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, 2001
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 number 1-8142
ENGELHARD CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1586002
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(732) 205-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed 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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate 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 31, 2001
--------------------- -------------------------------
$1 par value 129,796,484
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,
------------------------ ----------------------
2001 2000 2001 2000
----------- ----------- ---------- ----------
Net sales .................... $1,143,052 $1,396,812 $4,225,945 $4,000,337
Cost of sales ................ 974,843 1,230,160 3,718,418 3,457,630
----------- ----------- ----------- ----------
Gross profit ............ 168,209 166,652 507,527 542,707
Selling, administrative and
other expenses ............. 81,355 79,308 256,780 258,807
Special charge ............... - 24,617 7,100 24,617
---------- ---------- ---------- ----------
Operating earnings ...... 86,854 62,727 243,647 259,283
Equity in earnings of
affiliates ................. 3,520 5,031 23,928 19,428
Gain on sale of investments,
net ........................ - 24,787 - 18,787
Interest expense, net ........ (9,608) (15,001) (36,740) (47,867)
----------- ----------- ----------- ----------
Earnings before income
taxes ................. 80,766 77,544 230,835 249,631
Income tax expense ........... 23,018 26,210 65,788 80,417
----------- ----------- ----------- ----------
Net earnings ............ $ 57,748 $ 51,334 $ 165,047 $ 169,214
=========== =========== =========== ==========
Basic earnings per share ..... $ 0.44 $ 0.41 $ 1.27 $ 1.34
=========== =========== =========== ==========
Diluted earnings per share ... $ 0.43 $ 0.40 $ 1.25 $ 1.32
=========== =========== =========== ==========
Cash dividends per share .... $ 0.10 $ 0.10 $ 0.30 $ 0.30
=========== =========== =========== ==========
Average number of shares
outstanding - Basic ........ 131,011 126,451 130,124 126,281
=========== =========== =========== ==========
Average number of shares
outstanding - Diluted ...... 133,263 128,368 132,300 127,983
=========== =========== =========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
2
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
Cash ............................................. $ 62,218 $ 33,534
Receivables, net.................................. 408,421 459,753
Committed metal positions ........................ 598,302 720,659
Inventories ...................................... 406,855 371,767
Other current assets ............................. 174,175 155,992
---------- ------------
Total current assets ...................... 1,649,971 1,741,705
Investments ...................................... 205,796 200,070
Property, plant and equipment, net ............... 796,803 767,687
Intangible assets, net ........................... 292,461 302,843
Other noncurrent assets .......................... 137,654 154,527
---------- ------------
Total assets .............................. $3,082,685 $3,166,832
========== ============
Short-term borrowings ............................ $ 385,302 $ 352,042
Current portion of long-term debt ................ 73 150,130
Accounts payable ................................. 241,891 220,827
Hedged metal obligations ......................... 618,660 676,460
Other current liabilities ........................ 378,264 427,240
---------- ------------
Total current liabilities ................. 1,624,190 1,826,699
Long-term debt ................................... 239,607 248,566
Other noncurrent liabilities ..................... 209,259 217,000
Shareholders' equity ............................. 1,009,629 874,567
---------- ------------
Total liabilities and
shareholders' equity .................... $3,082,685 $3,166,832
========== ============
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,
--------------------
2001 2000
--------- ---------
Cash flows from operating activities
Net earnings ........................................ $ 165,047 $ 169,214
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation and depletion ..................... 72,254 77,258
Amortization of intangible assets .............. 10,143 8,404
Gain on sale of investments, net................ - (18,787)
Equity results, net of dividends ............... (19,770) (15,064)
Net change in assets and liabilities
Metal related ............................. (22,027) (84,982)
All other ................................. (18,261) (20,389)
---------- ----------
Net cash provided by operating
activities.................................... 187,386 115,654
---------- ----------
Cash flows from investing activities
Capital expenditures ................................ (111,344) (76,060)
