1
Page 1 of 22 Pages
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 September 30, 1999
OR
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
330 SOUTH FOURTH STREET
P. O. BOX 1335
RICHMOND, VIRGINIA 23210
- --------------------------- -----
(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
--- ---
Number of shares of common stock, $.01 par value, outstanding as
of October 31, 1999: 46,747,639
2
ALBEMARLE CORPORATION
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 3-4
Consolidated Statements of Income - Three and
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income
- Three and Nine Months Ended September 30, 1999
and 1998 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 7
Notes to the Consolidated Financial Statements 8-12
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition, Additional
Information, Year 2000 and Recent Developments 13-20
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II.OTHER INFORMATION
ITEM 3. Legal Proceedings 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
3
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements
--------------------
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars In Thousands)
----------------------
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $45,655 $21,180
Accounts receivable, less allowance for
doubtful accounts (1999 - $2,971;
1998 - $2,782) 141,098 145,207
Inventories:
Finished goods 88,864 97,684
Raw materials 11,060 11,684
Stores, supplies and other 16,873 17,838
--------------- --------------
116,797 127,206
Deferred income taxes and prepaid expenses 17,601 17,937
--------------- --------------
Total current assets 321,151 311,530
--------------- --------------
Property, plant and equipment, at cost 1,285,942 1,259,340
Less accumulated depreciation and
amortization 780,642 744,672
--------------- --------------
Net property, plant and equipment 505,300 514,668
Other assets and deferred charges 104,853 90,308
Goodwill and other intangibles, net of
amortization 18,030 21,291
--------------- --------------
Total assets $949,334 $937,797
--------------- --------------
--------------- --------------
<FN>
See accompanying notes to the consolidated financial statements.
4
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars In Thousands)
----------------------
September 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $57,780 $45,073
Long-term debt, current portion 821 408
Accrued expenses 58,315 53,300
Dividends payable 4,690 4,701
Income taxes payable 16,014 4,454
--------------- ---------------
Total current liabilities 137,620 107,936
--------------- ---------------
Long-term debt 146,380 192,530
Other noncurrent liabilities 80,660 75,664
Deferred income taxes 96,689 110,000
Shareholders' equity:
Common stock, $.01 par value, issued and
outstanding- 46,875,039 in 1999 and
47,008,283 in 1998, respectively 469 470
Additional paid-in capital 76,268 78,724
Accumulated other comprehensive
(loss) income (4,693) 7,360
Retained earnings 415,941 365,113
--------------- ---------------
Total shareholders' equity 487,985 451,667
--------------- ---------------
Total liabilities and shareholders' equity $949,334 $937,797
--------------- ---------------
--------------- ---------------
<FN>
See accompanying notes to the consolidated financial statements.
5
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands Except Per-Share Amounts)
---------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
--------- ---------- ---------- ----------
Net sales $212,086 $196,192 $621,242 $615,444
Cost of goods sold 150,923 138,683 427,250 423,936
--------- ---------- ---------- ----------
Gross profit 61,163 57,509 193,992 191,508
Selling, general and
administrative expenses 26,558 25,366 81,896 79,030
Research and development
expenses 8,603 7,903 26,119 21,846
Special charges 852 -- 6,631 --
--------- ---------- ---------- ----------
Operating profit 25,150 24,240 79,346 90,632
Interest and financing
expenses 1,564 596 6,883 2,303
Gain on sale of investment in
Albright & Wilson stock,
net -- -- (22,054) --
Other expense (income), net 20 (397) (960) (1,579)
--------- ----------- --------- ----------
Income before income taxes 23,566 24,041 95,477 89,908
Income taxes 6,427 6,464 30,553 27,871
---------- ---------- ---------- ---------
NET INCOME $17,139 $17,577 $64,924 $62,037
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
BASIC EARNINGS PER SHARE $0.37 $0.33 $1.38 $1.17
---------- ---------- ---------- --------
---------- ---------- ---------- --------
DILUTED EARNINGS PER SHARE $0.36 $0.33 $1.36 $1.16
---------- ---------- ---------- --------
---------- ---------- ---------- --------
Cash dividends declared per
share of common stock $0.10 $0.09 $0.30 $0.27
---------- ---------- ---------- --------
---------- ---------- ---------- --------
<FN>
See accompanying notes to the consolidated financial statements.
6
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(Dollars In Thousands)
----------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1999 1998 1999 1998
---------- ---------- --------- ---------
Net income $17,139 $17,577 $64,924 $62,037
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments 1,899 8,144 (12,053) 7,478
---------- ---------- --------- ---------
Comprehensive income $19,038 $25,721 $52,871 $69,515
---------- ---------- --------- ---------
---------- ---------- --------- ---------
<FN>
See accompanying notes to the consolidated financial statements.
