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Page 1 of 47 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 June 30, 2003
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
RICHMOND, VIRGINIA 23219
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (804) 788-6000
Registrant's website address: www.albemarle.com
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
---- ----
The Company makes available through its website, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports as soon as reasonably practical after such material is
electronically filed with the Securities and Exchange Commission.
Number of shares of common stock, $.01 par value, outstanding as of
July 31, 2003: 41,236,509
----------
2
ALBEMARLE CORPORATION
I N D E X
Page
Number(s)
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 3-4
Consolidated Statements of Income - Three- and Six-
Months Ended June 30, 2003 and 2002 5
Consolidated Statements of Comprehensive Income - Three-
and Six- Months Ended June 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 7
Notes to the Consolidated Financial Statements 8-16
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition and Additional
Information 17-27
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
ITEM 4. Controls and Procedures 28
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 29
ITEM 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
EXHIBITS 31-47
3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
June 30, December 31,
2003 2002
------------------------ ------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 49,993 $ 37,636
Accounts receivable, less allowance for doubtful
accounts (2003 - $2,331; 2002 - $2,368) 193,010 197,089
Income tax receivable 11,278 -
Inventories:
Finished goods 127,841 116,164
Raw materials 21,862 21,385
Stores, supplies and other 23,947 23,256
-------------------- ---------------------
173,650 160,805
Deferred income taxes and prepaid expenses 15,829 17,534
-------------------- ---------------------
Total current assets 443,760 413,064
-------------------- ---------------------
Property, plant and equipment, at cost 1,546,336 1,497,989
Less accumulated depreciation and amortization 1,030,367 978,918
-------------------- ---------------------
Net property, plant and equipment 515,969 519,071
Prepaid pension assets 168,799 166,287
Other assets and deferred charges 61,005 59,363
Goodwill 30,667 29,621
Other intangibles, net of amortization 28,982 5,550
-------------------- ---------------------
Total assets $ 1,249,182 $ 1,192,956
==================== =====================
See accompanying notes to the consolidated financial statements.
4
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
June 30, December 31,
2003 2002
--------------------- -------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 85,603 $ 75,092
Long-term debt, current portion 176 343
Accrued expenses 62,481 65,051
Dividends payable to shareholders 11,070 5,426
Income taxes payable 23,258 19,095
--------------------- -------------------
Total current liabilities 182,588 165,007
--------------------- -------------------
Long-term debt 175,183 180,137
Postretirement benefits 66,596 64,943
Other noncurrent liabilities 95,914 84,280
Deferred income taxes 134,501 128,849
Shareholders' equity:
Common stock, $.01 par value, issued and
outstanding- 41,214,982 in 2003 and
41,692,074 in 2002 412 417
Additional paid-in capital 128 2,286
Accumulated other comprehensive income (loss) 6,250 (4,514)
Retained earnings 587,610 571,551
--------------------- -------------------
Total shareholders' equity 594,400 569,740
--------------------- -------------------
Total liabilities and shareholders' equity $ 1,249,182 $ 1,192,956
===================== ===================
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 Six Months Ended
June 30, June 30,
---------------------------------------------------------------------------
2003 2002 2003 2002
------------------ ------------------ ----------------- -----------------
Net sales (see Note 15) $ 269,476 $ 252,706 $ 535,046 $ 484,528
Cost of goods sold 211,050 194,551 418,978 370,613
------------------ ------------------ ----------------- -----------------
Gross profit 58,426 58,155 116,068 113,915
Selling, general and administrative
expenses 29,435 28,916 57,061 54,620
Research and development
expenses 4,421 4,020 9,363 8,796
Special item -- -- -- 850
------------------ ------------------ ----------------- -----------------
Operating profit 24,570 25,219 49,644
49,649
Interest and financing expenses (1,257) (1,235) (2,594) (2,460)
Other income and (expenses),
including minority interest (316) 2,276 3,257 3,068
------------------ ------------------ ----------------- -----------------
Income before income taxes 22,997 26,260 50,307
50,257
Income taxes 414 5,566 4,510 12,765
------------------ ------------------ ----------------- -----------------
Income before cumulative effect 22,583 20,694 45,797 37,492
of a change in accounting
principle, net
Cumulative effect of a change in
accounting principle, net -- -- (2,220) --
------------------ ------------------ ----------------- -----------------
Net income $ 22,583 $ 20,694 $ 43,577 $ 37,492
================== ================== ================= =================
Basic earnings per share:
Income before cumulative effect of
a change in accounting principle $ 0.55 $ 0.50 $ 1.10 $ 0.88
Cumulative effect of a change in
accounting principle, net -- -- (0.05) --
------------------ ------------------ ----------------- -----------------
Net income $ 0.55 $ 0.50 $ 1.05 $ 0.88
================== ================== ================= =================
Diluted earnings per share:
Income before cumulative effect of
a change in accounting principle $ 0.54 $ 0.48 $ 1.08 $ 0.86
Cumulative effect of a change in
accounting principle, net -- -- (0.05) --
------------------ ------------------ ----------------- -----------------
Net income $ 0.54 $ 0.48 $ 1.03 $ 0.86
================== ================== ================= =================
Cash dividends declared per share
of common stock $ 0.14 $ 0.13 $ 0.42 $ 0.26
================== ================== ================= =================
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 Six Months Ended
June 30, June 30,
---------------- ----------------- ----------------- -----------------
2003 2002 2003 2002
---------------- ----------------- ----------------- -----------------
Net income $ 22,583 $ 20,694 $ 43,577 $ 37,492
Other comprehensive income (loss),
net of tax:
Unrealized gain (loss) on securities
available for sale 24 (123) 6 (96)
Unrealized loss on hedging
derivatives (30) - (30) -
Foreign currency translation 7,520 12,380 10,788 11,429
---------------- ----------------- ----------------- -----------------
Other comprehensive income 7,514 12,257 10,764 11,333
---------------- ----------------- ----------------- -----------------
Comprehensive income $ 30,097 $ 32,951 $ 54,341 $ 48,825
================ ================= ================= =================
See accompanying notes to the consolidated financial statements.
