UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the transition period from ________ to _________
Commission file name 1-8142
ENGELHARD CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1586002
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(732) 205-5000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at October 29, 1999
- --------------------- -------------------------------
$1 par value 125,839,290
1
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
Net sales .................... $1,016,242 $1,039,495 $3,292,209 $3,084,560
Cost of sales ................ 865,665 889,446 2,824,149 2,613,767
----------- ----------- ----------- ----------
Gross profit ............ 150,577 150,049 468,060 470,793
Selling, administrative and
other expenses ............. 69,428 76,765 232,358 241,773
----------- ----------- ----------- ----------
Operating earnings ...... 81,149 73,284 235,702 229,020
Equity in earnings of
affiliates ................. 4,192 1,456 11,995 8,929
Gain on sale of investments
and land ................... 2,911 - 8,592 -
Interest expense, net ........ (14,869) (16,450) (43,735) (43,934)
----------- ----------- ----------- ----------
Earnings before income
taxes ................. 73,383 58,290 212,554 194,015
Income tax expense ........... 22,382 13,045 64,829 54,712
----------- ----------- ----------- ----------
Net earnings ............ $ 51,001 $ 45,245 $ 147,725 $ 139,303
=========== =========== =========== ==========
Basic earnings per share ..... $ 0.41 $ 0.31 $ 1.10 $ 0.96
=========== =========== =========== ==========
Diluted earnings per share ... $ 0.40 $ 0.31 $ 1.08 $ 0.96
=========== =========== =========== ==========
Cash dividends paid per share $ 0.10 $ 0.10 $ 0.30 $ 0.30
=========== =========== =========== ==========
Average number of shares
outstanding - Basic ........ 125,921 144,313 134,642 144,461
=========== =========== =========== ==========
Average number of shares
outstanding - Diluted ...... 128,592 145,438 136,914 145,344
=========== =========== =========== ==========
Actual number of shares
outstanding ................ 125,968 143,204 125,968 143,204
=========== =========== =========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
2
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
Cash .................................. $ 38,658 $ 22,339
Receivables ........................... 380,221 376,826
Committed metal positions ............. 329,074 541,224
Inventories ........................... 371,432 349,752
Other current assets .................. 91,922 69,826
---------- ------------
Total current assets ............. 1,211,307 1,359,967
Investments ........................... 176,355 156,727
Property, plant and equipment, net .... 862,305 876,461
Intangible assets, net ................ 330,800 326,253
Other noncurrent assets ............... 151,362 146,911
---------- ------------
Total assets ..................... $2,732,129 $2,866,319
========== ============
Short-term borrowings ................. $ 554,099 $ 255,002
Accounts payable ...................... 172,808 227,535
Hedged metal obligations .............. 376,399 552,690
Other current liabilities ............. 267,597 235,218
---------- ------------
Total current liabilities ........ 1,370,903 1,270,445
Long-term debt ........................ 444,080 497,393
Other noncurrent liabilities .......... 191,470 196,924
Shareholders' equity .................. 725,676 901,557
---------- ------------
Total liabilities and
shareholders' equity ........ $2,732,129 $2,866,319
========== ============
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
3
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1999 1998
---------- ----------
Cash flows from operating activities
Net earnings ........................................ $ 147,725 $ 139,303
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and depletion ....................... 72,519 64,845
Amortization of intangible assets ................ 9,773 9,256
Gain on sale of investments and land ............. (8,592) -
Equity results, net of dividends ................. (9,564) (6,906)
Net change in assets and liabilities
Metal related ............................... 171,766 (31,029)
All other ................................... (51,431) (74,504)
---------- ----------
Net cash provided by operating activities ........ 332,196 100,965
---------- ----------
Cash flows from investing activities
Capital expenditures, net ........................... (61,519) (83,853)
Proceeds from sale of investments and land .......... 10,449 -
Acquisitions and other investments .................. (1,230) (245,401)
Other ............................................... 2,408 7,016
---------- ----------
Net cash used in investing activities ............ (49,892) (322,238)
---------- ----------
Cash flows from financing activities