Proceeds from sale of investments ................... 3,400 52,811
Acquisitions and other investments................... (3,000) (40,095)
---------- ----------
Net cash used in investing activities .......... (110,944) (63,344)
---------- ----------
Cash flows from financing activities
Increase in short-term borrowings ................... 33,260 19,529
Increase in hedged metal obligations................. 96,156 33,165
Repayment of long-term debt ......................... (159,189) (103,703)
Purchase of treasury stock .......................... (69,144) -
Stock bonus and option plan transactions ............ 91,597 7,641
Dividends paid ...................................... (39,130) (25,525)
---------- ----------
Net cash used in financing
activities.................................... (46,450) (68,893)
Effect of exchange rate changes on cash .................. (1,308) (2,428)
---------- ----------
Net increase/(decrease) in cash...................... 28,684 (19,011)
Cash at beginning of year ........................... 33,534 54,375
---------- ----------
Cash at end of period........................... $ 62,218 $ 35,364
========== ==========
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,
----------------------- -----------------------
2001 2000 2001 2000
------------ ---------- ----------- ----------
Net Sales
Environmental Technologies .. $ 149,247 $ 164,621 $ 494,484 $ 493,190
Process Technologies ........ 131,138 147,739 413,918 393,514
Appearance and Performance
Technologies............... 154,766 178,755 485,364 522,140
Materials Services........... 691,422 897,286 2,802,439 2,565,790
----------- ----------- ----------- -----------
Reportable segments ... 1,126,573 1,388,401 4,196,205 3,974,634
All other ................... 16,479 8,411 29,740 25,703
----------- ----------- ----------- -----------
$1,143,052 $1,396,812 $4,225,945 $4,000,337
=========== =========== =========== ===========
Operating Earnings
Environmental Technologies .. $ 35,577 $ 35,552 $ 114,710 $ 101,381
Process Technologies ........ 24,498 19,495 63,509 54,433
Appearance and Performance
Technologies............... 11,863 22,182 33,376 63,484
Materials Services........... 12,229 14,301 46,483 77,634
----------- ----------- ----------- -----------
Reportable segments ... 84,167 91,530 258,078 296,932
All other .................. 2,687 (28,803) (14,431) (37,649)
----------- ----------- ----------- -----------
86,854 62,727 243,647 259,283
Equity in earnings of
affiliates ................. 3,520 5,031 23,928 19,428
Gain on sale of
investments, net ........... - 24,787 - 18,787
Interest expense, net ........ (9,608) (15,001) (36,740) (47,867)
----------- ----------- ----------- -----------
Earnings before income
taxes ............... $ 80,766 $ 77,544 $ 230,835 $ 249,631
Income tax expense ........... 23,018 26,210 65,788 80,417
----------- ----------- ----------- -----------
Net earnings .......... $ 57,748 $ 51,334 $ 165,047 $ 169,214
=========== =========== =========== ===========
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 2000 Annual
Report to Shareholders. Certain prior-year amounts have been reclassified
to conform with the current-year presentation.
Note 2 - Inventories
--------------------
Inventories consist of the following (in thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials ........................... $ 98,567 $ 81,063
Work in process ......................... 68,816 76,735
Finished goods .......................... 218,234 190,764
Precious metals ......................... 21,238 23,205
-------- --------
Total inventories ....................... $406,855 $371,767
======== ========
The majority of the Company's physical metal is carried in committed metal
positions with the remainder carried in inventory. Precious-metals carried in
inventory are stated at LIFO cost. The market value of precious-metal
inventories exceeded cost by $98.3 million and $254.1 million at September 30,
2001 and December 31, 2000, respectively. Net earnings include after-tax gains
of $3.2 million for the third quarter and nine months ended September 30, 2001
and $2.5 million for the fourth quarter and twelve months ended December 31,
2000 from the sale of inventory accounted for under the LIFO method.
6
Note 3 - Comprehensive Income
-----------------------------
Comprehensive income is summarized as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2001 2000 2001 2000
-------- ------- -------- --------
Net earnings ................. $57,748 $51,334 $165,047 $169,214
Other comprehensive income/(loss):
Foreign currency
translation adjustment 20,193 (4,512) (37,718) (5,431)
Cash flow derivative
adjustment, net of tax (2,476) - (7,782) -
------- ------- -------- --------
Comprehensive income ......... $75,465 $46,822 $119,547 $163,783
======= ======= ======== ========
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. See Note
5 for details on the cash flow derivative adjustment.