7
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended June 30,
2003 2002
----------------- -----------------
Cash and cash equivalents at beginning of year $ 37,636 $ 30,585
----------------- ----------------
Cash flows from operating activities:
Net income 43,577 37,492
Cumulative effect of a change in accounting principle, net (a) 2,220 -
----------------- ----------------
Income before cumulative effect of a change in accounting principle 45,797 37,492
Adjustments to reconcile net income before cumulative effect of a change in
accounting principle, net to cash flows from operating activities:
Depreciation and amortization 40,779 40,475
Working capital decrease, net of the effects of acquisition 9,812 7,959
Increase in income tax receivable (11,278) -
Other, net 223 (5,198)
----------------- ----------------
Net cash provided from operating activities 85,333 80,728
----------------- ----------------
Cash flows from investing activities:
Acquisition of assets (26,579) -
Capital expenditures (19,278) (19,267)
Proceeds from liquidation of nonmarketable security 4,419 -
Investments in joint ventures and nonmarketable securities (6,410) (3,164)
Restricted cash from industrial revenue bond proceeds - 1,741
----------------- ----------------
Net cash used in investing activities (47,848) (20,690)
----------------- ----------------
Cash flows from financing activities:
Proceeds from borrowings 47,332 103,995
Repayments of long-term debt (52,441) (64,969)
Purchases of common stock (13,474) (92,943)
Dividends paid to shareholders (11,664) (11,316)
Dividends paid to minority interest (1,501) -
Proceeds from exercise of stock options 372 2,156
----------------- ----------------
Net cash used in financing activities (31,376) (63,077)
----------------- ----------------
Net effect of foreign exchange on cash and cash equivalents 6,248 5,858
----------------- ----------------
Increase in cash and cash equivalents 12,357 2,819
----------------- ----------------
Cash and cash equivalents at end of period $ 49,993 $ 33,404
================= ================
(a) Supplemental noncash disclosures due to a cumulative change in accounting principle:
Increase in property, plant and equipment $ (6,520) $ -
Increase in accumulated depreciation 3,083 -
Increase in other noncurrent liabilities 6,922 -
Decrease in deferred tax liabilities (1,265) -
----------------- ----------------
Cumulative effect of a change in accounting principle, net $ 2,220 $ -
================= ================
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 its wholly owned subsidiaries
("Albemarle" or the "Company") contain all adjustments necessary for a fair
presentation, in all material respects, of the Company's consolidated financial
position as of June 30, 2003, and December 31, 2002, the consolidated results of
operations and comprehensive income for the three- and six-month periods ended
June 30, 2003, and 2002, and condensed consolidated cash flows for the six-month
periods ended June 30, 2003, and 2002. 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 2002 Annual Report & Form 10-K as amended on May 12,
2003. The December 31, 2002 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 six-month periods ended June 30, 2003, are not necessarily indicative
of the results to be expected for the full year. Certain reclassifications have
been made to the accompanying consolidated financial statements and the notes
thereto to conform to the current presentation.
2. Long-term debt consists of the following:
June 30, December 31,
2003 2002
--------------------- ---------------------
Variable-rate bank loans $ 159,040 $ 163,015
Industrial revenue bonds 11,000 11,000
Foreign borrowings 4,362 5,470
Miscellaneous 957 995
--------------------- ---------------------
Total 175,359 180,480
Less amounts due within one year 176 343
--------------------- ---------------------
Long-term debt $ 175,183 $ 180,137
===================== =====================
3. Cost of goods sold includes foreign exchange transaction gains of $748 and
$283 and $809 and $1,074 for the three- and six-month periods ended June 30,
2003 and 2002, respectively.
9
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
4. Basic and diluted earnings per share for the three- and six-month periods
ended June 30, 2003 and 2002, are calculated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------------
Basic earnings per share 2003 2002 2003 2002
- ------------------------ ---------------- ------------------ ----------------- -----------------
Numerator:
Income before cumulative effect of a change in
accounting principle 22,583 20,694 45,797 37,492
Cumulative effect of a change in accounting
principle, net -- -- (2,220) --
---------------- ------------------ ----------------- -----------------
Income available to stockholders, as reported $ 22,583 $ 20,694 $ 43,577 $ 37,492
================ ================== ================= =================
Denominator:
Average number of shares of common stock
outstanding 41,208 41,618 41,352 42,528
================ ================== ================= =================
Basic earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.55 $ 0.50 $ 1.10 $ 0.88
Cumulative effect of a change in accounting
principle, net -- -- (0.05) --
---------------- ------------------ ----------------- -----------------
Basic earnings per share $ 0.55 $ 0.50 $ 1.05 $ 0.88
================ ================== ================= =================
Diluted earnings per share
- --------------------------
Numerator:
Income before cumulative effect
of a change in accounting principle $ 22,583 $ 20,694 $ 45,797 $ 37,492
Cumulative effect of a change in accounting
principle, net -- -- (2,220) --
---------------- ------------------ ----------------- -----------------
Income available to shareholders, as reported $ 22,583 $ 20,694 $ 43,577 $ 37,492
================ ================== ================= =================
Denominator:
Average number of shares of common stock
outstanding 41,208 41,618 41,352 42,528
Shares issuable upon exercise of stock options
and other common stock equivalents 838 1,204 814 978
---------------- ------------------ ----------------- -----------------
Total shares 42,046 42,822 42,166 43,506
================ ================== ================= =================
Diluted earnings per share:
Income before cumulative effect of a change in
accounting principle $ 0.54 $ 0.48 $ 1.08 $ 0.86
Cumulative of a change in accounting principle,
net -- -- (0.05) --
---------------- ------------------ ----------------- -----------------
Diluted earnings per share $ 0.54 $ 0.48 $ 1.03 $ 0.86
================ ================== ================= =================
10
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
5. The following table reflects the changes in consolidated shareholders' equity
from December 31, 2002 through June 30, 2003:
Accumulated Total
Additional Other Share-
Common Stock Paid-In Comprehensive Retained holders'
Shares Amounts Capital Income (Loss) Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 41,692,074 $ 417 $ 2,286 $ (4,514) $ 571,551 $ 569,740
Net income - - - - 43,577 43,577
Foreign currency translation, net - - - 10,788 - 10,788
Change in unrealized gain on
marketable equity securities,
net - - - 6 - 6
Change in unrealized (loss) on
hedging derivatives, net - - - (30) - (30)
Cash dividends declared - - - - (17,308) (17,308)
Shares repurchased and retired (528,600) (5) (2,999) - (10,210) (13,214)
Shares repurchased upon
exercise of stock options (9,794) - (260) - - (260)
Shares issued upon exercise of
stock options 27,766 - 372 - - 372
Issuance of incentive award
stock 33,536 - 729 - - 729
------------ ---------- ----------- --------------- ------------ --------------
Balance at June 30, 2003 41,214,982 $ 412 $ 128 $ 6,250 $ 587,610 $ 594,400
============ ============ ============ =============== ============ ==============
6. Cash dividends declared for the six-month period ended June 30, 2003 totaled
42 cents per share, which includes dividends of 14 cents per share declared on
January 31, 2003, paid on April 1, 2003; March 26, 2003, payable on July 1, 2003
and June 25, 2003, payable on October 1, 2003.
7. The significant differences between the U.S. Federal statutory income tax
rate on pretax income and the effective income tax rate for the three- and
six-month periods ended June 30, 2003 and 2002, respectively, are as follows:
% of Income Before Income Taxes
-----------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0% 35.0%
Revaluation of reserve requirements (28.7) - (13.1) -
Federal income tax settlement - (9.5) (8.9) (5.0)
Extraterritorial income exclusion (2.4) (2.4) (2.5) (2.4)
State taxes, net of federal tax benefit 0.9 1.0 0.9 1.0
Depletion (1.9) (1.7) (1.8) (1.8)
Other, net (1.1) (1.2) (0.6) (1.4)
---------------- ---------------- ----------------- ----------------
Effective income tax rate 1.8% 21.2% 9.0% 25.4%
================ ================ ================= ================
11
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
During the quarter ended June 30, 2003, the Company received notification of the
finalization of the Internal Revenue Service's examination of its Federal income
tax returns for the years ended December 31, 1998 and 1999. As a result, the
Company evaluated its tax reserves and released $6.6 million to earnings.