Increase in short-term borrowings ................... 203,673 140,307
Decrease in hedged metal obligations ................ (184,192) (1,806)
Proceeds from issuance of long-term debt ............ 45,894 119,744
Repayment of long-term debt ......................... (3,784) (114)
Purchase of treasury stock .......................... (296,076) (8,412)
Stock bonus and option plan transactions ............ 10,732 8,173
Dividends paid ...................................... (39,936) (43,381)
---------- ----------
Net cash (used in) provided by financing
activities ..................................... (263,689) 214,511
Effect of exchange rate changes on cash ............... (2,296) (1,795)
---------- ----------
Net change in cash ............................... 16,319 (8,557)
Cash at beginning of year ........................ 22,339 28,765
---------- ----------
Cash at end of period ............................ $ 38,658 $ 20,208
========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
4
ENGELHARD CORPORATION
BUSINESS SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
Net Sales
Environmental Technologies .. $ 141,195 $ 122,952 $ 440,900 $ 398,401
Process Technologies ........ 110,369 125,706 349,169 354,844
Paper Pigments and Additives 61,802 61,607 177,894 185,317
Specialty Pigments and
Additives ................. 91,298 79,309 274,281 257,095
Industrial Commodities
Management ................ 594,000 596,949 1,975,966 1,752,839
----------- ----------- ----------- -----------
Reportable segments ... 998,664 986,523 3,218,210 2,948,496
All other ................... 17,578 52,972 73,999 $ 136,064
----------- ----------- ----------- -----------
$1,016,242 $1,039,495 $3,292,209 $3,084,560
=========== =========== =========== ===========
Operating Earnings
Environmental Technologies .. $ 24,361 $ 22,989 $ 80,348 $ 68,042
Process Technologies ........ 18,784 18,340 52,736 48,740
Paper Pigments and Additives 5,228 10,037 21,081 28,453
Specialty Pigments and
Additives ................. 15,145 5,953 46,384 31,925
Industrial Commodities
Management ................ 9,372 8,457 29,569 39,516
----------- ----------- ----------- -----------
Reportable segments ... 72,890 65,776 230,118 216,676
All other ................... 8,259 7,508 5,584 12,344
----------- ----------- ----------- -----------
81,149 73,284 235,702 229,020
Equity in earnings of
affiliates ................. 4,192 1,456 11,995 8,929
Gain on sale of investments
and land ................... 2,911 - 8,592 -
Interest expense, net ........ (14,869) (16,450) (43,735) (43,934)
----------- ----------- ----------- -----------
Earnings before income
taxes ............... $ 73,383 $ 58,290 $ 212,554 $ 194,015
Income tax expense ........... 22,382 13,045 64,829 54,712
----------- ----------- ----------- -----------
Net earnings .......... $ 51,001 $ 45,245 $ 147,725 $ 139,303
=========== =========== =========== ===========
Note: Certain historical segment data have been reclassified to conform to a
realignment of responsibilities resulting from internal organization changes in
the second quarter of 1999.
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
5
Notes to the Unaudited Condensed Consolidated Financial Statements
- ------------------------------------------------------------------
Note 1 - Basis of Presentation
- ------------------------------
The unaudited condensed consolidated financial statements of Engelhard
Corporation and subsidiaries (the "Company") contain all adjustments, which, in
the opinion of management, are necessary for a fair statement of the results for
the interim periods presented. The financial statement results for interim
periods are not necessarily indicative of financial results for the full year.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report to Shareholders and Form 10-K as amended.
Note 2 - Inventories
- --------------------
Inventories consist of the following (in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials ........................ $ 78,963 $ 76,304
Work in process ...................... 61,863 54,933
Finished goods ....................... 201,734 189,653
Precious metals ...................... 28,872 28,862
-------- --------
Total inventories .................... $371,432 $349,752
======== ========
All precious metals are stated at LIFO cost. The precious metals
inventories exceeded cost by $99.2 million and $85.8 million at September 30,
1999 and December 31, 1998, respectively. In order to make more efficient use of
the Company's assets, the Company reduced certain elements of precious metals
inventories in 1998. As a result, operating earnings included $4.1 million and
net earnings included $2.4 million for the third quarter and first nine months
of 1998 as a result of selling inventory accounted for under the LIFO method.
This gain is included in the Company's "All Other" segment.