7
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Dollars In Thousands)
----------------------
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1999 1998
---------- -----------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR $21,180 $34,322
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 64,924 62,037
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 56,844 55,459
Gain on sale of investment in
Albright & Wilson stock, net (22,054) --
Write-off of plant facilities 4,781 --
Working capital decrease excluding
cash and cash equivalents 36,485 3,642
Other, net (5,028) (1,745)
---------- -----------
Net cash provided from
operating activities 135,952 119,393
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment
in Albright & Wilson stock 157,516 --
Cost of investment in
Albright & Wilson stock (135,462) --
Capital expenditures (61,298) (57,331)
Purchase of nonmarketable investments (3,245) --
Other, net (4,545) 1,375
---------- -----------
Net cash used in
investing activities (47,034) (55,956)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (169,036) (10,926)
Dividends paid (14,107) (14,525)
Purchases of common stock (3,102) (140,470)
Proceeds from borrowings 122,360 97,472
Proceeds from exercise of stock options 645 278
---------- -----------
Net cash used in
financing activities (63,240) (68,171)
---------- -----------
Net effect of foreign exchange on cash (1,203) (411)
---------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 24,475 (5,145)
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $45,655 $29,177
---------- -----------
---------- -----------
<FN>
See accompanying notes to the consolidated financial statements.
8
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
1. In the opinion of management, the accompanying consolidated
financial statements of Albemarle Corporation and Subsidiaries
("Albemarle" or "the Company") contain all adjustments necessary
to present fairly, in all material respects, the Company's
consolidated financial position as of September 30, 1999, and
December 31, 1998, the consolidated results of operations and
comprehensive income for the three- and nine-month periods ended
September 30, 1999, and 1998, and condensed consolidated cash
flows for the nine-month periods ended September 30, 1999, and
1998. All adjustments are of a normal and recurring nature.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's 1998 Annual Report & Form 10-K
filed on March 10, 1999. The December 31, 1998, consolidated
balance sheet data was derived from audited financial
statements, but does not include all disclosures required by
generally accepted accounting principles. The results of
operations for the three- and nine-month periods ended September
30, 1999, are not necessarily indicative of the results to be
expected for the full year. Certain amounts in the accompanying
consolidated financial statements and notes thereto for the
three-month and nine-month periods ended September 30, 1999,
have been compiled and included herein in connection with the
adoption of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 131
"Disclosure about Segments of an Enterprise and Related
Information." Certain amounts in the accompanying consolidated
financial statements and notes thereto have been reclassified to
conform to the current presentation.
2. Long-term debt consists of the following:
September 30, December 31,
1999 1998
------------- -------------
Variable-rate bank loans $116,000 $169,600
Foreign borrowings 19,107 22,216
Industrial revenue bonds 11,000 --
Miscellaneous 1,094 1,122
------------- -------------
Total 147,201 192,938
Less amounts due within
one year 821 408
------------- -------------
Long-term debt $146,380 $192,530
------------- -------------
------------- -------------
On March 10, 1999, the Company entered into a Loan Agreement
with Columbia County, Arkansas ("the County"), which issued $11
million in Tax Exempt Solid Waste Disposal Revenue Bonds ("Tax
Exempt Bonds") for the purpose of financing various solid waste
disposal facilities at the Company's Magnolia, Arkansas South
Plant. The presently unexpended proceeds from the Tax Exempt
Bonds of $3,780 are restricted to the purchase of solid waste
disposal facilities and accordingly, are reflected as a
noncurrent asset in the balance sheet caption - Other assets
9
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
2. Continued.
and deferred charges. The Tax Exempt Bonds bear interest at a
variable rate that approximates 65% of the federal funds rate.
The Tax Exempt Bonds will mature in 22 years and are
collateralized by a transferable irrevocable direct pay letter
of credit.
On March 10, 1999, the Company and the County entered into a
series of agreements. Pursuant to these agreements, the Company
will benefit from a ten-year property tax abatement on all new
plant capital expansions, modifications and/or improvements
(except for the restrictions on the $11 million Tax Exempt Bonds
mentioned in the paragraph above) constructed at the Company's
Magnolia, Arkansas South Plant over the next three years, up to
a total of $81 million, including the solid waste disposal
facilities mentioned above. With the exception of the $11
million Tax Exempt Bonds, the funding for the projects will be
provided primarily from the Company's cash flow from operations
and/or long-term debt.