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) 2001 2000 2001 2000
------------------------------------- -------- -------- -------- --------
Basic EPS Computation
---------------------
Net earnings applicable to common
shares $ 57,748 $ 51,334 $165,047 $169,214
-------- -------- -------- --------
Average number of shares
outstanding - basic 131,011 126,451 130,124 126,281
-------- -------- -------- --------
Basic earnings per share $ 0.44 $ 0.41 $ 1.27 $ 1.34
======== ======== ======== ========
Diluted EPS Computation
-----------------------
Net earnings applicable to common
shares $ 57,748 $ 51,334 $165,047 $169,214
-------- -------- -------- --------
Average number of shares
outstanding - basic 131,011 126,451 130,124 126,281
Effect of dilutive stock options
and other incentives 2,252 669 2,176 454
Effect of Rabbi Trust - 1,248 - 1,248
-------- -------- -------- --------
Average number of shares
outstanding-diluted 133,263 128,368 132,300 127,983
-------- -------- -------- --------
Diluted earnings per share $ 0.43 $ 0.40 $ 1.25 $ 1.32
======== ======== ======== ========
7
Note 5 - Derivatives and Hedging
---------------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities (an amendment of FASB Statement No. 133)" on January 1, 2001. The
Company reports all derivative instruments on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
earnings or comprehensive income, depending on the designation of the
derivative. Changes in the fair value of derivatives that are not designated as
accounting hedges are reported immediately in earnings.
In order to manage in a manner consistent with historical processes,
procedures and systems and to achieve operating economies, certain economic
hedge transactions are not designated as hedges for accounting purposes. In
those cases, which primarily relate to platinum group metals, the Company, in
accordance with the newly adopted standards, will continue to mark to market
both the hedge instrument and the related position constituting the risk hedged,
recognizing the effect in current earnings.
The Company documents all relationships between derivative hedging
instruments and hedged items, as well as its risk-management objective and
strategy for entering into various hedge transactions.
The following derivative instruments impacted the Company's results for the
three and nine month periods ended September 30, 2001:
Foreign Exchange Contracts
--------------------------
The Company designates as accounting hedges certain foreign currency
forward contracts entered into as hedges against anticipated receivables or
payables which will arise from forecasted transactions that are denominated in
currencies other than the functional currency of the entity which will hold
those assets or liabilities. The ultimate maturities of the contracts are timed
to coincide with the expected occurrence of the underlying transaction.
For the three and nine month periods ended September 30, 2001, the
Company reported after-tax losses of $0.9 million and after-tax gains of $0.2
million, respectively, in accumulated other comprehensive income relating to the
change in the fair value of derivatives designated as foreign currency cash flow
hedges. It is expected that gains of $0.2 million will be reclassified into
earnings within the next twelve months. There was no gain or loss reclassified
from accumulated other comprehensive income into earnings as a result of the
discontinuance of cash flow hedges due to the probability of forecasted
transactions not occurring. As of September 30, 2001, the maximum length of time
over which the Company is hedging its exposure to movements in foreign exchange
rates for forecasted transactions is three months.
A second group of forward contracts entered into to economically hedge the
exposure to foreign currency fluctuations associated with certain monetary
assets and liabilities are not designated as hedging instruments for accounting
purposes and changes in the fair value of these items are recorded in earnings
to offset the foreign exchange gains and losses of the related monetary assets
and liabilities.
8
Commodity Contracts
-------------------
The Company enters into contracts as a hedge to protect a portion of its
exposure to movements in certain commodity prices. The ultimate maturities of
the contracts are timed to coincide with the expected usage of these commodities
in the Company's manufacturing operations. For the three and nine month
periods ended September 30, 2001, the Company reported after-tax losses of $1.6
million and $8.0 million, respectively, in accumulated other comprehensive
income relating to the change in the fair value of derivatives designated as
commodity hedges. These losses primarily relate to derivatives designated as
natural gas cash flow hedges. It is expected that $7.1 million of these losses
will be reclassified into earnings within the next twelve months. As of
September 30, 2001, the maximum length of time over which the Company is hedging
its exposure to movements in commodity prices for forecasted transactions is
fifteen months.
Note 6 - 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 involved 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 involved for
approximately $20 million. This amount represented 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 2001, the
Company recovered $3.7 million reducing the receivable discussed above to
$16.3 million. The Company continues to pursue recovery from insurance and other
parties.
