Source: https://investors.albemarle.com/node/13216/html
Timestamp: 2020-01-24 16:49:11
Document Index: 303027871

Matched Legal Cases: ['in fine', 'in fine', 'in fine', '§ 1350', '§ 906', '§ 1350', '§ 906']

Form 10-Q for quarterly period ended March 31, 2005
For Quarterly Period Ended March 31, 2005
Number of shares of common stock, $.01 par value, outstanding as of April 30, 2005: 46,572,405
Consolidated Balance Sheets – March 31, 2005 and December 31, 2004 3-4
Consolidated Statements of Income – Three Months Ended March 31, 2005 and 2004 5
Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2005 and 2004 6
Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2005 and 2004 7
Notes to the Consolidated Financial Statements 8-16
Management’s Discussion and Analysis of Results of Operations and Financial Condition and Additional Information
$ 73,780 $ 46,390
Trade accounts receivable, less allowance for doubtful accounts (2005 - $373; 2004 - $426)
337,765 300,010
Other accounts receivable, less allowance for doubtful accounts (2005 - $421; 2004 - $403)
36,844 41,541
254,656 248,253
83,964 59,198
31,050 31,306
369,670 338,757
23,852 20,712
841,911 747,410
2,091,106 2,064,585
1,181,644 1,168,601
909,462 895,984
189,292 189,833
125,510 170,957
29,412 34,433
234,631 190,175
173,156 213,953
$ 2,503,374 $ 2,442,745
$ 204,286 $ 202,410
45,051 45,047
91,663 88,048
6,561 4,574
43,555 33,667
391,116 373,746
820,456 899,584
70,685 69,775
56,163 54,989
82,496 84,525
210,890 248,751
Common stock, $.01 par value, issued and outstanding – 46,572,405 in 2005 and 41,898,201 in 2004
175,694 22,839
36,160 46,203
659,248 641,914
871,568 711,375
$ 509,965 $ 322,009
402,643 261,225
107,322 60,784
57,026 30,354
10,980 4,579
Reduction in force adjustments
— 4,507
39,316 21,344
(10,253 ) (1,559 )
7,392 (13 )
Other (expenses), net including minority interest
(996 ) (1,070 )
35,459 18,702
11,140 5,095
$ 24,319 $ 13,607
Cash dividends declared per share of common stock (Note 9)
$ 0.15 $ 0.29
287 (51 )
(933 ) —
(9,425 ) (1,741 )
(10,043 ) (1,784 )
$ 14,276 $ 11,823
24,319 13,607
29,045 21,566
2,529 —
(53,120 ) 11,023
Equity in (net income) losses of unconsolidated investments
(7,392 ) 13
614 (636 )
1,562 (388 )
(2,443 ) 45,185
(18,801 ) (8,398 )
(10,277 ) (600 )
(391 ) (4,725 )
672 (460 )
(28,797 ) (14,183 )
68,533 7,965
2,295 3,499
(470,992 ) (19,369 )
(4,998 ) (5,963 )
65,255 (15,195 )
(6,625 ) (459 )
27,390 15,348
$ 73,780 $ 50,521
1. In the opinion of management, the accompanying consolidated financial statements of Albemarle Corporation and its wholly-owned and majority-owned subsidiaries (“Albemarle” or the “Company”) contain all adjustments necessary for a fair presentation, in all material respects, of the Company’s consolidated financial position as of March 31, 2005, and December 31, 2004, the consolidated results of operations and comprehensive income for the three-month periods ended March 31, 2005, and 2004, and condensed consolidated cash flows for the three-month periods ended March 31, 2005, and 2004. All adjustments are of a normal and recurring nature. In addition, appropriate adjustments have been recorded associated with the preliminary purchase accounting for the acquisition of the refinery catalysts business of Akzo Nobel N.V. (“Akzo Nobel”). These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K. The December 31, 2004 consolidated balance sheet data herein was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States. The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the accompanying consolidated financial statements and the notes thereto to conform to the current presentation.
2. Cost of goods sold includes foreign exchange transaction (losses) gains of ($375), and $392 for the three-month periods ended March 31, 2005 and 2004, respectively.
3. Reduction in force adjustments for the three-month period ended March 31, 2004 includes a charge of $4,507 ($2,871 after income taxes or seven cents per diluted share) for layoffs at the former Pasadena zeolite facility totaling $3,449 and their related Statement of Financial Accounting Standards (“SFAS”) No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” curtailment charge of $898, and certain relocation costs of $160.
The following table summarizes the total reduction in force charges related to the 2004 layoffs:
Payments in 2004
(3,217 )
Over accrual reversed to income in 2004
4. Interest and financing expenses for the three-month period ended March 31, 2005 include the write-off of deferred financing expenses totaling $1,386 ($883 net of income taxes, or two cents per diluted share), associated with the 364-day bridge loan that was retired using the proceeds from the Company’s public offering of senior notes and common stock.
5. Other (expenses), net including minority interest includes a charge for minority interest for the Company’s majority-owned subsidiary, Stannica LLC, totaling $1,484 and $1,337 for the three-month periods ended March 31, 2005 and 2004, respectively.