Note 3 - Comprehensive Income
- -----------------------------
Comprehensive income is summarized as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- ---------
Net earnings ....................... $51,001 $45,245 $147,725 $139,303
Other comprehensive income (loss):
Foreign currency translation
adjustment .................... 16,116 18,177 1,486 (1,575)
-------- -------- -------- ---------
Comprehensive income ............... $67,117 $63,422 $149,211 $137,728
======== ======== ======== =========
No provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries because such earnings are
expected to be reinvested indefinitely in the subsidiaries' operations.
6
Note 4 - Earnings Per Share
- ---------------------------
The following table represents the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1999 1998 1999 1998
- ------------------------------------- -------- -------- -------- --------
Basic EPS Computation
- ---------------------
Net earnings applicable to common
shares $ 51,001 $ 45,245 $147,725 $139,303
-------- -------- -------- --------
Average number of shares outstanding 125,921 144,313 134,642 144,461
-------- -------- -------- --------
Basic earnings per share $ 0.41 $ 0.31 $ 1.10 $ 0.96
======== ======== ======== ========
Diluted EPS Computation
- -----------------------
Net earnings applicable to common
shares $ 51,001 $ 45,245 $147,725 $139,303
-------- -------- -------- --------
Average number of shares outstanding 125,921 144,313 134,642 144,461
Effect of dilutive stock options 1,336 902 937 809
Effect of Rabbi Trust 1,335 223 1,335 74
-------- -------- -------- --------
Average number of shares outstanding 128,592 145,438 136,914 145,344
-------- -------- -------- --------
Diluted earnings per share $ 0.40 $ 0.31 $ 1.08 $ 0.96
======== ======== ======== ========
Note 5 - Sale of Investments and Land
- -------------------------------------
In the third quarter of 1999, the Company sold its Mearlcrete concrete
foaming agent business. The Company recorded a gain of $1.1 million ($0.8
million after tax or $0.01 per share on a diluted basis) which was recorded in
"gain on sale of investments and land" in the Company's "Condensed Consolidated
Statements of Earnings." Net cash proceeds received were $1.7 million. In 1998,
this business had approximately $1.4 million in annual revenue and was reported
in the Company's Specialty Pigments and Additives segment.
In the third quarter of 1999, the Company sold land and certain mineral
rights located in Talladega County, Alabama. The Company recorded a gain of $1.8
million ($1.3 million after tax or $0.01 per share on a diluted basis) which was
recorded in "gain on sale of investments and land" in the Condensed Consolidated
Statements of Earnings." Net cash proceeds received were $1.9 million. These
assets were previously reported in the Company's Paper Pigments and Additives
segment.
7
Note 6 - Deferred Compensation Arrangement ("Rabbi Trust")
- ----------------------------------------------------------
In the third quarter of 1999, the Company recognized income of $5.8 million
($4.1 million after tax or $0.03 per share on a diluted basis) related to the
decrease in the value of its common stock held in a Rabbi Trust for deferred
compensation from $22.63 at June 30, 1999 to $18.25 at September 30, 1999. For
the nine months ended September 30, 1999, the Company recognized income of $1.7
million ($1.2 million after tax or $0.01 per share on a diluted basis) related
to the decrease in the value of its common stock held in the Rabbi Trust from
$19.50 at December 31, 1998 to $18.25 at September 30, 1999. The compensation
income was reported in "selling, administrative and other expenses" in the
"Condensed Consolidated Statements of Earnings." The total value of the Rabbi
Trust at September 30, 1999 was $24.4 million.
Note 7 - Other Matters
- ----------------------
In 1998, management learned that Engelhard and several other companies
operating in Japan had been victims of a fraudulent scheme involving base-metal
inventory held in third-party warehouses in Japan. The inventory loss was
approximately $40 million in 1997 and $20 million in 1998. The Company is
vigorously pursuing various recovery actions. These actions include negotiations
with the various third parties and, in several instances, the commencement of
litigation. In the first quarter of 1998, Engelhard recorded a receivable from
the insurance carriers and third parties for approximately $20 million. This
amount represents management's and counsel's best estimate of the minimum
probable recovery from the various insurance policies and other parties involved
in the fraudulent scheme.