In March 2003, the Company recorded a receivable for an income tax refund of
$11,083. The refund related to the Internal Revenue Service's examination of the
Company's 1996 and 1997 tax returns. In addition, the Company recorded interest
income of $195 ($124 after income taxes) for the three months ended June 30,
2003. The net effect of the refund on the Consolidated Statement of Income for
the six month period ended June 30, 2003 amounted to $7,216 or 17 cents per
diluted share, including interest of $4,308 ($2,744 after income taxes).
On April 25, 2002, the Company received a favorable tax settlement of $3,777,
including interest of $1,285 after income taxes, from the Internal Revenue
Service on its claims for adjustment of export benefits for the years 1994 and
1995.
8. On January 21, 2003, Albemarle acquired Ethyl Corporation's ("Ethyl's") fuel
and lubricant antioxidants working capital, patents and other intellectual
property for approximately $26,579. In addition, Albemarle agreed pay to Ethyl a
total of $1,500 ($750 outstanding as of June 30) in additional consideration
during 2003 if Ethyl's purchases of antioxidant products from Albemarle and
Albemarle's sales of antioxidant products to third parties for fuel and
lubricant additive use meet certain specified performance criteria. A summary of
the final purchase price allocation is as follows:
Current assets $ 4,685
Property, plant and equipment 300
Other assets 50
Intangibles (range of lives: 1 - 35 years) 24,161
In-process R&D 250
Current liabilities (2,230)
Noncurrent liabilities (637)
------------------
Net cash paid $26,579
==================
9. During the first quarter of 2002, the Company recorded a special charge of
$850 ($541 after income taxes) through an involuntary separation program. In the
fourth quarter of 2002, the Company continued its efforts to reduce operating
costs through another separation adjustment of $700 ($446 after income taxes).
The 2002 program impacted a total of 18 salaried employees throughout the
Company. The following table summarizes the total special charges outlined above
related to the 2002 involuntary separation program:
12
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
Six Months Ended
June 30, 2003
----------------------------
Beginning accrual balance, January 1, 2003 $ 761
Workforce reduction charges, net -
Payments 523
Amounts reversed to income 210
----------------------------
Ending accrual balance $ 28
============================
10. During the first quarter ended March 31, 2002, the Company recorded a net
charge of $2,000 ($1,274 after income taxes) to cost of sales that related to
the discontinuance of product support for and the withdrawal from a water
treatment venture. The Company's balance sheet at June 30, 2003, included the
accrual of a probable insurance recovery of $5,781 in other assets and deferred
charges and an accrual totaling $500 in accrued expenses.
11. On February 13, 2002, the Company completed the purchase of 4,000,000 shares
of its common stock from Bruce C. Gottwald and his related immediate family
interests for an aggregate price of $92,680. At that time, the Company retired
the shares and reduced retained earnings by $40,979 after eliminating the
balance in additional paid-in capital.
12. The net change in the Company's recorded environmental liabilities at June
30, 2003 follows:
Beginning balance at December 31,2002 $ 32,144
Net additions 325
Expenditures (716)
Foreign exchange 1,865
SFAS No. 143 reclassification (4,053)
----------------------
Ending balance at June 30, 2003 $ 29,565
======================
Recorded liabilities decreased $2,579 primarily due to the reclassification of
certain environmental obligations previously accounted for under Financial
Accounting Standards Board ("FASB") Statement of Position 96-1 to other
noncurrent liabilities upon adoption of Statement of Financial Accounting
Standards ("SFAS") No. 143. See Footnote 14.
The amounts recorded represent management's best estimate of the Company's
future remediation and other anticipated environmental costs relating to past
operations. Although it is difficult to quantify the potential financial impact
of compliance with environmental protection laws, management estimates, based on
the latest available information, there is a reasonable possibility that future
environmental remediation costs associated with the Company's
13
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
past operations, in excess of amounts already recorded, could be up to
approximately $9,760 before income taxes, to be incurred over a period of time.
However, the Company believes that any sum it may be required to pay in
connection with environmental remediation matters in excess of the amounts
recorded should occur over a period of time and should not have a material
adverse effect upon results of operations, financial condition or cash flows of
the Company on a consolidated basis but could have a material adverse impact in
a particular quarterly reporting period.
13. 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 segment is comprised of flame retardants,
catalysts and polymer additives. The Fine Chemicals segment is comprised of
agrichemicals, pharmachemicals, fine chemistry services and intermediates and
performance chemicals. Segment data includes intersegment transfers of raw
materials at cost and foreign exchange transaction gains and losses, as well as
allocations for certain corporate costs. The corporate and other expenses
include certain corporate-related items not allocated to the reportable
segments.
Three Months Ended June 30,
-----------------------------------------------------------------------------------
Summary of Segment Results 2003 2002*
-----------------------------------------------------------------------------------
Revenues Income Revenues Income
-------------------- ------------------ -------------------- -------------------
Polymer Chemicals $ 150,128 $ 18,750 $ 142,955 $ 17,927
Fine Chemicals 119,348 11,769 109,751 13,290
-------------------- ------------------ -------------------- -------------------
Segment totals $ 269,476 30,519 $ 252,706 31,217
==================== ====================
Corporate and other expenses (5,949) (5,998)
------------------ -------------------
Operating profit 24,570 25,219
Interest and financing expenses (1,257) (1,235)
Other income and (expenses), including
minority interest (316) 2,276
------------------ -------------------
Income before income taxes $ 22,997 $ 26,260
================== ===================
Six Months Ended June 30,
-----------------------------------------------------------------------------------
Summary of Segment Results 2003 2002*
---------------------------------------- ----------------------------------------
Revenues Income Revenues Income
-------------------- ------------------ -------------------- -------------------
Polymer Chemicals $ 297,356 $ 35,099 $ 265,122 $ 29,851
Fine Chemicals 237,690 25,156 219,406 29,598
-------------------- ------------------ -------------------- -------------------
Segment totals $ 535,046 60,255 $ 484,528 59,449
==================== ====================
Corporate and other expenses (10,611) (9,800)
------------------ -------------------
Operating profit 49,644 49,649
Interest and financing expenses (2,594) (2,460)
Other income and (expenses), including
minority interest 3,257 3,068
------------------ -------------------
Income before income taxes $ 50,307 $ 50,257
================== ===================
* See footnote 15 for an explanation of the restatements for 2002.
14
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
14. On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. At the time of adoption, the Company
identified certain assets for which there are future retirement obligations.
These future obligations are comprised primarily of the cost of closing various
facilities and of capping brine wells. The financial statement impact at
adoption of this Statement on the Company's consolidated statements of income is
reflected as a cumulative effect of a change in accounting principle amounting
to $2,220, net of taxes of $1,265.