6. Basic and diluted earnings per share for the three-month periods ended March 31, 2005 and 2004 are calculated as follows:
45,538 41,365
1,347 835
46,885 42,200
7. The following table reflects the changes in consolidated shareholders’ equity from December 31, 2004 through March 31, 2005:
— — — — 24,319 24,319
— — — (9,425 ) — (9,425 )
— — — 23 — 23
Unrealized gain on marketable equity securities, net
— — — 5 — 5
— — — 287 — 287
— — — — (6,985 ) (6,985 )
— — 2,529 — — 2,529
94,500 1 2,294 — — 2,295
46,572,405 $ 466 $ 175,694 $ 36,160 $ 659,248 $ 871,568
8. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the three-month periods ended March 31, 2005 and 2004, respectively, are as follows:
(1.6 ) (3.2 )
(1.3 ) (2.4 )
31.4 % 27.2 %
9. Cash dividends declared for the three-month period ended March 31, 2005 totaled 15 cents per share, payable on April 1, 2005. Cash dividends declared for the three-month period ended March 31, 2004 totaled 29 cents per share, which included a dividend of 14.5 cents per share declared on January 30, 2004 and paid on April 1, 2004, as well as a dividend of 14.5 cents per share declared on March 31, 2004 and paid on July 1, 2004. The primary reason for the two dividend declarations in the 2004 period was the timing of the Board of Directors meeting dates.
10. On July 31, 2004, the Company completed the acquisition of the refinery catalysts business of Akzo Nobel for approximately $763,000, net of cash acquired, funded by a combination of a bridge loan and long-term financing. In the fourth quarter of 2004 and the first quarter of 2005, the Company increased the purchase price by approximately $23,000 and $10,000, respectively, due primarily to payments to Akzo Nobel as part of the post-closing working capital adjustments. As part of the acquisition, the Company acquired 50 percent ownership of non-consolidated joint ventures in Brazil (Fábrica Carioca de Catalisadores S.A.), Japan (Nippon Ketjen Co., Ltd,) and France (Eurecat S.A. with affiliates in the United States, Saudi Arabia and Italy).
The purchase price allocation is not final at the time of this filing due to the pending review of final tangible and intangible asset values with third party valuation consultants and the finalization of certain pension related issues with Akzo Nobel. During the quarter ended March 31, 2005, significant progress was made in the determination of the final purchase price allocation as can be seen in the allocation below versus the reported allocation at December 31, 2004. However, none of the changes made to the December 31, 2004 allocation was material to the financial position or results of operations of the Company, and the Company does not expect the final purchase price accounting to differ materially from the amounts reported below.
The preliminary purchase price allocation is summarized below.
(47,116 )
(74,923 )
(26,036 )
$ 796,424
The following unaudited pro forma data summarizes the results of operations for the three-month period ended March 31, 2004 as if the acquisition of the refinery catalysts business of Akzo Nobel had been completed as of the beginning of that period. The pro forma data gives effect to actual operating results prior to the acquisition, and includes adjustments for tangible and intangible asset depreciation and amortization, interest expense, various other (expense) income statement accounts and related income tax effects associated with the acquisition. Additionally, non-recurring items associated with the acquisition, including acquired inventory step-up charges, in-process research and development charges and net losses associated with the contract used to hedge the euro-denominated purchase price, are reflected in the pro forma data for the period presented. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of the beginning of the period presented or that may be obtained in the future.
$ 441,212
$ (779 )
Effective January 1, 2004, the Company acquired the business assets (including inventory), customer lists and other intangibles of Taerim International Corporation (“Taerim”) and formed Albemarle Korea Corporation located in Seoul. Taerim was formerly Albemarle’s Korean distributor and representative. The acquisition purchase price totaled $3,337, payable in cash and long-term payables due over five years.
11. At March 31, 2005, goodwill and other intangibles consist principally of goodwill, customer lists, trademarks, patents and other intangibles.
$ 24,322 $ — $ — $ (377 ) $ 23,945
145,824 44,033 (a) — 1,542 191,399
20,029 — — (742 ) 19,287
$ 190,175 $ 44,033 $ — $ 423 $ 234,631
$ 75,275 $ — $ 1,154 $ (1,279 ) $ 72,842
136,742 (35,871 )(b) 2,333 — 98,538
1,936 — 126 (34 ) 1,776
$ 213,953 $ (35,871 ) $ 3,613 $ (1,313 ) $ 173,156
(a) The increase in goodwill in the Catalysts segment is associated with changes to the allocation of the purchase price of the refinery catalysts business of Akzo Nobel.
(b) Other intangibles changes in the Catalysts segment are associated with changes to the allocation of the purchase price of the refinery catalysts business of Akzo Nobel as follows: trade name ($51,842), patents ($5,281), customer list and relationships $18,862, non-compete agreements ($5,430), and licenses and other $7,820. The estimated useful lives range from 2.5 to 22 years with a weighted average of approximately 13 years. These changes do not have a material impact on previously reported results. Consistent with previous disclosures, amortization for each of the next five years should approximate $9,300.
12. Long-term debt consists of the following:
$ 524,164 $ 923,624
324,671 —
4,804 9,095
868 912
865,507 944,631
$ 820,456 $ 899,584
In connection with the acquisition of the refinery catalysts business, the Company entered into (1) a new senior credit agreement, dated as of July 29, 2004, with a group of lenders, consisting of a $300,000 revolving credit facility and a $450,000 five-year term loan facility, and (2) a $450,000 364-day loan agreement. The Company used the initial borrowings under the new senior credit agreement and the 364-day loan agreement to consummate the acquisition, refinance the then-existing credit agreement and pay related fees and expenses incurred in connection therewith. The revolving credit facility and the five-year term loan facility bore variable interest rates at March 31, 2005 of 3.56% and 4.17%, respectively. The $450,000 five-year facility is payable in quarterly installments of $11,250 beginning September 30, 2004 through June 30, 2008, with three final quarterly payments of $90,000 beginning September 30, 2008 through March 31, 2009. These new credit facilities contain certain restrictive financial covenants including fixed charge coverage, debt to capitalization and other covenants as set forth in the agreements.