In February 1999, the Peruvian taxing authority made public an
investigation of the country's gold industry stemming from suspected evasion of
value-added tax payments. Engelhard Peru, S.A., a purchaser and exporter of
gold, has paid the tax to its vendors for each purchase and then claimed a
refund from the Peruvian taxing authority after export. Engelhard typically
would post a one-month letter of credit to obtain a prompt refund. Engelhard's
refund claims for November and December of 1998 and January of 1999 were
approximately $10 million per month. Engelhard has received the refunds for
November and December, but, at the request of the government, the letters of
credit, in the amount of $20 million, have been extended until December 1999
while the industry investigation is continued. The refund for January 1999 is
going through the claim procedure and remains unpaid. Management believes, based
upon consultation with counsel, that all appropriate tax payments have been made
and that the Company is entitled to all refunds claimed. However, if the
resolution of this matter differs from management's belief, the maximum
financial exposure is approximately $30 million.
8
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
- ------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the Third Quarter of 1999
with the Third Quarter of 1998
- ---------------------------------------
Net earnings increased 13% to $51.0 million in the third quarter of 1999
from $45.2 million in the same period of 1998. Operating earnings for the third
quarter of 1999 increased 11% to $81.1 million from $73.3 million in the same
period of 1998. Four of the Company's five reportable segments recorded
increased operating earnings, led by particularly strong results from the
Specialty Pigments and Additives segment.
The effective tax rate was 30.5% in the third quarter of 1999 compared with
22.4% for the same period last year. In 1998, the Company entered into
negotiations to dispose of underutilized real estate. As a result of this
program, capital gains were realized in 1998, as well as in 1999. The effective
tax rate for the third quarter of 1998 was reduced to reflect the reversal of a
valuation allowance related to capital loss carryforwards.
The Company's share of earnings from affiliates was $4.2 million for the
third quarter of 1999 compared with $1.5 million for the same period in 1998.
The increase was due primarily to higher equity earnings from Engelhard-CLAL, a
precious-metal-fabrication joint venture and higher equity earnings from
Heesung-Engelhard, an environmental catalyst joint venture.
Lower net interest expense was due primarily to the settlement of treasury
lock positions resulting in income of $3.0 million. Excluding this income, net
interest expense would have increased due primarily to increased borrowings
related to a major share repurchase in May 1999 and an increase in interest
rates.
Net sales decreased 2% to $1,016.2 million in the third quarter of 1999
from $1,039.5 million for the same period in 1998. The Environmental
Technologies, Specialty Pigments and Additives, and Paper Pigments and Additives
segments reported higher sales, which more than offset lower sales from both the
Process Technologies and Industrial Commodities Management segments. Sales
reported in the "All Other" segment decreased primarily as the Company sold its
metal plating business in the second quarter of 1999.
Environmental Technologies
- --------------------------
Operating earnings increased 6% to $24.4 million in the third quarter of
1999 from $23.0 million in the same period of 1998. Net sales for the third
quarter of 1999 increased 15% to $141.2 million from $123.0 million in the same
period of 1998.
The segment had higher operating earnings primarily due to increased
volumes of emission-control systems sold in North America.
9
More than 80% of the segment's sales and operating earnings came from
technologies to control emissions from mobile sources, including gasoline-and
diesel-powered passenger cars, sport utility vehicles, trucks, buses and
off-road vehicles. Sales and operating earnings from these technologies
increased 13% and 7%, respectively. Continuing demand for more sophisticated
emission-control technologies drove sales increases in North America. Higher
sales resulted primarily from increased volumes at General Motors. European
volumes were essentially flat versus a strong year-ago quarter.
Process Technologies
- --------------------
Operating earnings increased 2% to $18.8 million in the third quarter of
1999 from $18.3 million in the same period of 1998. Net sales for the third
quarter of 1999 decreased 12% to $110.4 million from $125.7 million in the same
period of 1998.
The segment had higher earnings primarily due to increased earnings from
petroleum catalysts and polypropylene catalysts.
Operating earnings from petroleum catalysts increased as an improved
product mix (sales of higher margin products) and productivity improvements more
than offset the impact of a 2% decrease in sales of cracking catalysts. The
sales decrease was due to continuing weakness in the refining market.
Operating earnings from chemical catalysts decreased due to a sales decline
of 19% related to overall weak market conditions. Operating earnings from
polypropylene catalysts increased due to lower operating costs.
Paper Pigments and Additives
- ----------------------------
Operating earnings decreased 48% to $5.2 million in the third quarter of
1999 from $10.0 million in the same period of 1998. Net sales for the third
quarter of 1999 increased slightly to $61.8 million from $61.6 million in the
same period of 1998.
