polymer Additives’ net sales increased $49.8 million (14.1%) due mainly to improved pricing ($38.8 million) offset, in part, by lower shipments ($12.3 million) in flame retardants (primarily ATH which is used in automotive wire and cable) and improved pricing ($14.7 million) and shipments ($0.9 million) in stabilizers and curatives. Polymer Additives’ net sales were also favorably impacted by foreign exchange ($7.7 million).

Catalysts’ net sales increased $272.9 million due mainly to the impact of the refinery catalysts business acquisition ($266.9 million) and higher shipments ($4.5 million), improved pricing ($0.9 million) and the favorable impact of foreign exchange ($0.6 million) in polyolefin catalysts.

Fine Chemicals’ net sales increased $41.3 million (16.6%) primarily due to improved pricing ($13.9 million) and higher shipments ($7.9 million) in fine chemistry services and intermediates and improved pricing ($10.9 million) and higher shipments ($7.6 million) in performance chemicals offset, in part, by unfavorable pricing ($5.3 million) in pharmaceutical actives. Fine Chemicals’ net sales were also favorably impacted by foreign exchange ($6.0 million).

Operating Costs and Expenses

Cost of goods sold in the first six months of 2005 increased $278.7 million (53.4%) from the corresponding 2004 period. The increase resulted primarily from the impact of the refinery catalysts business acquisition shipments as well as higher raw material and energy costs ($44.3 million) for our heritage businesses in the 2005 period. Our gross profit margin increased approximately 140 basis points to 21.0% in the first six months 2005 from 19.6% for the corresponding period in 2004.

SG&A expenses and R&D expenses increased $59.3 million (81.7%) in the first six months of 2005 versus the first six months of 2004. The increase is primarily due to higher SG&A and R&D costs related to acquisitions ($38.4 million), higher employee incentive provision ($8.7 million) and pension costs ($2.7 million) and higher overall R&D costs ($0.9 million). SG&A costs were also adversely affected by higher outside legal costs ($2.1 million) and the unfavorable impact of foreign exchange ($0.9 million). As a percentage of net sales, SG&A and R&D were 13.0% in 2005 versus 11.2% in the 2004 quarter.

Special items in the first six months of 2005 include a June 2005 curtailment gain ($5.6 million) associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments and a second-quarter 2005 provisional charge of $0.7 million for the potential settlement of future legal claims. Special items for the second quarter and six months ended June 30, 2004, included a second-quarter 2004 charge totaling $0.6 million related to the cleanup of the Pasadena plant zeolite facility and a first-quarter 2004 charge totaling $4.5 million which consisted of layoffs of 53 employees at the zeolite facility amounting to $3.4 million and related curtailment charges of $0.9 and certain other charges of $0.2 million.

Segment Income

Segment income by reportable operating segment for the six-month periods ended June 30, 2005 and 2004 is as follows:


	Segment Income
	Six Months
	2005			2004 **
	(In Thousands of Dollars)
Polymer Additives	$	53,173		$	42,954
Catalysts		49,405			5,329
Fine Chemicals		26,400			15,173

Segment totals		128,978			63,456
Corporate and other expenses		(25,179	)		(13,303	)

Segment income	$	103,799		$	50,153

**	Six-months 2004 have been recast to include the operating results of our joint ventures.

Polymer Additives’ six-months 2005 segment income increased $10.2 million (23.8%) from the first six months of 2004 due mainly to improved pricing in flame retardants ($38.8 million) and stabilizers and curatives ($14.7 million), an increase in the net income of joint ventures ($3.0 million) and the overall favorable net effects of foreign exchange ($2.1 million) offset, in part, by unfavorable raw material and energy costs ($25.4 million), unfavorable costs ($12.9 million) and lower shipments ($12.3 million) in flame retardants (primarily ATH which is used in automotive wire and cable). Polymer Additives results for six-months 2005 benefited $2.2 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

Catalysts’ six-months 2005 segment income was up significantly ($44.1 million) from the first six months of 2004 primarily due to the impact of the July 2004 acquisition of the refinery catalysts business ($40.6 million), including the change in equity in our refinery catalysts business joint ventures ($10.0 million). Our heritage polyolefins catalysts business contributed $3.0 million to the higher segment income versus the corresponding period in 2004. Catalysts’ results for six-months 2005 benefited $0.6 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