3. Cost of goods sold for the quarter ended September 30, 1999,
includes a charge of $2,400 ($1,529 after income taxes) related
to the write off of the residual net book value of an existing
tetrabromobisphenol-A facility in Magnolia, Arkansas currently
being replaced by the Company's new 6-sigma SAYTEX CP-2000
flame retardant facility. Cost of goods sold for the nine months
ended September 30, 1999, also includes a charge of $2,381
($1,517 after income taxes) for the June 1999 write off of
excess assets associated with other flame retardant production
facilities also located in Magnolia, Arkansas.
4. Cost of goods sold includes foreign exchange transaction
gains/(losses) of $867 and ($3,288), and $4,484 and ($3,172) for
the third quarter and nine months ended September 30, 1999, and
1998, respectively.
5. Special charges totaling $852 ($543 after income taxes) and
$6,631 ($4,130 after income taxes) for the third quarter and
nine months ended September 30, 1999, respectively, related to
work-force reduction programs at certain of the Company's
facilities. The programs impacted a total of 85 salaried and
wage employees.
6. In May 1999, the Company, through its affiliate Albemarle UK
Holdings Limited, sold all of its 58,394,049 common shares of
Albright & Wilson plc ("Albright & Wilson"), a United Kingdom
chemicals' company, acquired in March 1999, as part of its
tender offer for Albright & Wilson for an aggregate
consideration of $157,516 resulting in a gain of $22,054
($14,381 after income taxes), net of expenses. The proceeds from
the sale of the Albright & Wilson common shares were primarily
used to pay down debt under the Company's existing Competitive
Advance and Revolving Credit Agreement.
10
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
7. Basic and diluted earnings per share for the three- and
nine-month periods ended September 30, 1999, and 1998, are
calculated as follows:
Three-Months Ended Nine-Months Ended
September 30 September 30
------------------ -----------------
BASIC EARNINGS PER SHARE 1999 1998 1999 1998
-------- -------- -------- -------
Numerator:
Income available to
stockholders, as reported $17,139 $17,577 $64,924 $62,037
-------- -------- -------- -------
Denominator:
Average number of
shares of common
stock outstanding 46,949 52,695 47,000 53,077
-------- -------- -------- --------
Basic earnings per share $0.37 $0.33 $1.38 $1.17
-------- -------- -------- --------
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE
Numerator:
Income available to
stockholders, as reported $17,139 $17,577 $64,924 $62,037
-------- -------- -------- --------
Denominator:
Average number of
shares of common
stock outstanding 46,949 52,695 47,000 53,077
Shares issuable upon
exercise of stock
options 526 598 651 575
-------- -------- -------- ---------
Total shares 47,475 53,293 47,651 53,652
-------- -------- -------- ---------
Diluted earnings per share $0.36 $0.33 $1.36 $1.16
-------- -------- -------- ---------
-------- -------- -------- ---------
11
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
7. Continued.
The three- and nine-months ended September 30, 1999, average
number of shares of common stock outstanding includes the
effects of the purchase of 5,738,241 common shares through a
tender offer finalized on September 30, 1998.
8. The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" in June 1998, which was
effective for financial statements for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No.
133", postponing SFAS No. 133's effective date one year to June
15, 2000. SFAS No. 133 established accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging
activities. It required that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The
Company has not determined its adoption date for SFAS No. 133.
At the time of adoption, SFAS No. 133 is not expected to have a
material impact on the financial position or results of
operations of the Company.
9. At December 31, 1998, the Company adopted SFAS No. 131, which
changed the way it reports information about its operating
segments. Prior years' segment data has been restated to conform
to the current presentation. The Company is a global
manufacturer of specialty polymer and fine chemicals, currently
grouped into two operating segments: Polymer Chemicals and Fine
Chemicals. The operating segments were determined based on
management responsibility. The Polymer Chemicals' operating
segment is comprised of flame retardants, organometallics and
catalysts, and polymer additives and intermediates. The Fine
Chemicals' operating segment is comprised of agrichemicals,
bromine and derivatives, pharmachemicals, potassium and chlorine
chemicals, and surface actives. Segment data includes
intersegment transfers of raw materials at cost, except for
bromine which is accounted for at transfer price, and foreign
exchange gains and losses as well as allocations for certain
corporate costs. The corporate and other expenses include
corporate-related items not allocated to the reportable
segments. See Tables on the following page.