15. On January 1, 2003, the Company adopted the provisions of the Emerging
Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs". The Company reclassified all costs incurred for
shipping and handling from a reduction of net sales to cost of sales for the
periods reflected herein. The presentation of prior period information has been
reclassified to conform to the current year presentation. On May 12, 2003, the
Company filed an amendment to its Form 10-K for the year 2002 to reflect the
adoption of this EITF. This change does not have an effect on gross profit,
operating profit or net income. Shipping and handling costs reclassified totaled
$7,655 and $14,849 for the three- and six-month periods ended June 30, 2002,
respectively.
16. During January 2003, the FASB issued Interpretation No. 46 ("FIN 46" or the
"Interpretation"), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", which provides guidance on the identification of,
and financial reporting for, entities over which control is achieved through
means other than voting rights; such entities are known as variable-interest
entities ("VIEs"). This interpretation applies immediately to VIEs created after
January 31, 2003 and to VIEs in which an enterprise obtains an interest after
that date. The Company did not create a VIE during this period. FIN 46 applies
to VIEs in the first fiscal year or interim period beginning after June 15,
2003, in which a Company holds the interest acquired before February 1, 2003.
The Company is evaluating the effect that FIN 46 will have on the Company's
consolidated financial statements effective July 1, 2003.
17. SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123")
encourages, but does not require, companies to record at fair value,
compensation cost for stock-based employee compensation plans. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB Opinion No. 25") and related
interpretations. Under the intrinsic method, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. If compensation cost had been determined based on the fair value at
the grant date under the plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated as follows:
15
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
Three Months Ended
June 30,
-----------------------------------------
2003 2002
------------------- -------------------
Net income as reported $ 22,583 $ 20,694
pro forma $ 22,146 $ 20,391
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Basic earnings per share on net income as reported $ 0.55 $ 0.50
pro forma $ 0.54 $ 0.49
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Diluted earnings per share on net income as reported $ 0.54 $ 0.48
pro forma $ 0.53 $ 0.47
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Six Months Ended
June 30,
-----------------------------------------
2003 2002
------------------- -------------------
Income before cumulative effect of a change as reported $ 45,797 $ 37,492
in accounting principle, net pro forma $ 44,909 $ 36,757
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Net income as reported $ 43,577 $ 37,492
pro forma $ 42,689 $ 36,757
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Basic earnings per share on income before
cumulative effect of a change in as reported $ 1.10 $ 0.88
accounting principle, net pro forma $ 1.09 $ 0.86
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Basic earnings per share on as reported $ 1.05 $ 0.88
net income pro forma $ 1.03 $ 0.86
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Diluted earnings per share on income before
cumulative effect of a change in as reported $ 1.08 $ 0.86
accounting principle, net pro forma $ 1.06 $ 0.84
- --------------------------------------------------------------- ----------------- ------------------- -------------------
Diluted earnings per share on net income as reported $ 1.03 $ 0.86
pro forma $ 1.01 $ 0.84
- --------------------------------------------------------------- ----------------- ------------------- -------------------
The weighted average fair values of options granted during the three- and six-
month periods ending June 30, 2003 and 2002 were $7.77 and $9.65, and $7.77 and
$10.73, respectively. The fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted in the three- and six-
months ended June 30, 2003 and 2002, respectively: dividend yield 2.54% in all
periods; expected volatility of 31.23% and 31.03%, and 31.23% and 31.03%;
risk-free interest rate of 4.21% and 4.20%,and 4.21% and 4.17%; and expected
lives of eight years.
16
ALBEMARLE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Share and Per-Share Amounts)
(Unaudited)
18. Effective June 30, 2003, Albemarle adopted SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This statement
amends and clarifies financial accounting and reporting for derivatives and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard will have an immaterial impact on the
Company's financial statements.
19. In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, "Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity." This standard requires that certain financial
instruments embodying an obligation to transfer assets or to issue equity
securities be classified as liabilities. It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective July 1, 2003. At the time of adoption, this standard has no impact on
the Company's financial statements.
20. On July 24, 2003, the Company finalized an agreement with Rhodia SA to
acquire Rhodia's global organophosphorus and ammonium polyphosphate flame
retardants business for applications in rigid and flexible polyurethane foams.
This addition to Albemarle's polymer business segment is expected to generate
sales of approximately $65 million in its first year. As part of this
transaction, Albemarle is acquiring a production site in Avonmouth, United
Kingdom. Albemarle will be supplied with flame retardants and intermediates
manufactured at Rhodia's sites in Charleston, S.C., and Oldbury and Widnes in
the United Kingdom. About 75 employees will join Albemarle as part of this
transaction. The allocation of the purchase price is expected to be completed by
the end of the fourth quarter of 2003.
17
ITEM 2. Management's Discussion and Analysis of Results of Operations and
- --------------------------------------------------------------------------------
Financial Condition and Additional Information -
- ------------------------------------------------
The following is management's discussion and analysis of certain significant
factors affecting the results of operations of Albemarle Corporation and its
subsidiaries ("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, 2002.
Some of the information presented in the following discussion may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on our
current expectations, which are in turn based on our reasonable assumptions
within the bounds of its knowledge of its business and operations. There can be
no assurance, however, that our actual results will not differ materially from
the results and expectations in the forward-looking statements. Factors that
could cause actual results to differ materially include, without limitation, the
timing of orders received from customers, the gain or loss of significant
customers, competition from other manufacturers, changes in the demand for our
products, increases in the cost of products, increases in the cost of energy and
raw materials (notably, ethylene, chlorine and natural gas), changes in our
markets in general, fluctuations in foreign currencies, changes in new product
introductions resulting in increases in capital project requests and approvals
leading to additional capital spending, changes in laws and regulations,
unanticipated claims or litigation, the inability to obtain current levels of
product or premises liability insurance or the denial of such coverage,
political unrest affecting the global economy and changes in accounting
standards. The Company assumes no obligation to provide revisions to any
forward-looking statements should circumstances change, except as otherwise
required by securities and other applicable laws.
Results of Operations
- ---------------------
Second Quarter 2003 Compared with Second Quarter 2002
- -----------------------------------------------------
Net sales for second quarter 2003 of $269.5 million, a record second quarter for
the Company since the sale of the olefins businesses in March 1996, were up 6.6%
or $16.8 million from second quarter 2002 net sales of $252.7 million, as
restated. The increase in net sales was primarily due to the favorable impact of
foreign exchange ($16.4 million), the addition of the fuel and lube additives
products acquired in mid-January 2003 from Ethyl Corporation ($6.1 million),
higher shipments in performance chemicals ($3.3 million) and favorable prices
and higher shipments in fine chemistry services and intermediates ($2.5
million), offset, in part by lower shipments in catalysts and additives ($4.6
million), flame retardants ($2.8 million) and pharma actives ($2.2 million), and
unfavorable pricing in performance chemicals ($1.5 million).