Fine Chemicals’ six-months 2005 segment income increased $11.2 million (74.0%) from the first six months of 2004 including the benefit of $2.2 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments. Special items for the second quarter and six months ended June 30, 2004, included a second-quarter 2004 charge totaling $0.6 million related to the cleanup of the Pasadena plant zeolite facility and a first-quarter 2004 charge totaling $4.5 million which consisted of layoffs of 53 employees at the zeolite facility amounting to $3.4 million and related curtailment charges of $0.9 and certain other charges of $0.2 million. Excluding the special items in both periods, Fine Chemicals’ segment income increased $3.9 million (19.4%) from 2004 primarily due to higher income from our JBC joint venture ($4.7 million). Higher overall raw material and energy costs ($15.7 million) primarily in performance chemicals, lower pricing ($5.3 million) in pharmaceutical actives and a higher allocation of SG&A and R&D costs ($4.0 million) were offset, for the due to improved pricing in fine chemistry services and intermediates ($13.9 million) and performance chemicals ($10.9 million).

Corporate and other expenses for the first six months of 2005 increased $11.9 million (89.3%) from the first six months of 2004 primarily due to higher employee incentive costs ($9.5 million), higher pension costs ($1.1 million) and higher outside legal costs ($1.0 million). Corporate and other expenses for the first six months of 2005 includes two second-quarter 2005 special items: (1) a provisional charge of $0.7 million for the potential settlement of future legal claims; and (2) a $0.6 million allocation from a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

Interest and Financing Expenses

Interest and financing expenses for the first six months of 2005 amounted to $20.4 million, an increase of $17.5 million from the first six months of 2004 primarily due to higher average outstanding debt in the 2005 period related to the July 2004 acquisition of the refinery catalysts business. Interest and financing expenses for 2005 also includes the write-off of $1.4 million of deferred financing expenses associated with our acquisition related $450 million 364-day bridge loan that we retired using the proceeds from our public offering of senior notes and common stock on January 20, 2005.

Other (Expenses) Income, Net Including Minority Interest

Other (expenses) income, net including minority interest amounted to ($1.9 million) for the six-months periods of 2005 and 2004, excluding a second-quarter 2004 realized foreign exchange gain of $2.9 million associated with our July 2004 acquisition of the refinery catalysts business. Other (expenses) income, net including minority interest includes a charge for both periods for minority interest for our majority-owned subsidiary, Stannica LLC, totaling ($2.5 million) and ($2.4 million) for the six-month periods ended June 30, 2005 and 2004, respectively.

Income Taxes

The effective income tax rate for first six months of 2005 was 30.8%; up from 28.7% for the corresponding period in 2004 primarily due to the new geographical mix of income after the refinery catalysts business acquisition. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the six-months periods ended June 30, 2005 and 2004, respectively, are as follows:


	% of Income before Income Taxes
	For the Six Months Ended June 30,
	2005		2004
Federal statutory rate	35.0	%	35.0	%
State taxes, net of federal tax benefit	0.3		0.5
Extraterritorial income exclusion	(1.3	)	(2.7	)
Depletion	(1.2	)	(1.9	)
Domestic production deduction	(0.3	)	—
Other items, net	(1.7	)	(2.2	)

Effective income tax rate	30.8	%	28.7	%

Financial Condition and Liquidity

Cash and cash equivalents at June 30, 2005 were $98.3 million, representing an increase of $51.9 million from $46.4 million at year-end 2004.

For the six months ended June 30, 2005, cash provided from operating activities of $41.3 million, together with approximately $324.7 million and $147.9 million of proceeds from the issuance of senior notes and common stock, respectively, $117.4 million of proceeds from borrowings, $2.7 million of proceeds from the exercise of stock options, and $1.1 million of proceeds from the liquidation of an equity method investment and the sale of a nonmarketable security were used to cover operating activities, retire debt of $499.4 million, increase cash and cash equivalents by $51.9 million, fund capital expenditures totaling $36.2 million, pay quarterly dividends to shareholders and minority interest of $12.0 million and $1.0 million, respectively, fund investments in and advances to joint ventures and nonmarketable securities of $9.1 million, make a working capital settlement payment to Akzo Nobel and pay additional professional fees relating to the refinery catalysts acquisition of approximately $7.0 million and $0.6 million, respectively and pay financing costs of $2.3 million associated with new debt.

We anticipate that cash provided from operations in the future and borrowings under our senior credit agreement will be sufficient to pay our operating expenses, satisfy debt-service obligations, fund capital expenditures and make dividend payments for the foreseeable future.

The change in our accumulated other comprehensive income from December 31, 2004 was due primarily to net foreign currency translation adjustments (strengthening of the U.S. dollar versus the euro), net of related deferred taxes.