The Company is involved in a value-added tax dispute in Peru. Management
believes the Company was targeted by corrupt officials within the former
Peruvian Government. On December 2, 1999, Engelhard Peru, S.A., a wholly owned
subsidiary, was denied refund claims of approximately $28 million. The Peruvian
tax authority also determined that Engelhard Peru, S.A. is liable for
approximately $63 million in refunds previously paid, fines and interest as of
December 31, 1999. Interest and fines continue to accrue at rates established by
Peruvian law. Engelhard Peru, S.A. is contesting these determinations
vigorously, and Management believes, based on consultation with counsel, that
Engelhard Peru, S.A. is entitled to all refunds claimed and is not liable for
these additional taxes, fines or interest. In late October 2000, a criminal
proceeding alleging tax fraud and forgery related to this value-added tax
dispute was initiated against two Lima-based officials of Engelhard Peru, S.A.
Although Engelhard Peru, S.A. is not a defendant, it may be civilly liable in
Peru if its representatives are found responsible for criminal conduct.
Accordingly, Engelhard Peru is assisting in the vigorous defense of this
proceeding. Management believes the maximum economic exposure is limited to the
aggregate value of all assets of Engelhard Peru, S.A., including unpaid refunds,
which is approximately $30 million.
9
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the Third Quarter of 2001
with the Third Quarter of 2000
----------------------------------------
Net earnings increased 12% to $57.7 million in the third quarter of 2001
from $51.3 million for the same period in 2000. Operating earnings for the third
quarter of 2001 increased 38% to $86.9 million from $62.7 million in the same
period of 2000. Excluding the special charge of $24.6 million reported in the
third quarter of 2000 related to the write-down of goodwill and fixed assets of
the Company's HexCore business, operating earnings were essentially flat from
the year-ago quarter. This charge was reported in the Company's "All Other"
segment. Lower operating earnings from two reportable segments -- Appearance and
Performance Technologies and Materials Services -- were partially offset by
higher operating earnings from Process Technologies. Operating earnings from
Environmental Technologies were essentially flat from the year-ago quarter.
The effective tax rate was 28.5% in the third quarter of 2001 compared with
33.8% for the same period last year. The lower rate was primarily a result of
lowering the 2001 annual effective tax rate due to the utilization of foreign
tax credits.
The Company's share of earnings from affiliates was $3.5 million for the
third quarter of 2001 compared with $5.0 million for the same period in 2000.
Lower equity earnings were primarily from Engelhard-CLAL, a 50% owned
precious-metal-fabrication joint venture.
Net interest expense decreased 36% to $9.6 million in the third quarter of
2001 from $15.0 million in the same period of 2000. Lower net interest expense
was primarily due to decreased borrowings and lower short-term interest rates.
Net sales decreased 18% to $1.1 billion in the third quarter of 2001 from
$1.4 billion for the same period in 2000. Lower sales were reported in the
Company's four reportable segments. Higher sales were reported in the Company's
"All Other" segment primarily from the sale of inventory accounted for under the
LIFO method in the third quarter of 2001.
10
Environmental Technologies
--------------------------
Operating earnings of $35.6 million for the third quarter of 2001 were
essentially flat from the same period of 2000. Net sales for the third quarter
of 2001 decreased 9% to $149.2 million from $164.6 million in the same period of
2000. Excluding results of the segment's metal-joining products business sold in
the third quarter of 2000 and the silver nitrate business sold in the first
quarter of 2001, operating earnings would have increased 5% and net sales would
have been flat.
The majority of this segment's sales and operating earnings are derived
from technologies to control pollution from mobile sources, including gasoline
and diesel-powered passenger cars, sport-utility vehicles, trucks, buses and
off-road vehicles. Earnings increased slightly from auto-emission catalysts in
spite of a 9% drop in worldwide production of light-duty vehicles. This increase
was primarily due to a favorable product and customer mix from advanced
technologies for auto-emission catalysts.
Earnings also increased in the segment's non-automotive markets from higher
sales volumes of emission-control systems for gas turbines used in power
generation facilities.
Process Technologies
--------------------
Operating earnings increased 26% to $24.5 million in the third quarter of
2001 from $19.5 million in the same period of 2000. Net sales for the third
quarter of 2001 decreased 11% to $131.1 million from $147.7 million in the same
period of 2000.