Operating earnings decreased primarily due to a combination of weak
pricing, unfavorable product mix (sales of lower margin products), and higher
operating costs resulting from temporary unscheduled equipment outages. The
slight increase in sales resulted from a 15% increase in sales in the
Asia-Pacific region (excluding Japan) and a modest 2% increase in sales in
Europe. Sales in North America were flat while sales in Japan decreased 9% due
to continuing market weakness.
Specialty Pigments and Additives
- --------------------------------
Operating earnings increased 154% to $15.1 million in the third quarter of
1999 from $6.0 million in the same period of 1998. Net sales for the third
quarter of 1999 increased 15% to $91.3 million from $79.3 million in the same
period of 1998.
10
Operating earnings increased primarily due to record sales volumes of
effect pigments in the industrial and cosmetics segments and record sales
volumes of specialty film. In addition, specialty kaolin operating earnings
increased due to higher sales volume. These increases were driven by continued
Asia-Pacific growth as well as modest gains in European and North American
markets. In addition, operating earnings increased due to improved costs in most
product lines and the absence of costs related to inventory reductions in the
prior year third quarter. These improved results were partially offset by lower
colors volume due to the delayed start-up of a new manufacturing process.
Industrial Commodities Management
- ---------------------------------
Operating earnings increased 11% to $9.4 million in the third quarter of
1999 from $8.5 million in the same period of 1998. Net sales for the third
quarter of 1999 declined slightly to $594.0 million from $596.9 million in the
same period of 1998.
Platinum group metals were the primary contributor to the operating
earnings increase.
Comparison of the First Nine Months of 1999
with the First Nine Months of 1998
- -------------------------------------------
Net earnings increased 6% to $147.7 million in the first nine months of
1999 from $139.3 million in the same period of 1998. Operating earnings
increased 3% to $235.7 million in the first nine months of 1999 from $229.0
million in the same period of 1998. Higher earnings from three segments --
Environmental Technologies, Process Technologies and Specialty Pigments and
Additives -- were offset by lower operating earnings from the Paper Pigments and
Additives and Industrial Commodities Management segments.
The effective tax rate was 30.5% for the nine months ended September 30,
1999 compared with 28.2% for the same period last year. In 1998, the Company
entered into negotiations to dispose of underutilized real estate. As a result
of this program, capital gains were realized in 1998, as well as in 1999. The
effective tax rate for the nine months ended September 30, 1998 were reduced to
reflect the reversal of a valuation allowance related to capital loss
carryforwards.
The Company's share of earnings from affiliates increased 34% to $12.0
million for the first nine months of 1999 from $8.9 million in the same period
of 1998. The increase was due primarily to higher equity earnings from Heesung-
Engelhard, an environmental catalyst joint venture and the elimination of losses
from Acreon Catalyse, a hydrotreating catalyst joint venture sold in the first
quarter of 1999.
Lower net interest expense was due primarily to the settlement of treasury
lock positions resulting in income of $4.1 million. Excluding this income, net
interest expense would have increased due primarily to increased borrowings
related to a major share repurchase in May 1999 and an increase in interest
rates.
11
Net sales increased 7% to $3.3 billion in the first nine months of 1999
from $3.1 billion in the same period of 1998. The Environmental Technologies,
Specialty Pigments and Additives, and Industrial Commodities Management segments
reported higher sales, which more than offset lower sales from the Process
Technologies and Paper Pigments and Additives segments. Sales reported in the
"All Other" segment decreased primarily as the Company sold its metal plating
business in the second quarter of 1999.
Environmental Technologies
- --------------------------
Operating earnings increased 18% to $80.3 million in the first nine months
of 1999 from $68.0 million in the same period of 1998. Net sales increased 11%
to $440.9 million in the first nine months of 1999 from $398.4 million in the
same period of 1998.
The segment had higher earnings largely due to increased volumes of
emission-control systems sold in North America and reduced material costs
resulting from supply-chain management initiatives.
More than 80% of the segment's sales and operating earnings came from
technologies to control emissions from mobile sources, including gasoline- and
diesel-powered passenger cars, sport utility vehicles, trucks, buses and
off-road vehicles. Sales and operating earnings from these technologies
increased 11% and 16%, respectively. Continuing demand for more sophisticated
emission-control technologies drove sales increases in both North America and
Europe. In North America, higher sales were primarily from increased volumes at
General Motors. In Europe, the volume increase was primarily from Ford Motor
Company and Nissan.