On January 20, 2005, the Company concluded the sale of $325,000 in senior notes through a public offering at a price of 99.897% of par. The Company used the net proceeds from the sale of the senior notes along with its concurrent sale of common stock to repay the $450,000 364-day bridge loan. The senior notes bear an interest rate of 5.10%, which is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2005. The notes mature on February 1, 2015.
13. The Company has the following recorded environmental liabilities primarily included in “Other noncurrent liabilities” at March 31, 2005:
Beginning balance at December 31, 2004
Ending balance at March 31, 2005
The amounts recorded represent the Company’s future remediation and other anticipated environmental liabilities. Although it is difficult to quantify the potential financial impact of compliance with environmental protection laws, management estimates (based on the latest available information) that there is a reasonable possibility that future environmental remediation costs associated with the Company’s past operations, in excess of amounts already recorded, could be up to approximately $15,200 before income taxes.
The Company believes that any sum it may be required to pay in connection with environmental remediation matters in excess of the amounts recorded should occur over a period of time and should not have a material adverse effect upon results of operations, financial condition or cash flows of the Company on a consolidated annual basis although any such sum could have a material adverse impact in a particular quarterly reporting period.
On another matter, the Company has submitted a request for arbitration against Aventis S.A., the predecessor in interest to Sanofi Aventis (“Aventis”), to confirm that Aventis is obligated to indemnify the Company pursuant to the terms of a stock purchase agreement for certain present and future claims asserted against the Company arising out of soil and groundwater contamination at the site of the Thann, France facility. See Note 16.
14. Effective January 1, 2005, the Company revised the way it evaluates the performance of its segment results by including the operating results of its joint ventures termed “equity in net income (losses) of unconsolidated investments” along with its operating profit (losses), which represents income (loss) before income taxes, and before interest and financing expenses and other expenses, net including minority interest. The change to segment income versus segment operating profit was brought about by the material effect of the refinery catalysts business joint ventures acquired in July 2004 on the Company’s consolidated operating results. Prior year segment information has been restated to conform to this presentation. Segment data continues to include intersegment transfers of raw materials at cost and foreign exchange transaction gains and losses, as well as allocations for certain corporate costs.
$ 198,102 $ 172,824 $ 139,039 — $ 509,965
$ 22,018 $ 20,589 $ 10,344 $ (13,635 ) $ 39,316
1,780 4,470 1,206 (64 ) 7,392
$ 23,798 $ 25,059 $ 11,550 $ (13,699 ) 46,708
$ 35,459
$ 172,662 $ 22,877 $ 126,470 — $ 322,009
$ 18,859 $ 2,639 $ 5,136 $ (5,290 ) $ 21,344
1,502 76 (1,417 ) (174 ) (13 )
$ 20,361 $ 2,715 $ 3,719 $ (5,464 ) 21,331
15. SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) encourages, but does not require, companies to record, at fair value, compensation cost for stock-based employee compensation plans. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. If compensation cost had been determined based on the fair value at the grant date under the plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:
$ 2,165 $ 922
$ 2,368 $ 1,547
$ 24,116 $ 12,982
$ 0.53 $ 0.31
$ 0.51 $ 0.30
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-months periods ended March 31, 2005 and 2004.
$ 11.01 $ 7.92
1.97 % 2.37 %
29.58 % 30.23 %
4.67 % 4.15 %
16. Commitments and Contingencies.
The following table summarizes the Company’s contractual obligations and commitments at March 31, 2005:
$ 11,250 $ 11,250 $ 11,250 $ 33,750 $ 45,051 $ 45,056 $ 202,561 $ 201,708 $ 72 $ 337,309
9,517 9,585 9,733 28,835 33,397 31,958 29,487 18,020 16,913 69,457
2,899 2,899 2,899 8,697 5,929 3,852 2,939 2,510 2,499 20,597
62,181 62,181 62,180 186,542 54,843 9,471 7,574 6,905 5,401 23,881
2,599 6,811 2,308 11,718 30,594 4,760 4,389 3,888 6,101 57
13,496 1,350 2,145 16,991 649 653 653 653 1,345 —
— — 760 760 815 805 55 — — —
$ 101,942 $ 94,076 $ 91,275 $ 287,293 $ 171,278 $ 96,555 $ 247,658 $ 233,684 $ 32,331 $ 451,301
* These amounts are based on a weighted-average interest rate of 4.25% for term loans/credit facility, 3.25% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes for 2005. The weighted average rates for years 2006 – thereafter are 4.625% for term loans/credit facility, 3.75% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes.
In addition, the Company has commitments, in the form of guarantees, for 50% of the loan amounts outstanding (which at March 31, 2005, amounted to $34,853) of its 50%-owned joint venture company, Jordan Bromine Company Limited (“JBC”). JBC entered into the loans in 2000 to finance construction of certain bromine and derivatives manufacturing facilities on the Dead Sea. The Company also has guarantee commitments for 100% of certain operating loans and credit lines outstanding (which at March 31, 2005, amounted to $275 and $300, respectively) of its joint venture company, Eurecat U.S., Inc. (“Eurecat”).