Earnings from chemical-processing technologies were higher primarily from a
favorable product mix, reduced costs from supply-chain management initiatives
and productivity improvements and moderate price increases. Sales of
chemical-processing technologies decreased due to significantly lower prices of
precious and base metals, which are passed through primarily to the Company's
European customers.
Earnings from technologies for the polypropylene market increased primarily
from the inclusion of results from an acquisition late in the third quarter of
2000 and continued strong demand for Lynx 1000 polypropylene catalysts.
Earnings from petroleum refining technologies increased slightly as higher
sales volumes and a favorable product mix were partially offset by higher energy
and raw material costs.
Appearance and Performance Technologies
---------------------------------------
Operating earnings decreased 47% to $11.9 million in the third quarter of
2001 from $22.2 million in the same period of 2000. Net sales for the third
quarter of 2001 decreased 13% to $154.8 million from $178.8 million in the same
period of 2000.
Earnings from minerals technologies were down primarily due to lower sales
volumes in the paper market and higher energy costs.
11
Earnings for appearance technologies decreased from lower earnings in all
market segments. These decreases were due to lower sales volumes.
Materials Services
------------------
Operating earnings decreased 14% to $12.2 million in the third quarter of
2001 from $14.3 million in the same period of 2000. Net sales for the third
quarter of 2001 decreased 23% to $691.4 million from $897.3 million in the same
period of 2000.
Earnings were down due to significantly lower volumes and prices of
platinum group metals. The earnings decrease was partially offset by increased
earnings in the recycling (refining) of platinum group metals and the reversal
of certain expense accruals that are no longer necessary.
Comparison of the First Nine Months of 2001
with the First Nine Months of 2000
-------------------------------------------
Net earnings decreased 2% to $165.0 million in the first nine months of
2001 from $169.2 million in the same period of 2000. Operating earnings for the
first nine months of 2001 decreased 6% to $243.6 million from $259.3 million in
the same period of 2000. Excluding the special charge of $7.1 million reported
in the second quarter of 2001 and the special charge of $24.6 million reported
in the third quarter of 2000, operating earnings would have decreased 12%. Lower
operating earnings from two reportable segments -- Appearance and Performance
Technologies and Materials Services -- were partially offset by higher operating
earnings from Environmental Technologies and Process Technologies.
The effective tax rate was 28.5% in the first nine months of 2001 compared
with 32.2% for the same period last year. The lower rate was a result of
lowering the 2001 annual effective tax rate due to the utilization of foreign
tax credits.
The Company's share of earnings from affiliates was $23.9 million for the
first nine months of 2001 compared with $19.4 million for the same period in
2000. Higher equity earnings were primarily from Engelhard-CLAL, a 50% owned
precious-metal-fabrication joint venture; Heesung-Engelhard, a 49% Korean-owned
environmental catalyst joint venture; and N.E. Chemcat, a publicly traded
Japanese Corporation 38.8% owned by Engelhard that is a leading producer of
automotive and chemical catalysts.
Net interest expense decreased 23% to $36.7 million in the first nine
months of 2001 from $47.9 million in the same period of 2000. Lower net interest
expense was primarily due to decreased borrowings and lower short-term interest
rates.
12
Net sales increased 6% to $4.2 billion in the first nine months of 2001
from $4.0 billion in the same period in 2000. The Process Technologies and
Materials Services segments reported higher sales, which more than offset lower
sales from the Appearance and Performance Technologies segment. Sales of the
Environmental Technologies segment were essentially flat from the same period of
2000. Higher sales were reported in the Company's "All Other" segment due to the
sale of inventory accounted for under the LIFO method in the third quarter of
2001.
Environmental Technologies
--------------------------
Operating earnings increased 13% to $114.7 million in the first nine months
of 2001 from $101.4 million in the same period of 2000. Net sales for the first
nine months of 2001 of $494.5 million were essentially flat from the same period
of 2000. Excluding results of the segment's metal-joining products business sold
in the third quarter of 2000 and the silver nitrate business sold in the first
quarter of 2001, net sales and operating earnings would have increased 10% and
20%, respectively.
The majority of this segment's sales and operating earnings are derived
from technologies to control pollution from mobile sources, including gasoline
and diesel-powered passenger cars, sport-utility vehicles, trucks, buses and
off-road vehicles. Earnings increased primarily from strength in auto-emission
catalysts in North America, driven by increased volumes, and a favorable product
and customer mix from advanced technologies for auto-emission catalysts.