Process Technologies
- --------------------
Operating earnings increased 8% to $52.7 million in the first nine months
of 1999 from $48.7 million in the same period of 1998. Net sales for the first
nine months of 1999 decreased 2% to $349.2 million from $354.8 million in the
same period of 1998.
The segment had higher earnings primarily due to increased earnings from
petroleum catalysts, a modest increase in earnings from chemical catalysts, and
an increase in earnings from polypropylene catalysts. Excluding the results of
the catalyst businesses of Mallinckrodt Inc. acquired in May 1998, net sales for
the segment would have decreased 11%, primarily due to lower demand for
petrochemical catalysts and cracking catalysts.
Operating earnings from petroleum catalysts increased as lower operating
costs, an improved product mix and productivity improvements more than offset
the impact of a 10% decrease in sales of cracking catalysts due to continuing
weakness in the refining market. The lower operating costs resulted from the
mid-1998 shutdown of a manufacturing facility in The Netherlands, manufacturing
efficiencies and reduced administrative expenses. The plant shutdown reduced
fixed costs by $4.0 million in the first nine months of 1999. The manufacturing
efficiencies accounted for $3.1 million, while the reduced administrative
expenses totaled $2.5 million in the first nine months of 1999.
Operating earnings from chemical catalysts were up slightly due to a
favorable product mix and lower operating costs. Operating earnings from
polypropylene catalysts increased primarily due to increased sales and lower
operating costs.
12
Paper Pigments and Additives
- ----------------------------
Operating earnings decreased 26% to $21.1 million in the first nine months
of 1999 from $28.5 million in the same period of 1998. Net sales for the first
six months of 1999 decreased 4% to $177.9 million from $185.3 million in the
same period of 1998.
Operating earnings decreased primarily due to a decline in sales resulting
from continuing weakness in most regional markets, particularly Japan where
sales declined 8%. Sales in Europe decreased 9% and sales in North America
decreased 8% from the prior year, while sales in the rest of the Asia-Pacific
region (excluding Japan) increased 13%.
Specialty Pigments and Additives
- --------------------------------
Operating earnings increased 45% to $46.4 million in the first nine months
of 1999 from $31.9 million in the same period of 1998. Net sales for the first
nine months of 1999 increased 7% to $274.3 million from $257.1 million in the
same period of 1998.
Operating earnings increased primarily due to increased sales volume of
effect pigments, specialty films and specialty kaolin. These increases were
driven by continued Asia-Pacific growth and European and North American sales
increases. In addition, operating earnings increased due to improved costs in
most product lines and the absence of costs related to inventory reductions in
the prior year. These improved results were offset partially by lower colors
volume due to the delayed start-up of a new manufacturing process.
Industrial Commodities Management
- ---------------------------------
Operating earnings decreased 25% to $29.6 million in the first nine months
of 1999 from $39.5 million in the same period of 1998. Net sales for the first
nine months of 1999 increased 13% to $2.0 billion from $1.8 billion in the same
period of 1998.
The sales increase resulted from higher volumes as well as higher palladium
and rhodium prices compared with the prior year. The operating earnings decrease
resulted from significantly lower volatility in platinum group metals markets
during the first nine months of 1999 compared with the prior year.
Financial Condition and Liquidity
---------------------------------
At September 30, 1999, the Company's current ratio was 0.9, compared to 1.1
at December 31, 1998. The Company's total-debt-to-total-capital ratio increased
to 58% at September 30, 1999 from 45% at December 31, 1998, due to increased
short-term borrowings to fund a major share repurchase.
Cash flows from investing activities were impacted by the acquisition of
the chemical catalysts businesses of Mallinckrodt Inc. for approximately $210
million in May 1998 and decreased capital expenditures in 1999. Capital
expenditures in 1999 are expected to be below 1998 spending, without impairing
the Company's ability to meet volume growth.
13
Cash flows from financing activities were impacted by a major share
repurchase in May 1999, increased short-term borrowings to fund the share
repurchase, and the issuance of $120 million of 30-year bonds in June 1998 to
reduce short-term debt related to the acquisition of the chemical catalyst
businesses of Mallinckrodt Inc.