The gross profit margin decreased to 21.7% in second quarter 2003 from 23.0% for
the corresponding period in 2002. Second quarter 2003 operating profit was down
2.6% or $0.6 million from second quarter 2002 operating profit primarily due to
higher energy and raw material costs ($7.0 million), lower pricing ($1.3
million) and unfavorable manufacturing costs ($1.0 million) offset, in part, by
the overall effects of foreign exchange ($4.0 million), higher shipments ($2.7
million) and the favorable impact of the fuel and lube additives products
acquired from Ethyl ($1.9 million).
18
Selling, general and administrative ("SG&A") expenses and research and
development ("R&D") expenses increased 2.8% or $0.9 million in the second
quarter of 2003 versus second quarter 2002 primarily due to the unfavorable
impact of foreign exchange. As a percentage of net sales, SG&A expenses and R&D
expenses were 12.6% in 2003 versus 13.0%, as restated, in the 2002 quarter.
Operating Segments
Net sales by reportable business operating segment for the
second quarter period ended June 30, 2003 and 2002 are as follows:
Net Sales
(In Thousands)
---------------------------------------
2003 2002 *
----------------- -----------------
Polymer Chemicals $150,128 $142,955
Fine Chemicals 119,348 109,751
----------------- -----------------
Segment Totals $269,476 $252,706
================= =================
* Restated to reflect shipping and handling costs in conformity with EITF 00-10.
Polymer Chemicals' net sales for the second quarter 2003 increased 5.0%, or $7.2
million, from second quarter 2002 net sales. The increase is primarily due to
the favorable impact of foreign exchange ($8.7 million), the addition of the
fuel and lube additives products acquired in mid-January 2003 from Ethyl
Corporation ($6.1 million) offset, in part, by lower shipments in catalysts and
additives ($4.6 million) and flame retardants ($2.8 million).
Fine Chemicals' net sales for second quarter 2003 increased 8.7% or $9.6 million
from second quarter 2002. The increase is primarily due to the favorable impact
of foreign exchange ($7.7 million), higher shipments in performance chemicals
($3.3 million) and favorable prices and higher shipments in fine chemistry
services and intermediates ($2.5 million) offset, in part, by lower shipments in
pharma actives ($2.2 million) and unfavorable pricing in performance chemicals
($1.5 million).
Operating profit by reportable business operating segment for the second-quarter
period ended June 30, 2003, and 2002 is as follows:
Operating Profit
(In Thousands)
--------------------------------------
2003 2002
---------------- -----------------
Polymer Chemicals $18,750 $17,927
Fine Chemicals 11,769 13,290
---------------- -----------------
Segment Totals 30,519 31,217
Corporate and Other Expenses (5,949) (5,998)
---------------- -----------------
Operating Profit $24,570 $25,219
================ =================
19
Polymer Chemicals' second quarter 2003 segment operating profit was up 4.6% or
$0.8 million from second quarter 2002 primarily due to the overall effects of
foreign exchange ($3.0 million), favorable manufacturing costs ($1.9 million)
and the favorable impact of the fuel and lube additives products acquired ($1.9
million), offset, in part, by unfavorable raw material and energy costs ($3.7
million), lower shipments ($2.0 million) and lower pricing ($0.3 million).
Fine Chemicals' second quarter 2003 segment operating profit decreased 11.4% or
$1.5 million from second quarter 2002 primarily due to unfavorable manufacturing
costs ($3.4 million), unfavorable raw material and energy costs ($3.3 million)
and lower prices ($0.9 million) partially offset by favorable product mix ($4.7
million) and the overall effects of foreign exchange ($1.4 million).
Corporate and other expenses for the second quarter of 2003 decreased 0.8% or
$0.1 million from second quarter 2002.
Interest and Financing Expenses
Interest and financing expenses for second quarter 2003 amounted to $1.3
million, up slightly from $1.2 million in second quarter 2002 due primarily to
higher commitment fees under the Company's new Credit Agreement offset, in part,
by lower interest rates on lower average outstanding debt.
Other Income and (Expenses), Including Minority Interest
Other income and (expenses) for the second quarter 2003 amounted to $(0.3)
million, down $2.6 million from the 2002 corresponding period primarily due to
the absence of interest income of $2.0 million from the Internal Revenue Service
income tax settlement received in 2002.
Income Taxes
The second quarter 2003 effective income tax rate was 1.8% down from 21.2% for
the corresponding period in 2002. The 2003 period benefited from a favorable
income tax adjustment of $6.6 million due to the revaluation of reserve
requirements as the IRS closed audits related to tax years 1998 and 1999 in
mid-2003. The 2002 second quarter included a favorable IRS income tax settlement
of $2.5 million which related to export benefits for the years 1994 and 1995.
The Company expects to maintain a tax rate of about 30.0% for the remainder of
2003.
Results of Operations
- ---------------------
Six Months 2003 Compared with Six Months 2002
- ---------------------------------------------
Net sales for the first six months of 2003 amounted to $535.0 million, up 10.4%
or $50.5 million from net sales of $484.5 million, as restated, for the
corresponding period of 2002. The increase in net sales is primarily due to the
favorable impact of foreign exchange ($32.7 million), the addition of the fuel
and lube additives products acquired in mid-January 2003 from Ethyl Corporation
($11.3 million), higher shipments in flame retardants ($8.1 million) and
performance chemicals ($4.5 million) and higher shipments and favorable pricing
in fine chemistry services and intermediates ($2.9 million) offset, in part, by
lower shipments and unfavorable prices in catalysts and additives ($4.1 million)
and unfavorable prices in performance chemicals ($4.1 million).
20
The gross profit margin decreased to 21.7% in the first six months of 2003 from
23.5%, as restated, for the corresponding period in 2002. The first six months
of 2003 operating profit was relatively unchanged from the 2002 period due to
the overall favorable effects of foreign exchange ($7.3 million), and favorable
production and manufacturing costs ($5.8 million), higher volumes ($4.2 million)
and the favorable impact of the fuel and lube additives products acquired ($3.3
million), offset, in part, by unfavorable raw material and energy costs ($15.5
million) and lower selling prices ($6.5 million). The first six months of 2002
includes a $2.3 million charge to cost of sales related to the discontinuance
and withdrawal from a water treatment venture as well as a $0.9 million charge
for workforce reductions.
SG&A and R&D increased 4.7% or $3.0 million in the first six months of 2003
versus the 2002 period primarily due to the unfavorable impact of foreign
exchange ($2.4 million) and higher SFAS No. 2 R&D costs ($0.6 million). As a
percentage of net sales, SG&A and R&D were 12.4% in the first six months 2003
versus 13.1%, as restated, in the corresponding period of 2002.
Operating Segments
Net sales by reportable business operating segment for the six-months periods
ended June 30, 2003 and 2002 are as follows:
Net Sales
(In Thousands)
---------------------------------------
2003 2002 *
----------------- -----------------
Polymer Chemicals $297,356 $265,122
Fine Chemicals 237,690 219,406
----------------- -----------------
Segment Totals $535,046 $484,528
================= =================
* Restated to reflect shipping and handling costs in conformity with EITF 00-10.