12
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
9. Continued.
Three Months Ended September 30
-------------------------------
1999 1998
----- -----
SUMMARY OF SEGMENT RESULTS Revenues Income Revenues Income
--------- -------- ---------- ---------
Polymer Chemicals $113,842 $16,780 $101,251 $15,868
Fine Chemicals 98,244 13,304 94,941 12,456
--------- -------- ---------- ---------
Segment totals $212,086 30,084 $196,192 28,324
--------- ----------
--------- ----------
Corporate and other expenses (4,934) (4,084)
-------- ---------
Operating profit 25,150 24,240
Interest and financing
expenses 1,564 596
Other expense (income), net 20 (397)
-------- ----------
Income before income taxes $23,566 $24,041
-------- ----------
-------- ----------
Nine Months Ended September 30
------------------------------
1999 1998
---- ----
SUMMARY OF SEGMENT RESULTS Revenues Income Revenues Income
-------- -------- ---------- ---------
Polymer Chemicals $324,317 $53,327 $315,876 $58,486
Fine Chemicals 296,925 42,334 299,568 48,005
-------- -------- ---------- ---------
Segment totals $621,242 $95,661 $615,444 106,491
-------- ----------
-------- ----------
Corporate and other expenses (16,315) (15,859)
-------- ----------
Operating profit 79,346 90,632
Interest and financing
expenses 6,883 2,303
Gain on sale of investment
in Albright & Wilson stock,
net (22,054) --
Other (income), net (960) (1,579)
-------- ----------
Income before income taxes $95,477 $89,908
-------- ----------
-------- ----------
13
ITEM 2. Management's Discussion and Analysis of Results of
--------------------------------------------------
Operations and Financial Condition, Additional lnformation,
-----------------------------------------------------------
Year 2000 and Recent Developments
---------------------------------
The following is management's discussion and analysis of certain
significant factors affecting the results of operations of
Albemarle Corporation ("Albemarle" or "the Company") during the
periods included in the accompanying consolidated statements of
income and changes in the Company's financial condition since
December 31, 1998.
Some of the information presented in the following discussion
constitutes forward-looking comments within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the
Company believes its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business
and operations, there can be no assurance that actual results
will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations 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
the Company's products, increases in the cost of the products,
changes in the market in general, fluctuations in foreign
currencies and significant changes in new product introduction
resulting in an increase in capital project requests and
approvals leading to additional capital spending.
Results of Operations
- ---------------------
Third Quarter 1999 Compared with Third Quarter 1998
- ----------------------------------------------------
Net sales for third quarter 1999 amounted to $212.1 million, up
8.1% or $15.9 million from third quarter 1998 net sales of
$196.2 million due to higher shipments in most businesses and
the favorable effects of foreign exchange, primarily in Japan,
in third quarter 1999 versus third quarter 1998 offset, in part,
by the negative effects of competitive pricing.
The gross profit margin decreased to 28.8% in 1999 from 29.3%
for the corresponding period in 1998. Third-quarter 1999
operating profit was up 3.8% or $.9 million from 1998 primarily
due to higher net sales and the favorable effects of foreign
exchange in third quarter 1999 versus third quarter 1998 offset,
in part, by higher operating and new product development costs,
including start-up costs associated with the Company's new
SAYTEX CP-2000(tetrabromobisphenol-A) plant in Magnolia,
Arkansas as well as the residual write off of the current
facility being replaced and a special charge for voluntary
work-force reductions at the Company's Orangeburg plant. The
Company anticipates future annual operating cost savings per
year of approximately $1 million, before income taxes, as a
result of the work-force reductions.
Selling, general and administrative expenses and research and
development expenses, increased 5.7% or $1.9 million in the
third quarter of 1999 versus third quarter 1998 primarily due to
an increase in employee related costs and higher outside
consulting expenses in the 1999 period. As a percentage of net
sales, selling, general and administrative expenses, including
research and development expenses, were 16.6% in 1999 versus
17.0% in the 1998 quarter.
14
OPERATING SEGMENTS
Net sales by reportable business operating segment for the third
quarter periods ended September 30, 1999, and 1998 are as
follows:
Net Sales
---------
1999 1998
---- ----
Polymer Chemicals $113,842 $101,251
Fine Chemicals 98,244 94,941
-------- --------
Segment totals $212,086 $196,192
-------- --------
-------- --------
Polymer Chemicals' net sales for third quarter 1999 increased
12.4% or $12.6 million from third quarter 1998 primarily due to
increased shipments in flame retardants, polymer additives and
intermediates and organometallics and the favorable effects of
foreign exchange in 1999 in the Asia-Pacific region offset, in
part, by the effects of competitive pricing in most businesses.
Fine Chemicals' net sales for third quarter 1999 increased 3.5%
or $3.3 million from third quarter 1998 primarily due to higher
shipments of pharmachemicals and surface actives offset, in
part, by the effects of competitive pricing in most businesses.