In July 1998, the Company filed a shelf registration for $300 million. The
net proceeds from offerings under the shelf registration are expected to be used
to retire short-term debt and for general corporate purposes. Depending on
market conditions, the Company anticipates issuing up to $150 million of bonds
under the shelf registration by year-end 1999.
The nature of the Industrial Commodities Management segment can result in
significant fluctuations in cash flow. A reduction in committed metal positions,
net of a decrease in metal-related accounts payable, resulted in a decrease in
hedged metal obligations. Management believes the Company will continue to have
adequate access to credit and other capital markets to meet its needs for the
foreseeable future.
Other Matters
-------------
Year 2000 Update
- ----------------
The ability of computers, software or any equipment utilizing microprocessors to
properly recognize and process data at the turn of the century is commonly
referred to as a Y2K compliance issue. To address this issue, Engelhard has
developed a worldwide Y2K readiness plan that is divided into phases. The phases
are as follows:
o Inventory - understanding what applications are in the portfolio.
o Assessment - determining what, if any, Y2K shortcomings each application
has.
o Remediation - fixing or replacing each application to make it Y2K
compliant.
o Testing - conducting thorough Y2K scenarios to ensure that the fixing of
each application is complete.
The entire company has completed the inventory and assessment stages. Our
major Company-wide applications -- such as order processing, financials, metals
trading, human resources and payroll -- are complete, including testing.
Engelhard has approached its Y2K compliance issue by categorizing its
dependencies into two sections: Internal systems and External systems of
suppliers and customers. Generally, internal systems identified as non-Y2K
compliant have been, or will be, replaced or modified by reprogramming,
upgrading or other means. Some of the internal non-compliant systems were
targeted for replacement for reasons other than Y2K issues as the benefits of
newer technology already had created an economic business case for action. The
cost of these replacement solutions have been, or will be, capitalized as
permitted by applicable accounting standards, whereas the cost of modification
solutions have been or will generally be expensed as repairs. External systems
will be monitored with the cooperation of our suppliers and customers.
Internal IT systems - includes internal applications software such as finance,
manufacturing and logistics. All internal IT systems have been inventoried and
assessed for Y2K compliance.
All of the key applications of the Company's individual business unit systems
have been addressed and are believed to be Y2K compliant.
14
All of the completed projects were primarily planned and staffed
internally. The only major project that used external help in assessment,
remediation and testing was our corporate order-processing system (CSS), for
which we engaged MCI Systemhouse. This is now complete.
A core team in corporate headquarters, including a representative from internal
audit, has been given the responsibility to assess Y2K project progress during
remediation. They also conduct reviews at the end of each major project to
validate Y2K concurrence, according to a pre-determined checklist.
There has been little in the way of deferral of projects due to Y2K efforts. In
fact, the two major Company-wide system implementations (PeopleSoft for Human
Resources and Oracle for Accounts Receivable) were Y2K compliance driven. Both
are now complete.
There have been no Y2K problems to date. In particular, orders that have
been placed with Y2K delivery have experienced no problem.
Internal Non-IT systems - includes embedded chip technology such as
programmable logic controllers and related hardware/software; and personal
computers and related software. Engelhard's programmable logic controllers and
related hardware/software have been inventoried and assessed for Y2K compliance.
All non-compliant equipment software has been replaced or upgraded. Engelhard
believes all of its "critical" personal computers and related software are Y2K
compliant. All of Engelhard's other personal computers and related software have
been remediated and tested. Engelhard has replaced and/or upgraded any
significant non-compliant hardware/software.
External systems - includes systems of customers and suppliers. Engelhard
has identified and contacted customers and suppliers who would have a
significant negative impact on operations if not Y2K compliant. Engelhard has
assessed the status of these customers and suppliers and has developed requisite
action plans where necessary. There can be no assurance that the Y2K compliance
issues of these customers and suppliers will not have a material adverse affect
on operating results or cash flows of the Company.
Engelhard's assessment of its suppliers regarding their Y2K readiness,
including both domestic and international, includes comprehensive surveys of all
vendors and individual assessments of key ones. The surveys are complete and
revealed no major problems. Engelhard has responded to customer inquiries with a
standard written response that gives assurance that appropriate steps are being
taken toward Y2K compliance before January 1, 2000.