Polymer Chemicals' net sales for the first six months of 2003 increased 12.2% or
$32.2 million from the corresponding period in 2002. The increase is primarily
due to the favorable impact of foreign exchange ($17.9 million), the addition of
the fuel and lube additives products acquired in mid-January 2003 from Ethyl
Corporation ($11.3 million), higher shipments in flame retardants ($8.1 million)
offset, in part, by lower shipments and unfavorable prices in catalysts and
additives ($4.1 million) and unfavorable prices in flame retardants ($0.9
million).
Fine Chemicals' net sales for the first six months of 2003 increased 8.3% or
$18.3 million from the corresponding period in 2002. The increase is primarily
due to the favorable impact of foreign exchange ($14.8 million), higher
shipments in performance chemicals ($4.5 million) and agricultural actives ($1.3
million), higher shipments and favorable pricing in fine chemistry services and
intermediates ($2.9 million) offset, in part, by unfavorable prices in
performance chemicals ($4.1 million) and agricultural and pharma actives ($1.2
million).
Operating profit by reportable business operating segment for the six-months
periods ended June 30, 2003, and 2002 is as follows:
21
Operating Profit
(In Thousands)
---------------------------------------
2003 2002
---------------- ------------------
Polymer Chemicals $35,099 $29,851
Fine Chemicals 25,156 29,598
---------------- ------------------
Segment Totals 60,255 59,449
Corporate and Other Expenses (10,611) (9,800)
---------------- ------------------
Operating Profit $49,644 $49,649
================ ==================
Polymer Chemicals' first six months of 2003 segment operating profit increased
17.6% or $5.2 million from the corresponding period in 2002 primarily due to the
favorable net effects of foreign exchange ($6.6 million), favorable
manufacturing and production costs ($5.5 million), a reclassification of bad
debt expense from corporate and other expenses in the 2002 period ($2.0 million)
and the favorable impact of the fuel and lube additives products acquired ($3.3
million) offset, in part, by higher raw material and energy costs ($8.2
million), lower selling prices ($2.2 million) and lower shipments ($1.8
million).
Fine Chemicals' first six months of 2003 segment operating profit decreased
15.0% or $4.4 million from the corresponding period in 2002 primarily due to
higher raw material and energy costs ($7.3 million), lower selling prices ($4.7
million) and unfavorable manufacturing costs ($2.3 million) offset, in part, by
favorable product mix ($6.0 million), the absence of a $2.3 million charge to
costs of sales related to the discontinuance and withdrawal from a water
treatment venture in the 2002 period and the favorable net effects of foreign
exchange ($1.6 million).
Corporate and other expenses for the first six months of 2003 were up 8.3%, or
$0.8 million, from the corresponding period in 2002, primarily due to the
following adjustments that occurred in 2002 and did not recur in 2003. Excluding
the 2002 adjustments, corporate and other expenses were down approximately $0.3
million in the first six months of 2003 due primarily to lower employee related
costs.
Corporate and Other Expenses
(In Thousands)
----------------------------------------------------------
Increase/
2003 2002 Decrease
----------------- ----------------- ----------------
Balance at June 30, 2003 $10,611 $9,800 $811
Reclassification of Bad Debt Reserve
to Polymer Chemicals Segment - 2,000 (2,000)
2002 Workforce Reduction - (850) 850
----------------- ----------------- ----------------
Net Change Excluding 2002 Adjustments $10,611 $10,950 ($339)
================= ================= ================
Interest and Financing Expenses
Interest and financing expenses for the first six months of 2003 increased $0.1
million from $2.5 million in the corresponding period of 2002 due primarily to
higher commitment fees under the Company's new Credit Agreement offset, in part,
by lower interest rates on lower average outstanding debt.
22
Other Income and (Expenses), Including Minority Interest
Other income and (expenses) for the first six months of 2003 amounted to $3.3
million, up $0.2 million from the corresponding period in 2002 primarily due to
an increase in interest on income tax settlements in 2003 over 2002 of $2.3
million offset, in part, by the full-year effect of higher minority interest
related to the Stannica LLC joint venture.
Income Taxes
The effective income tax rate for the first six months of 2003 was
9.0%, down from 25.4% in the corresponding period of 2002. The 2003 period
includes the impact of an IRS income tax settlement recorded in the amount of
$4.5 million as well as a favorable benefit of $6.6 million related to the
revaluation of reserve requirements as the IRS closed audits related to tax
years 1998 and 1999 in mid-2003. The 2002 period included an IRS income tax
settlement of $2.5 million that related to an adjustment of export benefits for
the years 1994 and 1995. The Company expects to maintain a tax rate of about
30.0% for the remainder of 2003.
Financial Condition and Liquidity
- ---------------------------------
Cash and cash equivalents at June 30, 2003, were $50 million, representing an
increase of $12.4 million from $37.6 million at year-end 2002.
Cash flows provided from operating activities of $85.3 million, together with
$47.3 million of proceeds from borrowings and $4.4 million of proceeds from the
liquidation of a marketable security were used to purchase Ethyl Corporation's
fuel and lubricant antioxidants working capital, patents and other intellectual
property for approximately $26.6 million, to cover repayment of debt, purchase
approximately 500,000 shares of the Company's common stock, pay quarterly
dividends to shareholders, fund capital expenditures, fund investments in joint
ventures and nonmarketable securities, and increase cash and cash equivalents by
$12.4 million. We anticipate that cash provided from operations in the future
will be sufficient to pay our operating expenses, satisfy debt-service
obligations and make dividend payments.
The change in the Company's accumulated other comprehensive loss from December
31, 2002, was due primarily to net foreign currency translation adjustments
(strengthening of the Euro and Japanese Yen versus the U.S. Dollar), net of
related deferred taxes.
The noncurrent portion of the Company's long-term debt amounted to $175.2
million at June 30, 2003, compared to $180.1 million at the end of 2002. The
Company's long-term debt, including the current portion, as a percentage of
total capitalization amounted to 22.8% at June 30, 2003. The Company is
guarantor of $26.1 million of long-term debt, in the form of commitments, on
behalf of its 50-percent owned joint venture company, Jordan Bromine Company
Limited. The Company's long-term debt, including the guarantee, as a percent of
total capitalization amounted to 25.3% at June 30, 2003.
Borrowings under the Company's Credit Agreement dated September 10, 2002, are
conditioned upon compliance with the following financial covenants: (a)
consolidated interest coverage ratio, as defined, must be greater or equal to
3.00:1.00, (b) consolidated leverage ratio, as defined, must be less than or
equal to 3.50:1.00, (c) consolidated tangible domestic assets, as defined, must
be equal to or greater than $750 million for the Company to make investments in
entities and enterprises that are organized outside the United States, (d) with
the exception of liens specified in the Credit Agreement, liens may not attach
to assets with a value of more than 10% of consolidated net worth, as defined in
the agreement. As of June 30, 2003, the Company is in compliance with these
covenants.
23
The Company's capital expenditures in the first six months of 2003 were about
the same as the six-month period of 2002. For the year, capital expenditures are
forecasted to be greater than the 2002 level. Capital spending will be financed
primarily with cash flow provided from operations with additional cash needed,
if any, provided from debt. The amount and timing of any additional borrowings
will depend on the Company's specific cash requirements.