Operating profit by reportable business operating segment for
the third quarter periods ended September 30, 1999, and 1998 are
as follows:
Operating Profit
----------------
1999 1998
---- -----
Polymer Chemicals $16,780 $15,868
Fine Chemicals 13,304 12,456
-------- --------
Segment totals 30,084 28,324
Corporate and
other expenses (4,934) (4,084)
-------- --------
Operating profit $25,150 $24,240
-------- --------
-------- --------
Polymer Chemicals' third quarter 1999 segment operating profit
was up 5.7% or $.9 million from third quarter 1998 primarily due
to increased shipments in most businesses, the favorable effects
of foreign exchange and improved plant utilization in certain
product lines in third quarter 1999 versus third quarter 1998
offset, in part, by the start-up costs associated with the
Company's new flame retardant plant in Arkansas, the residual
write-off of the current facility being replaced as well as
higher new product development costs and an allocated portion of
the work-force reduction special charge in third quarter 1999.
Fine Chemicals' third quarter 1999 segment operating profit
increased approximately 6.8% or $.8 million from third quarter
1998 primarily due to increased shipments in most businesses,
the favorable effects of foreign exchange and lower raw material
costs in third quarter 1999 versus third quarter 1998 offset, in
part, by higher production costs due to unfavorable plant
utilization in certain product lines, primarily pharmachemicals
and agrichemicals in third quarter 1999 versus third quarter
1998 and an
15
allocated portion of the work-force reduction
special charge in third quarter 1999. Corporate and other
expenses were up 20.8% percent or $.9 million from third quarter
1998 primarily due to an increase in employee related costs in
the 1999 period.
INTEREST AND FINANCING EXPENSES
Interest and financing expenses for third quarter 1999 increased
to $1.6 million from $.6 million for third quarter 1998
primarily due to higher average outstanding debt associated with
the purchase of approximately six million common shares of the
Company's stock in 1998.
INCOME TAXES
Income taxes for third quarter 1999 were essentially flat
compared to the same period in 1998. The third quarter 1999
effective income tax rate was 27.3%, up slightly from 26.9% in
third quarter 1998.
Results of Operations
- ---------------------
Nine Months 1999 Compared with Nine Months 1998
- -----------------------------------------------
Net sales for the first nine months of 1999 amounted to $621.2
million, an increase of 0.9% or $5.8 million from the
corresponding period of 1998, due to higher shipments in most
businesses and the effects of favorable foreign exchange,
primarily in Japan, in 1999 versus 1998 offset, in part, by the
negative effects of competitive pricing.
The gross profit margin increased slightly to 31.2% in 1999 from
31.1% in the 1998 period. Operating profit for the first nine
months of 1999 was down 12.5% or $11.3 million from 1998
primarily due to special charges of $6.6 million for voluntary
work-force reductions at certain of the Company's facilities in
1999, higher operating and new product development costs,
including the start-up costs associated with the Company's new
flame retardant plant in Arkansas as well as the residual write
off of the current facility being replaced and the June 1999
write off of an excess flame retardant facility in Arkansas
offset, in part, by the favorable effects of foreign exchange
and favorable raw material costs in 1999 versus the
corresponding period in 1998, and increased net sales in 1999
versus 1998 primarily due to higher shipments in most
businesses, despite continuing competitive pricing pressures.
Selling, general and administrative expenses, combined with
research and development expenses, increased 7.1% or $7.1
million for the first nine months of 1999 versus the
corresponding period in 1998, primarily due to higher new
product development costs, higher outside consulting expenses
and an increase in employee related costs in the 1999 period.
As a percentage of net sales, selling, general and
administrative expenses, including research and development
expenses, were 17.4% in 1999 versus 16.4% in the 1998 quarter.
OPERATING SEGMENTS
Net sales by reportable business operating segment for the
nine-month periods ended September 30, 1999, and 1998 are as
follows:
16
Net Sales
---------
1999 1998
---- ----
Polymer Chemicals $324,317 $315,876
Fine Chemicals 296,925 299,568
-------- --------
Segment totals $621,242 $615,444
-------- --------
-------- --------
Polymer Chemicals' net sales for the first nine months of 1999
were up 2.7% or $8.4 million from the corresponding period of
1998 primarily due to increased shipments of flame retardants
and organometallics and the favorable effects of foreign
exchange, primarily Japan in 1999 offset, in part, by the
effects of competitive pricing in most businesses. Fine
Chemicals' net sales for the 1999 nine-month period were down
0.9% or $2.6 million from the corresponding period of 1998
primarily due to the effects of competitive pricing in most
businesses, lower shipments of European potassium and chlorine
chemicals and lower sales of non-manufactured products in the
Asia-Pacific region offset, in part, by higher shipments of
surface actives, agrichemicals, bromine and derivatives and
pharmachemicals in the 1999 period.