On April 2, 2004, Albemarle Overseas Development Company (“AODC”), a wholly owned subsidiary of the Company, initiated a Request for Arbitration against Aventis through the International Chamber of Commerce, International Court of Arbitration, Paris, France. The dispute arises out of a 1992 Stock Purchase Agreement (“Agreement”) between a predecessor to AODC, and a predecessor to Aventis under which 100% of the stock of Potasse et Produits Chimiques, S.A., now known as Albemarle PPC (“APPC”), was acquired by AODC. The dispute relates to a chemical facility in Thann, France owned by APPC. Under the terms of the Agreement, the Company believes that Aventis is obligated to indemnify AODC and APPC, and hold them harmless from certain claims, losses, damages, costs or any other present or prospective liabilities arising out of soil and groundwater contamination at the site in Thann.
The Request for Arbitration requests indemnification of AODC by Aventis for certain costs incurred by APPC, in connection with any environmental claims of the French government for the APPC facility and a declaratory judgment as to the liability of Aventis under the Agreement for costs to be incurred in the future by APPC in connection with such claims. Arbitration related to the question of liability is currently scheduled for June 2005.
At this time, it is not possible to predict what the French government will require with respect to the Thann facility, since this matter is in its initial stages and environmental matters are subject to many uncertainties. The Company believes, however, that it is entitled to be fully indemnified by Aventis for all liabilities arising from this matter, but no assurance can be given that it will prevail in this matter. If the Company does not prevail in the arbitration and the government requires additional remediation, the costs of remediation could be significant.
17. In accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106,” the following information is provided for interim domestic and foreign pension and postretirement benefit plans:
$ 4,851 $ 2,533
7,492 6,643
(10,926 ) (10,382 )
Plan pension curtailment*
2,084 638
$ 3,616 $ 518
$ 469 $ 487
1,098 1,070
(358 ) (339 )
$ 1,185 $ 1,200
* During first quarter ended March 31, 2004, a SFAS No. 88 pension curtailment charge was incurred totaling $898 due to the layoffs at the zeolite facility in Pasadena, Texas.
The Company did not make any contributions to its pension plans in the first three months of 2005.
In December 2004, FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and its related implementation guidance. SFAS No. 123R will be effective as of the first annual reporting period that begins after June 15, 2005. SFAS No. 123R will result in the recognition of additional compensation expense relating to our incentive plans. This revision will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The Company currently uses the intrinsic value method from APB No. 25 to measure compensation expense for stock-based awards to its employees. Under this standard, the Company generally does not recognize any compensation related to stock option grants the Company issues under its incentive plans. Under the new rules, the Company is required to adopt a fair-value-based method for measuring the compensation expense related to incentive stock awards. The adoption of SFAS No. 123R is not expected to have a significant impact on the Company’s reported results of operations.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion 29” (“SFAS No. 153”). This statement is effective for fiscal periods beginning after June 15, 2005. This statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of SFAS No. 153 is not expected to have an effect on the Company.
The following is a discussion and analysis of our financial condition and results of operations since December 31, 2004.
Effective January 1, 2005, we revised the way we evaluate the performance of our segment results by including the operating results of our joint ventures, termed “equity in net income (losses) of unconsolidated investments,” along with our operating profit (losses). Segment results for the quarter ended March 31, 2004 have been recast to reflect the way the chief operating decision maker reviews our three segments. The change to segment income versus segment operating profit was brought about by the material effect of the joint ventures acquired from Akzo Nobel N.V. as part of our acquisition of Akzo Nobel’s refinery catalysts business (“refinery catalysts business”) on July 31, 2004 on our consolidated operating results. The refinery catalysts business included 50% interests in three different joint ventures: Fábrica Carioca de Catalisadores S.A., a Brazilian joint venture; Nippon Ketjen Co., Ltd., a Japanese joint venture; and Eurecat S.A., a French joint venture (with affiliates in the United States, Saudi Arabia and Italy).
A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 22.
Some of the information presented in this Quarterly Report on Form 10-Q, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and variations of such words and similar expressions to identify such forward-looking statements.
We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals. Our products and services enhance the value of our customers’ end-products by improving performance, providing essential product attributes, lowering cost and simplifying processing. We sell a highly diversified mix of products to a wide range of customers, including manufacturers of consumer electronics, building and construction materials, automotive parts, packaging, pharmachemicals and agrichemicals, and
petroleum refiners. We believe that our commercial and geographic diversity, technical expertise, flexible, low-cost global manufacturing base, strong cash flows and experienced management team enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.
First-quarter 2005 net sales totaled $510 million, up $188 million from the same period last year, setting an all-time record quarter for the Company. Strong contributions from the refinery catalysts business acquisition, improved pricing and product mix helped offset continued pressure from higher raw material and energy costs. Our pricing initiatives, when combined with cost reduction efforts, catalyst synergies, and new product introductions, resulted in margin improvements across all business segments. We saw year-on-year operating margin improvement, including joint ventures, of roughly 260 basis points.
These first-quarter results are particularly notable in light of the continued pressure from raw material costs incurred during this period. As we reported last quarter, our 2004 business saw an increase in raw material and energy costs. For the first quarter of 2005, we faced additional cost increases versus the first quarter of 2004, most notably in bisphenol-A, phenol, caustic and chlorine, olefins, ethylene and metals, including molybdenum, nickel and cobalt.