The estimated total cost of implementing Y2K solutions is approximately
$11.5 million. The total amount spent includes $10.6 million through December
31, 1998, an additional $0.3 million in the first quarter of 1999, an additional
$0.1 million in the second quarter of 1999 and an additional $0.1 million in the
third quarter of 1999. With regard to the $11.1 million spent to date,
approximately $6.6 million has been expensed and $4.5 million capitalized in
accordance with applicable accounting standards. The remaining Y2K expenditures
are estimated to be incurred by the end of 1999.
15
Failure to correct a material Y2K compliance problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have a material adverse impact on Engelhard's
operations. Engelhard believes that, with the implementation of new business
systems and completion of the Y2K project as scheduled, the possibility of
significant interruptions of normal operations is reduced.
While management believes Engelhard does not have significant exposure with
respect to major systems, contingency planning has been assessed. To that end,
each business has identified the key systems that require development of a
contingency plan. The following milestones have been met:
Establish business/site teams to develop plans and
procedures to address identified critical components Done
Develop contingency plans Done
Publish recommendations relative to year-end 1999 activities Done
Test contingency plans where possible Done
Forward-looking Statements
--------------------------
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
the future prospects, developments and business strategies of Engelhard. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These forward-looking statements involve risks and
uncertainties that may cause Engelhard's actual future activities and results of
operations to be materially different from those suggested or described in this
document. These risks include: competitive pricing or product development
activities; Engelhard's ability to achieve and execute internal business plans;
global economic trends; worldwide political instability and economic growth;
markets, alliances and geographic expansions developing differently than
anticipated; fluctuations in the supply and prices of precious and base metals;
government legislation and/or regulation (particularly on environmental issues);
technology, manufacturing and legal issues; the impact of "Year 2000"; and the
impact of any economic downturns and inflation, including the recent weaknesses
in the currency, banking and equity markets of countries in the Asia/Pacific
region. Investors are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of their dates. Engelhard
disclaims any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K Pages
- ------- -------------------------------- -----
(a)(12) Computation of the Ratio of Earnings to Fixed Charges. 18-19
(b) There were no reports on Form 8-K filed during the quarter
ended September 30, 1999.
16
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.
ENGELHARD CORPORATION
-----------------------------
(Registrant)
Date November 14, 1999 /s/ Orin R. Smith
--------------------- -----------------------------
Orin R. Smith
Chairman and Chief
Executive Officer
Date November 14, 1999 /s/ Thomas P. Fitzpatrick
--------------------- -----------------------------
Thomas P. Fitzpatrick
Senior Vice President and
Chief Financial Officer
Date November 14, 1999 /s/ Michael A. Sperduto
---------------------- -----------------------------
Michael A. Sperduto
Controller
17
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
18
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30, Years Ended December 31,
----------------- --------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Earnings from continuing operations
before provision for income taxes $212,554 $260,563 $ 85,812 $209,955 $185,312 $157,306
Add/(deduct)
Portion of rents representative
of the interest factor 2,625 3,500 3,000 3,900 4,700 4,800
Interest on indebtedness 43,735 58,887 52,776 45,009 31,326 21,954
Equity dividends 2,431 2,022 3,803 2,515 3,411 3,800
Equity in (earnings) losses
of affiliates (11,995) (10,077) 47,833 5,008 (695) (632)
--------- --------- -------- -------- --------- ---------
Earnings, as adjusted $249,350 $314,895 $193,224 $266,387 $224,054 $187,228
========= ========= ======== ======== ========= =========
Fixed Charges
Portion of rents representative
of the interest factor $ 2,625 $ 3,500 $ 3,000 $ 3,900 $ 4,700 $ 4,800
Interest on indebtedness 43,735 58,887 52,776 45,009 31,326 21,954
Capitalized interest 1,336 1,897 651 875 784 528
------- --------- ------- ------- ------- --------
Fixed charges $47,696 $ 64,284 $56,427 $49,784 $36,810 $27,282
======= ========= ======= ======= ======= ========
Ratio of Earnings to Fixed Charges 5.23 4.90 3.42 (a) 5.35 6.09 6.86
======= ========= ======= ======= ======= ========
(a) Earnings in 1997 were negatively impacted by special and other charges of $149.6 million for a variety of events.
Without such charges the ratio of earnings to fixed charges would have been 5.28.
19