On July 29, 2004, in connection with the acquisition of the refinery catalysts business, we entered into (1) a senior credit agreement with a group of lenders, consisting of a $300 million revolving credit facility and a $450 million five-year term loan facility, and (2) a $450 million 364-day loan agreement. We used the initial borrowings under the senior credit agreement and the $450 million 364-day loan agreement to consummate the acquisition, refinance the then-existing credit agreement and pay related fees and expenses incurred in connection therewith. The remaining balance of the $450 million five-year facility is payable in quarterly installments of $11.25 million through June 30, 2008, with three final quarterly payments of $90 million beginning September 30, 2008 through March 31, 2009.

Borrowings under our senior credit agreement are conditioned upon compliance with the following financial covenants: (a) consolidated fixed charge coverage ratio (as defined) must be greater than or equal to 1.25:1.00 as of the end of any fiscal quarter; (b) consolidated debt to capitalization ratio, as defined, at the end of any fiscal quarter must be less than or equal to 60%; (c) consolidated tangible domestic assets (as defined) must be or greater than or equal to $750 million for us to make investments in entities and enterprises that are organized outside the United States; and (d) with the exception of liens specified in our new senior credit agreement, liens may not attach to assets where the aggregate amount of all indebtedness secured by such liens at any time exceeds 10% of consolidated net worth (as defined in the agreement).

On July 8, 2005 we amended our senior credit agreement (outlined above). Generally, the amendment (1) reduces the applicable borrowing rates and fees payable under the revolving credit facility and five-year term loan facility, based on the ratings of the our senior unsecured long-term debt as rated by outside credit rating agencies, (2) eliminates certain conditions for borrowings under the revolving credit facility, and (3) provides an option to increase the amount available for borrowings under the revolving credit facility by up to $50 million.

On January 20, 2005, we concluded the public offering of 4,573,000 shares of our common stock at a price of $34.00 per share and $325 million of 5.10% senior notes at a price of 99.897% of par. We used the net proceeds from both of the offerings to retire the $450 million 364-day bridge loan that we incurred in connection with the acquisition of the refinery catalysts business. The notes are senior unsecured obligations and rank equally with all of our other senior unsecured indebtedness from time to time outstanding. The notes will be effectively subordinated to any of our future secured indebtedness and to existing and future indebtedness of our subsidiaries.

We may redeem the notes before their maturity, in whole at any time or in part from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the indenture governing the notes) plus 15 basis points, plus, in each case, accrued interest thereon to the date of redemption.

The principal amount of the notes becomes immediately due and payable upon the occurrence of certain bankruptcy or insolvency events involving us or certain of our subsidiaries and may be declared immediately due and payable by the trustee

or the holders of not less than 25% of the notes upon the occurrence of an event of default. Events of default include, among other things: failure to pay principal or interest at required times; failure to perform or remain in breach of covenants within prescribed periods; and an event of default on any of our other indebtedness or certain of our subsidiaries of $40 million or more that is caused by a failure to make a payment when due or that results in the acceleration of that indebtedness before its maturity; and certain bankruptcy or insolvency events involving us or certain of our subsidiaries.

The noncurrent portion of our long-term debt amounted to $839.2 million at June 30, 2005, compared to $899.6 million at the end of 2004. Our long-term debt, including the current portion, as a percentage of total capitalization amounted to 49.8% at June 30, 2005. In addition, at June 30, 2005, we had the ability to borrow an additional $291 million under our various credit arrangements.

As of June 30, 2005, we were the guarantor of $33.3 million of outstanding long-term debt on behalf of our joint venture company, JBC. Our long-term debt, including the guarantees, as a percent of total capitalization amounted to 50.7% at June 30, 2005. During the second quarter of 2005, we and our joint venture partner each advanced $6 million to JBC for operating capital purposes.

On June 29, 2005, we announced a change in our coverage for its unfunded postretirement health care benefits plan effective December 31, 2005. The change in coverage (“plan change”) affects our paid retiree medical premium payments for future retirees and results in the recognition of a special item for the acceleration of a portion of current unrecognized prior service credits in the current period of $5.6 million ($3.6 million after income taxes, or seven cents per diluted share). The plan change special item is reflected as a curtailment gain in accordance with Statement of Financial Accounting Standards No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The plan change did not affect the medical premium subsidy of retired employees. The plan change will affect the our future retiree medical premium subsidy in two ways: (1) active employees who are age 50 or older as of December 31, 2005 and who commence their retirement benefit after January 1, 2006 and otherwise meet all other eligibility requirements will be eligible to receive a revised fixed Company subsidy; and (2) active employees who are under the age of 50 on December 31, 2005 and who otherwise meet the eligibility requirements will remain eligible for retiree medical coverage, but will be responsible for 100% of the cost of their coverage.