To continue to offset this inflation, we remain focused on driving price increases in each segment, as well as controlling costs and improving raw material utilizations. Effective April 1, we are implementing price increases in a number of bromine and phosphorus related products, which should help to further offset key raw material price increases. In addition, we should begin to see the impact of an announced price increase in the first quarter for fluid catalytic cracking (“FCC”) catalysts. We believe that we are on track to exceed our three-year, $50 million manufacturing cost savings program by the end of this year, and have begun looking forward to identify cost and utilization objectives for the next three years.
Looking forward, we expect solid growth in the second half of 2005, which should allow us to maintain or further improve margins as we move through the year.
In Polymer Additives, we successfully drove price increases in many areas, and while volume was essentially flat sequentially and down slightly year-over-year, we still managed to achieve revenue growth of $25.4 million. Demand in consumer electronics was down in the early months of the quarter, but returned in March in most business segments with April orders showing strength as well. We began sales of our new pentabrom replacement, Saytex RZ-243, based on internally developed technology, targeted for the high growth, flexible foam market. We also achieved mechanical completion of a new plant in Magnolia, Arkansas to produce proprietary, brominated polystyrene for use in emerging thermoplastics applications for electrical components.
Looking ahead to the second quarter of 2005, pricing will continue to be a priority as we address margin improvement. We expect volumes to continue to strengthen moderately during the balance of the quarter and into the second half of 2005.
The Catalysts segment had a very strong quarter, achieving a sales and income record for the refinery catalysts business in the month of March. We realized record volumes of hydroprocessing (“HPC”) catalysts, including sales of our new nebula catalyst, which the Company believes is the most active HPC catalyst available on the market. While overall Catalysts results were strong, FCC catalyst volumes were weaker in the first quarter due to scheduled refinery turnarounds. However, beginning in March, we saw a pick up in demand and expect a stronger second quarter. Polyolefin sales were also very strong in both conventional and new catalyst products. The integration of the acquired refinery catalysts business proceeds on track.
The Fine Chemicals segment showed significant improvement this quarter as we began seeing the results of a turnaround plan put into action last year. We believe this segment has moved past the inflection point and has been effectively transitioning towards a higher value portfolio. Bromine profitability improved with continued customer support for price increases, as well as growing global demand. Jordan Bromine Company, our Jordan bromine venture, recorded strong positive results this quarter on strong demand as we realized the cost benefits of self-produced chlorine. This venture is now operating at its bromine capacity and providing much needed support for the growing Asian market for bromine and derivatives. Adding to the turnaround was strong performance in fine chemistry services and intermediates, with a number of new products now meeting our expectations for good returns.
Critical areas of focus for Fine Chemicals in the second quarter of 2005 will be to continue fueling new product growth in life sciences and maximizing our long- term bromine franchise value.
We conduct a substantial portion of our business outside of the United States. As a result, our business is subject to economic cycles in different regions of the world. In addition, because many of our customers are in industries, including the consumer electronics, building and construction, and automotive industries, that are cyclical in nature and sensitive to changes in general economic conditions, our results are impacted by the effect on our customers of economic upturns and downturns, as well as our own costs to produce our products. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices.
Set forth below is a reconciliation of net income excluding special items, a non-GAAP financial measure, to net income, the most directly comparable financial measure calculated and reported in accordance with GAAP, for the quarter ended March 31, 2005 and 2004, respectively. This information is included to provide further support of the fluctuations discussed in the results of operations below.
$ 509,965 $ — $ 509,965 $ 322,009 $ — $ 322,009
(402,643 ) — (402,643 ) (261,225 ) — (261,225 )
— — — (4,507 ) 4,507 (a) —
Selling, general and administrative expenses (including SFAS No.2 R&D)
(68,006 ) — (68,006 ) (34,933 ) — (34,933 )
39,316 — 39,316 21,344 4,507 (a) 25,851
(10,253 ) 1,386 (b) (8,867 ) (1,559 ) — (1,559 )
7,392 — 7,392 (13 ) — (13 )
(996 ) — (996 ) (1,070 ) — (1,070 )
35,459 1,386 36,845 18,702 4,507 23,209
(11,140 ) (503 )(b) (11,643 ) (5,095 ) (1,636 )(a) (6,731 )
$ 24,319 $ 883 $ 25,202 $ 13,607 $ 2,871 $ 16,478
$ 0.52 $ 0.02 $ 0.54 $ 0.32 $ 0.07 $ 0.39
(a) Special items for 2004 include a charge in the Fine Chemical segment totaling $4,507 ($2,871 after income taxes or seven cents per diluted share) for layoffs at the zeolite facility and associated Statement of Financial Accounting Standards (“SFAS”) No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” curtailment charges.
(b) Interest and financing expenses include the January 2005 write-off of deferred financing expenses totaling $1,386 ($883 net of income taxes, or two cents per diluted share) that were associated with the 364-day bridge loan that was retired using the proceeds from the our public offering of senior notes and common stock.
First Quarter 2005 Compared with First Quarter 2004
Net sales by operating segment for the first-quarter periods ended March 31, 2005 and 2004 are as follows:
$ 198,102 $ 172,662
172,824 22,877
139,039 126,470
Net sales for first-quarter 2005 of $510 million were up $188 million (58.4%) from first-quarter 2004 net sales of $322 million.
Polymer Additives’ net sales increased $25.4 million (14.7%) due mainly to improved pricing ($17.9 million) offset, in part, by lower volumes ($6.5 million) in flame retardants and improved pricing in stabilizers and additives ($10.0 million). Polymer Additives’ net sales were also favorably impacted by foreign exchange ($4.1 million).