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 our knowledge, we are currently complying, and expecting 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 is not expected to have in the future
a material effect on earnings or the competitive position of Albemarle.
Among other environmental requirements, we are 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
- ----------------------
Summary of Critical Accounting Policies:
- ----------------------------------------
Consolidation
The consolidated financial statements include the accounts and operations of
Albemarle Corporation and all of its majority-owned and controlled subsidiaries.
The Company applies the equity method of accounting for investments between 20%
and 50% owned over which we have significant influence. All significant
intercompany accounts and transactions are eliminated in consolidation. Minority
shareholder's interest in controlled subsidiaries is included in other
noncurrent liabilities in the consolidated balance sheets for the periods
presented and in the consolidated statement of income for the period ended June
30, 2003.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Listed below are the estimates and assumptions that we consider to
be significant in the preparation of our financial statements.
Allowance for Doubtful Accounts -- We estimate losses for uncollectible accounts
based on the aging of receivables and the evaluation of the likelihood of
success in collecting the receivables.
24
Recovery of Long-Lived Assets -- We evaluate the recovery of our long-lived
assets on a segment basis by periodically analyzing our operating results and
considering significant events or changes in the business environment.
Acquisition Accounting -- We estimate the fair value of assets and liabilities
when allocating the purchase price of an acquisition.
Income Taxes -- We assume the deductibility of certain costs in our income tax
filings and estimate the future recovery of deferred tax assets.
Legal Accruals -- We estimate the amount of potential exposure with respect to
litigation, claims and assessments.
Environmental Remediation Liabilities -- We estimate and accrue the costs
required to remediate a specific site depending on site-specific facts and
circumstances. Cost estimates to remediate each specific site are developed by
assessing (i) the scope of the Company's contribution to the environmental
matter, (ii) the scope of the anticipated remediation and monitoring plan, and
(iii) the extent of other parties' share of responsibility.
Insurance Accruals/Receivables -- We record and assume the recoverability of
insurance receivables and potential impact of insurance claims based on our
estimates after considering advice from in-house and outside legal counsel as
well as outside consultants.
Actual results could differ materially from the estimates and assumptions that
we use in the preparation of our financial statements.
Revenue Recognition
Sales revenue is recognized when (1) ownership and all rewards and risks of loss
have been transferred to the buyer, (2) the price is fixed and determinable, and
(3) collectibility is reasonably assured. Revenue from services is recognized
when performance of the services has been completed.
Property, Plant and Equipment
Accounts include costs of assets constructed or purchased, related delivery and
installation costs and interest incurred on significant capital projects during
their construction periods. Expenditures for renewals and betterments also are
capitalized, but expenditures for repairs and maintenance are expensed as
incurred. The cost and accumulated depreciation applicable to assets retired or
sold are removed from the respective accounts, and gains or losses thereon are
included in income. Depreciation is computed primarily by the straight-line
method based on the estimated useful lives of the assets.
We evaluate historical and expected undiscounted operating cash flows of the
related business segments or fair value of property, plant and equipment to
determine the future recoverability of any property, plant and equipment
recorded. Recorded property, plant and equipment is re-evaluated on the same
basis at the end of each accounting period whenever any significant permanent
changes in business or circumstances have occurred which might impair recovery.
The costs of brine wells, leases and royalty interests are primarily amortized
over the estimated average life of the field. On a yearly basis for all fields,
this approximates a units-of-production method based upon estimated reserves and
production volumes.
25
Pension Plans and Other Postretirement Benefits
Annual costs of pension plans are determined actuarially based on Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"). Our
policy is to fund U.S. pension plans at amounts not less than the minimum
requirements of the Employee Retirement Income Security Act of 1974 and
generally for obligations under our foreign plans to deposit funds with trustees
and/or under insurance policies. Annual costs of other postretirement plans are
accounted for based on SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." Our policy is to fund post-retirement health
benefits for retirees on a pay-as-you-go basis. There are significant
assumptions used in determining amounts including the discount rate, expected
return on plan assets, rate of compensation increase and assumed health care
trend rate. These assumptions are based on our estimates after considering
advice from a major actuarial consulting firm and using the consistent
application of certain indexes.
Income Taxes
Deferred income taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes, using the
liability or balance sheet method. Such temporary differences result primarily
from differences between the financial statement carrying amounts and tax basis
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
Investments
We have investments in joint ventures, nonmarketable securities and marketable
equity securities. The majority of our investments are in joint ventures. Since
we do not have the ability to exercise significant influence over the operating
and financial policies and are not the "primary beneficiary" of these joint
ventures, they are accounted for using the equity method of accounting. The
Company's share of the investee's (losses) earnings are included in the
consolidated statement of operations as a component of other income and
(expenses), including minority interest. Investments in marketable securities
are accounted for as available-for-sale securities with changes in fair value
included in "accumulated other comprehensive income (loss)" in the shareholders'
equity section of the consolidated balance sheets. Joint ventures' and
nonmarketable securities' results for immaterial entities are estimated based
upon the overall performance of the entity where financial results are not
available on a timely basis.
Environmental Compliance and Remediation
Environmental compliance costs include the cost of purchasing and/or
constructing assets to prevent, limit and/or control pollution or to monitor the
environmental status at various locations. These costs are capitalized and
depreciated based on estimated useful lives. Environmental compliance costs also
include maintenance and operating costs with respect to pollution prevention and
control facilities and other administrative costs. Such operating costs are
expensed as incurred. Environmental remediation costs of facilities used in
current operations are generally immaterial and are expensed as incurred.
We accrue for environmental remediation costs and post-remediation costs on an
undiscounted basis at facilities or off-plant disposal sites that relate to
existing conditions caused by past operations in the accounting period in which
responsibility is established and when the related costs are estimable. In
developing these cost estimates, evaluation is given to currently available
facts regarding each site, with consideration given to existing technology,
presently enacted laws and regulations, prior experience in remediation of
contaminated sites, the financial capability of other potentially responsible
parties and other factors, subject to uncertainties inherent in the estimation
process. These estimates are reviewed periodically, with adjustments to the
accruals recorded as necessary.
26
Outlook
- -------
Fine Chemicals
Looking ahead to the second half of 2003, we should begin to see improvements in
our Fine Chemicals' results based upon business initiatives that have been
undertaken to meet the challenges of the current operating environment,
including cost reductions and price increases. Higher raw materials and energy
costs, as compared to last year, will continue to adversely affect profits and
the performance of selected products sold into paper, home care and agricultural
markets could stay depressed if the economy does not improve. The increase in
Fine Chemicals' raw materials costs that occurred in the second quarter of 2003
is likely to continue into fourth-quarter 2003. During the remainder of 2003, we
believe that we will face cost pressures with respect to the Fine Chemicals'
segment that will gradually subside and give way to favorable comparative
performance in the second half of the year versus the first half.