Earnings also were favorably impacted by strength in the segment's
non-automotive markets, primarily from increased volumes of emission-control
systems for gas turbines used in power generation facilities.
Process Technologies
--------------------
Operating earnings increased 17% to $63.5 million in the first nine months
of 2001 from $54.4 million in the same period of 2000. Net sales for the first
nine months of 2001 increased 5% to $413.9 million from $393.5 million in the
same period of 2000.
Earnings from chemical-processing technologies were higher primarily from
reduced costs from supply-chain management initiatives and productivity
improvements and moderate price increases. Sales of chemical-processing
technologies decreased due to significantly lower prices of precious and base
metals in the third quarter of 2001, which are passed through primarily to the
Company's European customers.
Earnings from technologies for the polypropylene market increased primarily
from the inclusion of results from an acquisition late in the third quarter of
2000 and continued strong demand for Lynx 1000 polypropylene catalysts.
Earnings from petroleum refining technologies decreased due to higher
energy and raw material costs, partially offset by increased sales volumes of
fluid cracking catalysts.
13
Appearance and Performance Technologies
---------------------------------------
Operating earnings decreased 47% to $33.4 million in the first nine months
of 2001 from $63.5 million in the same period of 2000. Net sales for the first
nine months of 2001 decreased 7% to $485.4 million from $522.1 million in the
same period of 2000. Excluding the $7.1 million special charge reported in the
second quarter of 2001, operating earnings would have decreased 36% from the
same period of 2000.
Earnings in minerals technologies decreased due to lower volumes to the
paper market and higher energy costs.
Earnings in appearance technologies decreased due to lower earnings of
color pigments and specialty films. Earnings from effect pigments were up
slightly as reduced manufacturing costs and higher cosmetic volumes were
partially offset by lower automotive and industrial volumes.
Materials Services
------------------
Operating earnings decreased 40% to $46.5 million in the first nine months
of 2001 from $77.6 million in the same period of 2000. Net sales for the first
nine months of 2001 increased 9% to $2.8 billion from $2.6 billion in the same
period of 2000.
Earnings were down compared with unusually strong results in the prior
year. This decrease was partially offset by increased earnings in the recycling
(refining) of platinum group metals. The sales increase was due to higher
platinum-group-metal prices.
14
Financial Condition and Liquidity
---------------------------------
The Company's current ratio was 1.0 at September 30, 2001 and December 31,
2000. The percentage of total debt to total capitalization decreased to 38% at
September 30, 2001 from 46% at December 31, 2000, primarily due to decreased
borrowings and increased retained earnings.
The variance in cash flows from operating activities primarily occurred in
the Materials Services segment and reflects changes in metal positions used to
facilitate requirements of the Company, its metals customers and suppliers.
Materials Services routinely enters into a variety of arrangements for the
sourcing of metals. Generally, transactions are hedged on a daily basis. Hedging
is accomplished primarily through forward, future and option contracts. However,
in closely monitored situations for which exposure levels and transaction size
limits have been set by senior management, the Company from time to time holds
large unhedged industrial commodity positions that are subject to future market
fluctuations. Hedged metal obligations (primarily amounts payable for metal
purchased forward as an economic hedge) are considered financing activities and
are included in that section of the Company's "Consolidated Statements of Cash
Flows." These transactions generally cover Materials Services' sourcing
requirements. Materials Services works to ensure that the Company and its
customers have an uninterrupted source of metals, primarily platinum group
metals, utilizing supply contracts and commodities markets around the world.
Committed metal positions include significant advances made for the purchase of
precious metals that have been delivered to the Company but are as yet unpriced.
As of the end of the quarter, the aggregate market value of those metals had
fallen below the amounts advanced; however, the Company does not expect any loss
on these purchases due to contractual exchanges of metals/cash or future price
changes.
The variance in cash flows from financing activities is primarily related
to an increase in stock option plan transactions associated with the exercise of
stock options, an increase in the purchase of treasury stock and the repayment
of long-term debt in the third quarter of 2001.
In July 1998, the Company filed a shelf registration for $300 million.
Plans to issue debt in 2001 under the shelf registration are under consideration
by Management.
Management believes the Company will continue to have adequate access to
credit and other capital markets to meet its needs for the foreseeable future.