Catalysts’ net sales increased $149.9 million due mainly to the impact of the refinery catalysts business acquisition ($146.1 million), which included record sales for our HPC catalysts, higher shipments of polyolefin catalysts ($3.4 million) and the favorable impact of foreign exchange ($0.4 million).
Fine Chemicals’ net sales increased $12.6 million (9.9%) primarily due to improved pricing ($4.5 million) and volumes ($2.7 million) in performance chemicals, improved pricing ($4.6 million) offset, in part, by lower shipments ($0.5 million) in fine chemistry services and intermediates and unfavorable pricing ($1.9 million) in pharmaceutical actives. Fine Chemicals’ net sales were also favorably impacted by foreign exchange ($3.2 million).
Cost of goods sold in the first quarter of 2005 increased $141.4 million (54.1%) from the corresponding 2004 period. The increase resulted primarily from the impact of the refinery catalysts business acquisition sales volumes as well as higher raw material and energy costs ($22 million) for our heritage businesses in the 2005 period. Our gross profit margin increased 216 basis points to 21.04% in first-quarter 2005 from 18.88% for the corresponding period in 2004.
Selling, general and administrative (“SG&A”) expenses and research and development (“R&D”) expenses increased $33.1 million (94.7%) in the first quarter of 2005 versus first quarter of 2004. The increase is primarily due to higher SG&A and R&D costs related to acquisitions ($20.5 million), higher employee incentive accrual ($6 million) and pension costs ($1.2 million) and higher overall R&D costs ($1.1 million). SG&A costs were also adversely affected by higher outside legal costs ($0.7 million) and the unfavorable impact of foreign exchange ($0.5 million). As a percentage of net sales, SG&A and R&D were 13.3% in 2005 versus 10.8% in the 2004 quarter.
Effective January 1, 2005, we revised the way we evaluate the performance of our segment results by including the operating results of our joint ventures, termed “equity in net income (losses) of unconsolidated investments,” with our operating profit (losses). Segment results for the quarter ended March 31, 2004 have been recast to reflect the way the chief operating decision maker reviews our three segments. The change to segment income versus segment operating profit was brought about by the material effect of the refinery catalysts business joint ventures acquired on July 31, 2004 on our consolidated operating results.
Segment income by reportable operating segment for the three-month periods ended March 31, 2005 and 2004 is as follows:
$ 23,798 $ 20,361
25,059 2,715
11,550 3,719
60,407 26,795
(13,699 ) (5,464 )
$ 46,708 $ 21,331
** First-quarter 2004 has been recast to include the operating results of our joint ventures.
Polymer Additives’ first-quarter 2005 segment income increased $3.4 million (16.9%) from first-quarter 2004 due mainly to improved pricing ($27.8 million) in flame retardants and stabilizers and additives and the overall favorable net effects of foreign exchange ($1.2 million), offset, in part, by unfavorable raw material and energy costs ($13.4 million), unfavorable costs ($8.3 million) and lower shipments ($3.5 million) in flame retardants.
Catalysts’ first-quarter 2005 segment income was up significantly ($22.3 million) from first-quarter 2004 primarily due to the impact of the July 2004 acquisition of the refinery catalysts business ($19.2 million), including our change in equity in net income of unconsolidated investments (“joint ventures”). Our HPC catalyst business set a record for quarterly net sales and operating profit. Our heritage polyolefins catalysts business contributed $3.1 million to the higher segment income based upon higher shipments ($2.3 million) and favorable costs ($2.1 million), offset, in part by higher raw materials cost of $1.6 million.
Fine Chemicals’ first-quarter 2005 segment income increased $7.8 million (210.6%) from first-quarter 2004, which included a special item charge of $4.5 million that related to the layoff of 53 employees at our Pasadena plant zeolite facility. Excluding the first quarter-2004 special charge, first-quarter 2005 segment income increased $3.3 million (40.4%) from 2004, primarily due to higher pricing ($4.6 million) from the pass through of certain raw materials costs in fine chemistry services and intermediates, improved pricing (4.5 million) in performance chemicals, overall favorable manufacturing costs ($3.2 million) and higher income from Fine Chemicals’ joint ventures ($2.6 million), offset, in part, by higher raw materials and energy costs ($7.8 million), unfavorable pricing ($1.9 million) in bulk active pharmaceuticals and a higher allocation of SG&A and R&D costs ($1.7 million).
Corporate and other expenses for the first quarter of 2005 increased $8.2 million (150.7%) from first-quarter 2004 primarily due to higher employee incentive costs ($6.6 million) and higher pension costs ($1.2 million).
Interest and financing expenses for first-quarter 2005 amounted to $10.2 million, an increase of $8.7 million from first-quarter 2004 due to higher average outstanding debt in the 2005 period related to the acquisition of the July 2004 refinery catalysts business. Interest and financing expenses for 2005 also includes the write-off of $1.4 million of deferred financing expenses associated with our acquisition related $450 million 364-day bridge loan that we retired using the proceeds from our public offering of senior notes and common stock on January 20, 2005.
Other (expenses), net including minority interest for the first-quarter 2005 amounted to $1.0 million, a decrease of $0.1 million from the 2004 corresponding period due primarily to the change in minority interest in our majority-owned subsidiary, which increased $0.2 million to $1.5 million.
The effective income tax rate for first-quarter 2005 was 31.4%; up from 27.2% for the corresponding period in 2004 primarily due to the new geographical mix of income after the refinery catalysts business acquisition. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the quarters ended March 31, 2005 and 2004, respectively, are as follows:
Cash and cash equivalents at March 31, 2005, were $73.8 million, representing an increase of $27.4 million from $46.4 million at year-end 2004.