The normal seasonal performance of our agricultural chemicals products occur in
the second half of 2003, which should provide an improvement in our Fine
Chemicals' results over the first half of the year. However, we expect that many
of the profit pressures we have experienced in Fine Chemicals in the first half
will continue to some extent into the second half of 2003.
Throughout the Fine Chemicals sector there are significant efforts to overcome
these economic issues and position the segment for a profit rebound as markets
improve. Our bromine product area, highlighted by our Jordan investment, has
delivered improved performance in the second quarter of 2003. There is optimism
that it could continue to provide profitable growth for us going forward.
Biocides for industrial and recreational water treatment are also providing
profits for the segment. Finally, we are generating over 70 inquiries per month
for new business in fine chemistry services and intermediates, a 50 percent
increase from the early months of 2003.
Polymer Chemicals
Volume improvement in Polymer Chemicals for the second half of 2003 and
thereafter, particularly in flame retardants, is dependent upon general economic
conditions. Printed wiring board shipments, television production, construction
starts and production of polyolefin products (sheet, film and other plastics)
are critical to sales in this segment.
Flame retardants production is mixed. While large volume products such as
tetrabrom and decabrom are running behind last year, many of our proprietary
mineral- and phosphorus-based products are running at increased rates. With
higher raw material and energy costs impacting flame retardants profitability,
one of the Company's major efforts is to increase prices. The Company began to
see some success toward the end of last year, and has continued this push into
the first half of 2003. Asia Pacific serves as an important growth driver for
this business, and the lingering effects of the Iraqi war and Sudden Acute
Respiratory Syndrome (SARS ) slowed demand in this region. Early third-quarter
2003 sales have been similar to the pattern of recent months, with some pockets
of strength and renewed orders, balanced by areas of weakness, all indicative of
the uncertain pace of economic improvement.
27
In catalysts and additives, both new product development and continuing strong
performance from the recently acquired antioxidant products line have brought
improved results. Curatives, now finding favor in various construction coating
applications, have shown improvement.
On July 24, 2003, we closed on the acquisition of Rhodia's polyurethane flame
retardants business. The funding was provided by our existing $375 million
Credit Agreement. This acquisition should increase our sales on an annual basis
by approximately $65 million. This acquisition is projected to be accretive to
earnings and cash flow, beginning in the fourth quarter of 2003.
Overview
The second half of 2003 is predicted to offer continuous macro-economic
uncertainty. The good news is that inventories appear to be reasonable across
much of our customer base because of the intense focus on keeping working
capital costs down. This points the way to a quick turnaround should conditions
improve.
Raw material and energy costs are projected to continue to produce negative
comparisons into the second half of 2003. The Company continues to address this
issue with cost reductions and price increases wherever possible.
Foreign exchange rate changes created favorable revenue and margin comparisons
during the second quarter, and these favorable comparisons are expected to
continue into the third quarter. The Company generates over 30% of revenue in
Euro or Sterling. The Company realizes only modest effects of changes in
valuations of the U.S. dollar against the Japanese yen for the most part, but a
weak dollar, as seen recently, does provide some positive effects on revenues
and earnings.
Over the past five quarters we have closed out the U.S. Internal Revenue Service
reviews from 1994 through 1999, and we have announced over $17 million of
favorable tax adjustments including interest. Based on our current tax planning,
we think we should be able to maintain an effective tax rate of about 30 percent
in coming years.
The Company continues to generate good cash flow. In addition, we believe the
time is right to consider either a bond issue or other lines of finance to
enhance the current credit facilities. Proceeds could be used to repurchase
shares to generate additional shareholder value, support acquisitions to
profitably grow the business, or replace some of our floating rate debt.
Additional information regarding the Company, its products, markets and
financial performance is provided at the Company's Internet web site,
www.albemarle.com.
28
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, 2002, except as noted below.
The operations of the Company are exposed to market risk from changes in natural
gas prices. The Company purchases natural gas to meet its production
requirements. In the second quarter of 2003, the Company began hedging a portion
of its 12 month rolling forecast for North American natural gas requirements, by
entering into natural gas futures contracts, to help mitigate uncertainty and
volatility.
Hedging decisions are subject to the management, direction and control of the
Company's Natural Gas Risk Management Committee ("NGRMC"), and are supported by
a third-party consultant. The NGRMC is composed of the chief executive officer,
chief financial officer, treasurer, vice president of supply chain, director of
external reporting and director of purchasing and logistics. The chief executive
officer also exercises an independent right to review and change the hedging
policy. The scope of the derivative activities are to be communicated to the
Board of Directors. Extensive controls are in place to govern all aspects of the
hedging process.
Hedge transactions are executed with a major financial institution by the
Company's purchasing personnel. Such derivatives are held to secure natural gas
at fixed prices and not for trading.
The natural gas contracts qualify as cash flow hedges under SFAS 133 and are
marked to market. The unrealized gains and/or losses are deferred and reported
in Other Comprehensive Income to the extent that the unrealized gains and losses
are offset by the forecasted transaction. Any unrealized gains and/or losses on
the derivative instrument that are not offset by the forecasted transaction are
recorded in earnings. At June 30, 2003, the Company recorded unrealized losses
of approximately $47 ($30 net of tax) in Other Comprehensive Income.
ITEM 4. Controls and Procedures
-----------------------
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of Albemarle's management,
including our principal executive officer and our principal financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based upon that evaluation, our principal executive
officer and our principal financial officer concluded that the design and
operation of these disclosure controls and procedures were effective for the
second quarter of 2003. No significant changes were made in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
29
Part II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings
-----------------
The Company is 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
any liability that is likely to have a material adverse effect upon the results
of operations, financial condition or cash flows of the Company on a
consolidated basis.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
3(ii) Bylaws of the registrant amended June 25, 2003
31 Section 302 Certifications of Chief Executive Officer and
Chief Financial Officer
32 Section 906 Certifications of Chief Executive Officer and
Chief Financial Officer
(b) Reports on Form 8-K
(1) The Company filed a Form 8-K on April 23, 2003, which
included the Company's earnings press release for the
quarter ended March 31, 2003.
(2) The Company filed a Form 8-K on June 19, 2003, which
included the Company's press release regarding the
Company's intent to acquire phosphorus flame
retardants in agreement with Rhodia SA.
(3) The Company filed a Form 8-K on July 23, 2003, which
included the Company's earnings press release for the
quarter ended June 30, 2003.
(4) The Company filed a Form 8-K on July 24, 2003, which
included the Company's press release regarding the
Company's completion of the acquisition of Rhodia's
polyurethane flame retardant business.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALBEMARLE CORPORATION
---------------------
(Registrant)
Date: August 1, 2003 By: /s/ PAUL F. ROCHELEAU
----------------------
Paul F. Rocheleau
Senior Vice President and
Chief Financial Officer
31
EXHIBIT INDEX
-------------
Page
Numbers
-------
3(ii) Bylaws of the registrant amended June 25, 2003 32-43
31 Section 302 Certifications of Chief Executive Officer and
Chief Financial Officer 44-45
32 Section 906 Certifications of Chief Executive Officer and
Chief Financial Officer 46-47