Operating profit by reportable business operating segment for
the nine-month periods ended September 30, 1999, and 1998 are as
follows:
Operating Profit
----------------
1999 1998
---- ----
Polymer Chemicals $53,327 $58,486
Fine Chemicals 42,334 48,005
-------- --------
Segment totals 95,661 106,491
Corporate and other
expenses (16,315) (15,859)
-------- --------
Operating profit $79,346 $90,632
-------- --------
-------- --------
Polymer Chemicals' segment operating profit for the first nine
months of 1999 was down 8.8% or $5.2 million from the
corresponding period of 1998 primarily due to higher operating
and new product development costs including the start-up costs
associated with the Company's new flame retardant plant in
Arkansas, the residual write off of the current facility being
replaced as well as the June 1999 write off of an excess flame
retardant facility in Arkansas and an allocation of
approximately $3.3 million for work-force reduction special
charges in 1999 offset, in part, by the favorable effects of
foreign exchange and lower raw material costs in the 1999
nine-month period versus the 1998 nine-month period and
increased sales in the 1999 period due to higher shipments in
most businesses, despite continued unfavorable competitive
pricing pressures. Fine Chemicals' 1999 nine month segment
operating profit declined 11.8% or $5.7 million from the 1998
nine-month period primarily due to an allocation of
approximately $3.3 million for the work-force reduction special
charges in 1999 and higher new product development and operating
costs offset, in part, by the favorable effects of foreign
exchange and lower raw material costs in the 1999 nine-month
period versus the 1998 nine-month period.
17
INTEREST AND FINANCING EXPENSES AND OTHER EXPENSE (INCOME), NET
Interest and financing expenses for the first nine months of
1999 increased to $6.9 million from $2.3 million in the
corresponding period of 1998 primarily due to higher average
outstanding debt associated with the March 1999 investment in
Albright & Wilson plc ("Albright & Wilson") and the 1998
purchases of common stock. Other income declined $.6 million
primarily due to lower interest income in the 1999 period.
GAIN ON SALE OF INVESTMENT IN ALBRIGHT & WILSON STOCK
Results for the first nine months of 1999 include the gain of
$22.1 million ($14.4 million after income taxes), net of
expenses, from the sale of the Company's investment in Albright
& Wilson common stock acquired in March 1999, as part of its
tender offer for Albright & Wilson.
INCOME TAXES
Excluding the special charges related to the work-force
reductions and the gain on the sale of Albright & Wilson common
stock, income taxes in the first nine months of 1999 decreased
$2.5 million, primarily due to lower pretax income offset, in
part, by a higher effective income tax rate (31.7% in 1999
versus 31.0% in the corresponding period of 1998.)
Financial Condition and Liquidity
- ---------------------------------
Cash and cash equivalents at September 30, 1999, were $45.7
million, representing an increase of $24.5 million from $21.2
million at year-end 1998.
Cash flows provided from operating activities of $136.0 million
(which included a working capital decrease of $36.5 million) for
the first nine months of 1999 together with proceeds from sale
of the investment in Albright & Wilson stock of $157.5 million
and borrowings of $122.4 million were primarily used to cover
repayment of debt, the cost of investment in Albright & Wilson
stock, capital expenditures and payment of dividends with the
balance added to cash and cash equivalents.
The Company anticipates that cash provided from operations in
the future will be sufficient to pay its operating expenses,
satisfy debt-service obligations and make dividend payments.
The change in the Company's accumulated other comprehensive
income account from December 31, 1998, was due to foreign
currency adjustments, net of related deferred taxes, primarily
related to the strengthening of the U.S. Dollar versus the Euro
currencies.
The noncurrent portion of the Company's long-term debt amounted
to $146.4 million at September 30, 1999, compared to $192.5
million at the end of 1998. The Company's long-term debt,
including the current portion, as a percentage of total
capitalization amounted to 23.2% at September 30, 1999.
The Company's capital expenditures in the first nine months of
1999 were higher than the same period of 1998. For the year
however, capital expenditures are forecasted to be lower than
the 1998 level. Capital spending will be financed primarily with
cash flow from operations with any additional cash provided from
additional debt. The amount and timing of any additional
borrowings will depend on the Company's specific cash
requirements.
18
The Company is 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
the best of the Company's knowledge, it currently is complying
with and expects to continue to comply in all material respects
with existing environmental laws, regulations, statutes and
ordinances. Such compliance with federal, state, local and
foreign environmental protection laws has not in the past had,
and is not expected to have in the future, a material effect on
earnings or the competitive position of Albemarle.