In the three months ended March 31, 2005, we had a net cash use in operating activities of $2.4 million due to the increase in working capital, including accounts receivable and inventory, of approximately $53 million. The majority of this increase (approximately $38 million) was in trade receivables attributable to the strong operating results and shipments in the refinery catalysts business late in the period. Also during this period, proceeds from the issuance of senior notes and common stock of $324.7 million and $147.9 million, respectively, proceeds from borrowings of $68.5 million, and proceeds from the exercise of stock options of $2.3 million were used to cover operating activities, fund capital expenditures totaling $18.8 million, make a working capital settlement payment to Akzo Nobel and pay additional professional fees relating to the refinery catalysts acquisition of approximately $9.9 million and $0.4 million, respectively, fund investments in joint ventures and nonmarketable securities of $0.4 million, repay debt of $471 million, pay quarterly dividends to shareholders of $5.0 million, pay financing costs of $2.3 million, and increase cash and cash equivalents by $27.4 million. We anticipate that cash provided from operations in the future and borrowings under our senior credit agreement will be sufficient to pay our operating expenses, satisfy debt-service obligations, fund capital expenditures and make dividend payments.
The change in our accumulated other comprehensive income from December 31, 2004, was due primarily to net foreign currency translation adjustments (strengthening of the U.S. dollar versus the euro), net of related deferred taxes.
In connection with the acquisition of the refinery catalysts business, we entered into (1) a new senior credit agreement, dated as of July 29, 2004, with a group of lenders, consisting of a $300,000 revolving credit facility and a $450,000 five-year term loan facility, and (2) a $450,000 364-day loan agreement. We used the initial borrowings under the new senior credit agreement and the 364-day loan agreement to consummate the acquisition, refinance the then-existing credit agreement and pay related fees and expenses incurred in connection therewith. The revolving credit facility and the five-year term loan facility bore variable interest rates at March 31, 2005 of 3.56% and 4.17%, respectively. The $450,000 five-year facility is payable in quarterly installments of $11,250 beginning September 30, 2004 through June 30, 2008, with three final quarterly payments of $90,000 beginning September 30, 2008 through March 31, 2009.
Borrowings under our senior credit agreement are conditioned upon compliance with the following financial covenants: (a) consolidated fixed charge coverage ratio, as defined, must be greater than or equal to 1.25:1.00 as of the end of any fiscal quarter; (b) consolidated debt to capitalization ratio, as defined, at the end of any fiscal quarter must be less than or equal to 65% (i) prior to the earlier of (A) July 29, 2005 and (B) our first equity issuance subsequent to July 29, 2004, and (ii) thereafter, 60%; (c) consolidated tangible domestic assets, as defined, must be or greater than or equal to $750 million for us to make investments in entities and enterprises that are organized outside the United States; and (d) with the exception of liens specified in our new senior credit agreement, liens may not attach to assets where the aggregate amount of all indebtedness secured by such liens at any time exceeds 10% of consolidated net worth, as defined in the agreement.
On January 20, 2005, we concluded the public offering of 4,573,000 shares of our common stock at a price of $34.00 per share and $325 million of 5.10% senior notes at a price of 99.897% of par. We used the net proceeds from both of the offerings to retire the
$450 million 364-day bridge loan that we incurred in connection with the acquisition of the refinery catalysts business. The notes are senior unsecured obligations and rank equally with all of our other senior unsecured indebtedness from time to time outstanding. The notes will be effectively subordinated to any of our future secured indebtedness and to existing and future indebtedness of our subsidiaries.
The principal amount of the notes becomes immediately due and payable upon the occurrence of certain bankruptcy or insolvency events involving us or certain of our subsidiaries and may be declared immediately due and payable by the trustee or the holders of not less than 25% of the notes upon the occurrence of an event of default. Events of default include, among other things: failure to pay principal or interest at required times; failure to perform or remain in breach of covenants within prescribed periods; and an event of default on any of our other indebtedness or certain of our subsidiaries of $40 million or more that is caused by a failure to make a payment when due or that results in the acceleration of that indebtedness before its maturity; and certain bankruptcy or insolvency events involving us or certain of our subsidiaries.
The noncurrent portion of our long-term debt amounted to $820.5 million at March 31, 2005, compared to $899.6 million at the end of 2004. Our long-term debt, including the current portion, as a percentage of total capitalization amounted to 49.8% at March 31, 2005. In addition, at March 31, 2005, we had the ability to borrow an additional $292 million under our various credit arrangements.
As of March 31, 2005, we were the guarantor of $34.9 million of outstanding long-term debt on behalf of our joint venture company, Jordan Bromine Company Limited. We were also the guarantor of $0.6 million of outstanding debt at March 31, 2005, on behalf of our joint venture company, Eurecat U.S., Inc. Our long-term debt, including the guarantees, as a percent of total capitalization amounted to 50.8% at March 31, 2005.
Our capital expenditures in first-quarter 2005 were up by $10.4 million from first-quarter 2004. Our capital spending program (including investments in joint ventures) is expected to be approximately $80 to $90 million over the next few years, with expenditures expected to expand capacities at existing facilities to support an expected increase in sales. We anticipate that future capital spending will be financed primarily with cash flow provided from operations with additional cash needed, if any, provided by borrowings, including borrowings under our senior credit agreement. The amount and timing of any additional borrowings will depend on the Company’s specific cash requirements.