The plan change noted above reduced our accumulated postretirement benefit obligation (“APBO”) under our postretirement health care benefits plan by $16.2 million; the reduction in APBO will be amortized to income over the remaining service life to full eligibility of affected employees, amounting to four years, beginning July 1, 2005. Other postretirement benefits expense for 2005 will be reduced by $2.3 million on a prospective basis as a result of the plan change. This amount will be recognized into income in the third and fourth quarters of 2005.

Our capital expenditures for the six-months ended June 30, 2005 were up by $16.6 million from the same period in 2004. Our capital spending program (including investments in joint ventures) is expected to be approximately $80 to $90 million over the next few years, with expenditures expected to expand capacities at existing facilities to support an expected increase in sales. We anticipate that future capital spending will be financed primarily with cash flow provided from operations with additional cash needed, if any, provided by borrowings, including borrowings under our senior credit agreement. The amount and timing of any additional borrowings will depend on our specific cash requirements.

The following table summarizes our contractual obligations and commitments in thousands of dollars at June 30, 2005:


	3Q 2005		4Q 2005		Sub-total 2005		2006		2007		2008		2009		2010		There- after
Long-term debt obligations	$	11,250	$	11,250	$	22,500	$	45,048	$	45,056	$	202,561	$	231,803	$	72	$	337,246
Expected interest payments on long-term debt obligations*		9,742		9,900		19,642		34,603		33,042		30,570		18,301		16,911		69,457
Operating lease obligations (rental)		2,897		2,897		5,794		7,747		5,440		4,170		3,016		3,005		25,791
Take or pay / throughput agreements		67,555		67,555		135,110		57,161		11,823		8,226		7,095		5,718		27,312
Letters of credit and guarantees		8,406		966		9,372		29,382		1,207		517		221		8		833
Capital projects		9,204		4,065		13,269		1,120		640		635		635		1,308		—
Other		2,149		196		2,345		—		—		—		—		—		—
Additional investment commitment payments		—		563		563		815		805		55		—		—		—

Total	$	111,203	$	97,392	$	208,595	$	175,876	$	98,013	$	246,734	$	261,071	$	27,022	$	460,639

These amounts are based on a weighted-average interest rate of 4.2% for term loans/credit facility, 3.5% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes for 2005. The weighted average rates for years 2006 – thereafter are 4.6% for term loans/credit facility, 3.7% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes.

We are subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials (some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection of the environment. To our knowledge, we are currently complying, and expect to continue to comply, in all material respects with existing environmental laws, regulations, statutes and ordinances applicable to its operations. Compliance with federal, state, local and foreign environmental protection laws is not expected to have in the future a material effect on earnings or our competitive position, but increased legal or regulatory requirements could have an adverse effect on our results.

Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a potentially responsible party (“PRP”) and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Management believes that in most cases our participation is de minimis. Further, almost all such sites represent environmental issues that are quite mature and have been investigated, studied, and in many cases settled. In de minimis situations, our policy generally is to negotiate a consent decree and to pay any apportioned settlement, enabling us to be effectively relieved of any further liability as a PRP, except for remote contingencies. In other than de minimis PRP matters, our records indicate that unresolved PRP exposures should be immaterial. We accrue and expense our proportionate share of PRP costs. Because management has been actively involved in evaluating environmental matters, we are able to conclude that the outstanding environmental liabilities for unresolved PRP sites should not be material to operations.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our interest rate risk, marketable security price risk or raw material price risk from the information provided in the Annual Report on Form 10-K for the year ended December 31, 2004, except as noted below.

We had outstanding variable interest rate borrowings at June 30, 2005 of $557.7 million, bearing an average interest rate of 4.11%. A change of 0.125% in the interest rate applicable to these borrowings would change our annualized interest expense by approximately $0.7 million. Due to the increase in our outstanding indebtedness as a result of the acquisition of the refinery catalysts business, we may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs.

During the fourth quarter of 2004, we entered into treasury lock agreements (“T-locks”) with a notional value of $275 million to fix the yield on the U.S. Treasury security used to set the yield for approximately 85% of our public offering of $325 million of senior notes in January 2005. The T-locks fixed the yield on the U.S. Treasury security at approximately 4.25%. The value of the T-locks depended on the difference between (1) the yield-to-maturity of the 10-year U.S. Treasury security that has the maturity date most comparable to the maturity date of the notes when issued and (2) the fixed rate of approximately 4.25%. The cumulative effect of the T-lock agreements (a charge of approximately $2.2 million) is being amortized over the life of the notes as an adjustment to the interest expense of the notes. At June 30, 2005, there were unamortized realized losses of approximately $2.1 million ($1.3 million after income taxes) in accumulated other comprehensive income.