Among other environmental requirements, the Company is subject
to the federal Superfund law, and similar state laws, under
which the Company may be designated as a potentially responsible
party and may be liable for a share of the costs associated with
cleaning up various hazardous waste sites.
Additional Information
- ----------------------
OUTLOOK
In the Company's Polymer Chemicals' segment, our flame retardant
comparisons will be impacted by two major factors. Results in
our large volume products versus the year-ago quarter, will show
the effect of having met competitive pricing earlier this year
(sequentially we anticipate minimal impact). In addition, both
sequentially and versus a year ago, start-up costs for the new
SAYTEX CP-2000 (tetrabromobisphenol-A) flame retardant plant
and higher factory costs reflecting lower plant operating rates
to draw down inventory built for this changeover, will have a
negative effect on fourth quarter 1999 results. However, these
impacts should be partially offset by continuing strong sales
volumes of most flame retardants.
Our polymer additives and intermediates businesses benefited
from strong volumes in the third quarter of 1999. We may see
this moderate in fourth quarter 1999, but still anticipate
results that are in line with the fourth quarter of 1998.
In third quarter 1999, the Company's Fine Chemicals' bromine and
derivatives business results reflected strong volumes,
especially for products going into oilfield applications. These
were up sequentially from second quarter 1999 to third quarter
1999 with resultant profit improvements; current forecasts are
for this trend to continue into the fourth quarter. In
pharmachemicals, although volume in ibuprofen in each succeeding
quarter since first quarter 1999 has been better than the
previous one, profitability versus the previous years' quarters
has been disappointing and fourth quarter 1999 will likely be
another poor comparison versus fourth quarter 1998, when
shipments were at their peak.
Fine Chemicals' agrichemicals business had a significant profit
decline in the third quarter 1999, off high double digits
sequentially. The Company expects that this will continue in the
1999 fourth quarter. Farmers are substituting older, lower
priced products and are reducing the application rate of the
products they buy to cut costs as they face low crop prices. As
a result, customers have sufficient inventory to fill their
orders and are delaying their purchases, thus we expect lower
sales continuing throughout the remainder of the year. We
anticipate the order pattern to pick up in the year 2000,
however, the Company is concerned that our sales in this
business may not return to levels seen in years past.
19
As a result of the work-force reductions in the second and third
quarters of 1999, the Company anticipates future annual
operating cost savings per year of approximately $6 million
before income taxes.
Additional information regarding the Company, its products,
markets and financial performance is provided at the Company's
Internet web site, www.Albemarle.com.
Year 2000 Update
- ----------------
Albemarle's Year 2000 Project ("Project") is generally
proceeding on schedule. The Project addresses the inability of
some computer programs and embedded computer chips to
differentiate between the years 1900 and 2000. The Company has a
global Project team, with certain location specific sub teams.
At September 30, 1999, the inventory, priority assessment and
compliance assessment phases of each area of the Project were
essentially complete. In corporate systems activities and most
process and support equipment, most critical and problem items
had been completed at September 30, 1999, however remediation
efforts are still in progress in some areas. Completion of
planned remediation efforts is expected by early fourth quarter
1999.
The total cost associated with required modifications to become
Year 2000 ready is not expected to be material to the Company's
financial position. Conversion to SAP, Peoplesoft, and Lotus
Notes business systems prior to beginning the Project
significantly reduced the costs the Company otherwise would have
incurred. The Project is being funded from current operations.
The estimated total cost of the Project is less than $3 million
of which approximately two-thirds has or will be expensed and
one-third is or will be capital items. The total amount expended
on the Project through September 1999, including internal costs,
was approximately $2.4 million. The estimate does not include
Albemarle's potential share of Year 2000 costs that may be
incurred by small joint ventures in which the Company
participates or entities in which the Company holds a minority
interest.
The Company has completed the identification and evaluation
phase of its supplier contingency planning program and is
currently developing contingency plans as necessary. These
phases are scheduled for completion by early fourth quarter
1999, with adjustment and monitoring planned through the
remainder of 1999 and early 2000. Failure to correct a material
Year 2000 problem could result in an interruption in, or a
failure of certain normal business activities or operations,
which could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000
readiness of suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000
problems will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is
expected to reduce significantly the Company's level of
uncertainty about the Year 2000 problem and, in particular,
about Year 2000 compliance and readiness of its suppliers. Since
the Company's products are not date aware, its Year 2000 issues
revolve around its suppliers' ability to supply, its ability to
produce, its business processes' ability to function properly,
and its customers' ability to purchase. Contingency plans are
under development regarding the most critical suppliers of goods
and services. As examples, these plans may include inventory
increases of raw materials and finished products and/or changes
in the mix of suppliers for certain
20
goods or services. Contingency plans for manufacturing and other
business processes will include increased sensitivity at the actual
changeover from December 31, 1999, to January 1, 2000, and alternative
methods, including manual processing for business information processes.