15
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; and the impact of any economic
downturns and inflation. 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.
16
Part II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K Pages
------- -------------------------------- -----
(a)(10) Material Contracts
(a) Amendment to Deferred Compensation Plan for Key
Employees of Engelhard Corporation,
effective October 4, 2001. 19-20
(12) Computation of the Ratio of Earnings to
Fixed Charges. 21-22
(b) There were no reports on Form 8-K filed during the
quarter ended September 30, 2001.
17
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 9, 2001 /s/ Barry W. Perry
--------------------- -----------------------------
Barry W. Perry
Chairman and
Chief Executive Officer
Date November 9, 2001 /s/ Michael A. Sperduto
---------------------- -----------------------------
Michael A. Sperduto
Vice President and
Chief Financial Officer
18
EXHIBIT (10)(a)
Amendment to Deferred Compensation Plan For Key Employees
of Engelhard Corporation
---------------------------------------------------------
19
AMENDMENT TO DEFERRED COMPENSATION
PLAN FOR KEY EMPLOYEES OF ENGELHARD CORPORATION
The Deferred Compensation Plan for Key Employees of Engelhard Corporation
(the "Plan") is amended as follows, effective October 4, 2001.
1. The first two sentences of paragraph 2 of the Plan are amended to read
in their entirety as follows :
"Each Eligible Employee shall have the option exercisable by written notice
to the Company on or before November 30 of any calendar year to defer payment of
(i) up to thirty percent (30%) of his base salary for the next succeeding
calendar year and (ii) all or any portion of any regular or special bonus the
amount of which has not been determined as of the date of the deferral election
and which is to be paid in the next succeeding calendar year. Notwithstanding
the foregoing, in the case of an individual who first becomes an Eligible
Employee during a calendar year, such individual shall have the option
exercisable by written notice to the Company to defer payment of up to thirty
percent (30%) of his base salary for the period during such calendar year
beginning on the date specified by the individual in his deferral election
(which shall be at least one month after the date on which the deferral election
is filed with the Company) and ending on the last day of such calendar year."
20
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
21
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30, Years Ended December 31,
------------------ -----------------------------------------------------------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
Earnings from continuing operations
before provision for income taxes $230,835 $245,687 $284,118 $260,563 $ 85,812 $209,955
Add/(deduct)
Portion of rents representative
of the interest factor 6,600 8,800 7,000 3,500 3,000 3,900
Interest on indebtedness 36,740 62,649 56,555 58,887 52,776 45,009
Equity dividends 4,158 4,363 2,431 2,022 3,803 2,515
Equity in (earnings) losses
of affiliates (23,928) (24,187) (16,266) (10,077) 47,833 5,008
--------- --------- --------- --------- -------- ---------
Earnings, as adjusted $254,405 $297,312 $333,838 $314,895 $193,224 $266,387
========= ========= ========= ========= ======== =========
Fixed Charges
Portion of rents representative
of the interest factor $ 6,600 $ 8,800 $ 7,000 $ 3,500 $ 3,000 $ 3,900
Interest on indebtedness 36,740 62,649 56,555 58,887 52,776 45,009
Capitalized interest 2,250 3,880 2,580 1,897 651 875
-------- --------- --------- -------- -------- --------
Fixed charges $45,590 $ 75,329 $ 66,135 $ 64,284 $ 56,427 $ 49,784
======== ========= ========= ======== ======== ========
Ratio of Earnings to Fixed Charges 5.58(a) 3.95(b) 5.05 4.90 3.42(c) 5.35
======== ========= ========= ======== ======== ========
(a) Earnings in 2001 were negatively impacted by pre-tax special and other charges of $7.1 million related to the redeployment
of assets between the Company's kaolin-based operations in Middle Georgia and its petroleum refining catalyst facility
in Savannah, GA. Excluding this charge, the ratio of earnings to fixed charges would have been 5.74.
(b) Earnings in 2000 were negatively impacted by pre-tax special and other charges of $134.2 million for a variety of events.
Excluding these charges, the ratio of earnings to fixed charges would have been 5.73.
(c) Earnings in 1997 were negatively impacted by special and other charges of $149.6 million for a variety of events.
Excluding these charges, the ratio of earnings to fixed charges would have been 5.28.
22