Our operations are exposed to market risk from changes in natural gas prices. We purchase natural gas to meet our production requirements for a portion of our 12-month rolling forecast for North American natural gas requirements by entering into natural gas futures contracts to help mitigate uncertainty and volatility.

Our hedge transactions are executed with a major financial institution. Such derivatives are held to secure natural gas at fixed prices and not for trading.

The natural gas contracts qualify as cash flow hedges under SFAS No. 133 and are marked to market. The unrealized gains and/or losses are deferred and reported in accumulated other comprehensive income to the extent that the unrealized gains and losses are offset by the forecasted transaction. At June 30, 2005, there were unrealized gains of approximately $0.2 million ($0.1 million after income taxes). Any unrealized gains and/or losses on the derivative instrument that are not offset by the forecasted transaction are recorded in earnings.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) occurred during the second quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We have invested significant resources to document and analyze our system of internal controls, and we are continuing our evaluation of such internal controls versus the standards adopted by the Public Company Accounting Oversight Board. In the course of our ongoing evaluation, we have identified certain areas of our internal controls requiring improvement, and are in the process of designing enhanced processes and controls to address issues identified through this review. We believe that our efforts will allow management and our Independent Registered Public Accounting Firm to complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2004 in connection with our annual report for the fiscal year ended December 31, 2005; however, we cannot guarantee such outcome.

Part II - OTHER INFORMATION

ITEM 1. Legal Proceedings

On April 2, 2004, Albemarle Overseas Development Company (“AODC”), a wholly owned subsidiary of the Company, initiated a Request for Arbitration against Aventis S.A., the predecessor in interest to Sanofi Aventis (“Aventis”), through the International Chamber of Commerce, International Court of Arbitration, Paris, France. The dispute arises out of a 1992 Stock Purchase Agreement (“Agreement”) between a predecessor to AODC, and a predecessor to Aventis under which 100% of the stock of Potasse et Produits Chimiques, S.A., now known as Albemarle PPC (“APPC”), was acquired by AODC. The dispute relates to a chemical facility in Thann, France owned by APPC. Under the terms of the Agreement, we believe that Aventis is obligated to indemnify AODC and APPC, and hold us harmless from certain claims, losses, damages, costs or any other present or prospective liabilities arising out of soil and groundwater contamination at the site in Thann.

Beginning in May 2000, the French government, with respect to the management of pollution risk on the site of active industrial installations, required APPC to conduct an environmental risk study of the Thann facility. In June 2002, the French Government directed APPC to undertake a more detailed risk study of groundwater contamination. The administrative process of the French government is still ongoing as of the present date. AODC has demanded indemnification from Aventis for the cost of the studies, but Aventis has refused to pay.

On July 13, 2005, the French environmental authorities instructed APPC to conduct additional testing and take certain measures with respect to the containment of certain contamination at the Thann facility. At this time, it is not possible to predict what the French government will otherwise require, since this matter is in its initial stages and environmental matters are subject to many uncertainties. We believe, however, that we are entitled to be fully indemnified by Aventis for all liabilities arising from this matter, but no assurance can be given that we will prevail in this matter. If we do not prevail in the arbitration and the government requires additional remediation, the costs of remediation could be significant.

During the second quarter of 2005, we entered into an agreement with Ethyl Corporation (“Ethyl”) related to a dispute over the allocation of responsibility for certain past and future claims by third parties related to certain asbestos premises liability. In addition, Ethyl and Albemarle entered into an agreement with Travelers Indemnity Company that provides a procedure for allocating defense and indemnity costs with respect to certain future asbestos premises liability claims. As a result of the above agreements, we incurred an after-tax charge of $0.5 million, or one cent per diluted share, as provision for future legal claims.

In addition, we are involved from time to time in legal proceedings of types regarded as common in our businesses, particularly administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability and premises liability litigation. We maintain a financial accrual for these proceedings that includes defense costs and potential damages, as estimated by our general counsel. We also maintain insurance to mitigate certain of such risks.

ITEM 5. Other Information

None

ITEM 6. Exhibits

(a) Exhibits


31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

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.


	ALBEMARLE CORPORATION
	(Registrant)

Date: August 8, 2005	By:	/s/ PAUL F. ROCHELEAU
		Paul F. Rocheleau Senior Vice President and Chief Financial Officer

EXHIBIT INDEX


		Page Numbers
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)	35

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)	36

32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350	37

32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350	38

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Albemarle (ALB) 10-Q2005 Q2 Quarterly report

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