The Company believes that, with the previously accomplished
implementation of global business systems and completion of the
Project as scheduled, the possibility of material interruptions
of normal operations should be reduced significantly.
Readers are cautioned that to the extent legally permissible,
this statement should be considered a Year 2000 Readiness
Disclosure pursuant to the Year 2000 Information and Readiness
Disclosure Act and that forward-looking statements contained in
the Year 2000 Update should be read in conjunction with the
Company's disclosures on Year 2000 included in the Company's
1998 Annual Report [To Shareholders] & [SEC] Form 10-K filed on
March 10, 1999, and with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 referenced on
page 13.
Recent Developments
- -------------------
On October 4, 1999, the Company announced a voluntary separation
offer to all eligible U.S. salaried R&D employees. The Company
believes this offer will allow R&D to reduce its cost and
improve productivity. It is anticipated this will result in a
reduction of at least 20 R&D positions in Baton Rouge. This
offer is one of several phases within the R&D cost reduction
effort. Many of the salaried R&D employees who accepted the
offer have left the Company, while some who accepted were asked
to remain longer for transition purposes.
On October 5, 1999, the Company had a fire in the electrical
substation at its plant in Thann, France. There were no injuries
to plant employees or emergency personnel and no damage to plant
operating units, no release of chemicals and no off-site impact.
Fire damage was restricted to the substation, the heart of
electricity production for both the Thann facility and
neighboring Millennium Inorganic Chemicals plant sites.
Inventories of most products were available to allow resumption
of shipments from the plant later the same week. Cleaning of the
substation and repairs have been completed and the site is again
fully operational.
On October 28, 1999, the Company announced that Andre B. Lacy,
chairman and president of LDI Management, Inc., Indianapolis,
Ind., had resigned as a director. He had served on Albemarle's
board from its inception as a publicly-held company in 1994 and
had been a member of Ethyl Corporation's board of directors from
1981 to 1994. Concurrently, the Company's Board of Directors
elected as a director and a member of the executive committee,
William M. Gottwald, MD, vice president-- corporate strategy and
secretary to the executive committee of Albemarle. Dr.
Gottwald's election fills the vacancy created by Lacy's
departure. Dr. Gottwald joined Albemarle in 1996 after having
been associated with Ethyl Corporation from 1981 to 1996 in a
number of senior management positions, including senior vice
president responsible for finance, planning and information
resources. In addition, he earlier served as president and
general manager of Whitby Pharmaceuticals and a member of
Ethyl's board of directors and executive committee until early
1996. He served as a director and executive committee member
of Albemarle from 1994 until early 1996.
21
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 our Form 10-K for the year
ended December 31, 1998.
The Company's foreign currency risk has changed from that
disclosed in our Form 10-K for the year ended December 31, 1998.
At September 30, 1999, and December 31, 1998, the Company had
entered into Japanese Yen forward contracts in the amount of
$7.5 million and $6.9 million, respectively, all with maturity
dates in 1999. An instantaneous 10% depreciation of the U.S.
Dollar versus the Japanese Yen from September 30, 1999 rates,
with all other variables held constant, would result in a $.8
million decrease in the fair value of the forward contracts.
Part II - OTHER INFORMATION
- ----------------------------
ITEM 3. Legal Proceedings
------------------
The Company and its subsidiaries are involved from time to time
in legal proceedings of types regarded as common in the
Company's businesses, particularly administrative or judicial
proceedings seeking remediation under environmental laws, such
as Superfund, and products liability litigation.
While it is not possible to predict or determine the outcome of
the proceedings presently pending, in the Company's opinion they
should not result ultimately in liabilities likely to have a
material adverse effect upon the results of operations or
financial condition of the Company and its subsidiaries on a
consolidated basis.
In early January 1999, the U.S. Environmental Protection Agency
("EPA"), Region 6, issued an administrative complaint under
section 113 of the Clean Air Act, alleging violations at the
Company's Pasadena, Texas plant of EPA's rule regarding leaks
and repairs of appliances containing hydrochlorofluorocarbons.
EPA proposed a civil penalty of $162,000. The Company has filed
an answer and request for an administrative hearing. Although
the Company is vigorously contesting the complaint, it is
attempting to negotiate a settlement with EPA.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter
for which this report is filed.
22
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: November 5, 1999 By: s/ Robert G. Kirchhoefer
------------------------
Robert G. Kirchhoefer
Treasurer and Chief
Accounting Officer
(Principal Accounting Officer)