The following table summarizes our contractual obligations and commitments at March 31, 2005:
Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a potentially responsible party (“PRP”) and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Management believes that in most cases our participation is de minimus. Further, almost all such sites represent environmental issues that are quite mature and have been investigated, studied, and in many cases settled. In de minimis situations, our policy generally is to negotiate a consent decree and to pay any apportioned settlement, enabling us to be effectively relieved of any further liability as a PRP, except for remote contingencies. In other than de minimis PRP matters, our records indicate that unresolved PRP exposures should be immaterial. We accrue and expense our proportionate share of PRP costs. Because management has been actively involved in evaluating environmental matters, we are able to conclude that the outstanding environmental liabilities for unresolved PRP sites should not be material to operations.
There have been no significant changes in the Company’s interest rate risk, marketable security price risk or raw material price risk from the information provided in the Annual Report on Form 10-K for the year ended December 31, 2004 except as noted below.
We had outstanding variable interest rate borrowings at March 31, 2005 of $538.9 million, bearing an average interest rate of 3.97%. A change of 0.125% in the interest rate applicable to these borrowings would change our annualized interest expense by approximately $0.7 million. Due to the increase in our outstanding indebtedness as a result of the acquisition of the refinery catalysts business, we may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs.
During the fourth quarter of 2004, we entered into treasury lock agreements (“T-locks”) with a notional value of $275 million, to fix the yield on the U.S. Treasury security used to set the yield for approximately 85% of our January 2005 $325 million notes offering. The T-locks fixed the yield on the U.S. Treasury security at approximately 4.25%. The value of the T-locks depended on the difference between (1) the yield-to-maturity of the 10-year U.S. Treasury security that has the maturity date most comparable to the maturity date of the notes when issued and (2) the fixed rate of approximately 4.25%. The cumulative effect of the T-lock agreements (a charge of approximately $2.2 million) is being amortized over the life of the notes as an adjustment to the interest expense of the notes. At March 31, 2005, there were unamortized realized losses of approximately $2.1 million ($1.4 million after income taxes) in accumulated other comprehensive income. Our operations are exposed to market risk from changes in natural gas prices. We purchase natural gas to meet our production requirements for a portion of our 12-month rolling forecast for North American natural gas requirements by entering into natural gas futures contracts to help mitigate uncertainty and volatility.
The natural gas contracts qualify as cash flow hedges under SFAS No. 133 and are marked to market. The unrealized gains and/or losses are deferred and reported in accumulated other comprehensive income to the extent that the unrealized gains and losses are offset by the forecasted transaction. At March 31, 2005, there were no outstanding natural gas futures contracts or unrealized gains and/or losses. Any unrealized gains and/or losses on the derivative instrument that are not offset by the forecasted transaction are recorded in earnings.
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
No change in the Company’s internal control over financial reporting (or defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
On April 2, 2004, Albemarle Overseas Development Company (“AODC”), a wholly owned subsidiary of the Company, initiated a Request for Arbitration against Aventis S.A., the predecessor in interest to Sanofi Aventis (“Aventis”), through the International Chamber of Commerce, International Court of Arbitration, Paris, France. The dispute arises out of a 1992 Stock Purchase Agreement (“Agreement”) between a predecessor to AODC, and a predecessor to Aventis under which 100% of the stock of Potasse et Produits Chimiques, S.A., now known as Albemarle PPC (“APPC”), was acquired by AODC. The dispute relates to a chemical facility in Thann, France owned by APPC. Under the terms of the Agreement, the Company believes that Aventis is obligated to indemnify AODC and APPC, and hold them harmless from certain claims, losses, damages, costs or any other present or prospective liabilities arising out of soil and groundwater contamination at the site in Thann.
The Request for Arbitration requests indemnification of AODC by Aventis for certain costs incurred by APPC, in connection with any environmental claims of the French government for the APPC facility and a declaratory judgment as to the liability of Aventis under the Agreement for costs to be incurred in the future by APPC in connection with such claims. Arbitration related to the of liability is currently scheduled for June 2005.
On June 4, 2004, we initiated a petition for breach of contract and declaratory judgment against Amerisure Insurance Company and Amerisure Mutual Insurance Company (f/k/a Michigan Mutual Insurance Company) in the Nineteenth Judicial District Court, Parish of Baton Rouge, Louisiana on the grounds of the defendants’ refusal to honor their respective obligations under certain insurance policies on which we were named an additional insured to reimburse us for certain damages incurred by us in the discontinuance of product support for and the withdrawal from a water treatment venture. This proceeding has been removed to United States District Court for the Middle District of Louisiana where it is currently pending. We have also initiated formal discussions related to such damages with our primary general commercial liability carrier. No assurances can be made that we will prevail in this matter.
The annual meeting of the Company’s shareholders was held on April 20, 2005. As of the record date for the annual meeting, there were 46,564,405 shares of common stock outstanding and entitled to vote, of which 43,835,734 were represented in person or by proxy at the annual meeting. The voting shareholders elected the directors named in the Company’s Proxy Statement sent to shareholders in connection with the annual meeting with the following affirmative votes and votes withheld:
42,235,332 1,600,402
43,289,109 546,625
43,373,417 462,317
42,264,145 1,571,589
43,267,590 568,144
43,293,969 541,765
42,242,879 1,592,855
43,372,664 463,070
43,371,067 464,667
41,888,091 1,947,643
The shareholders also approved the ratification of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2005 with 42,986,772 affirmative votes, 830,796 negative votes and 18,166 abstained.
There were no broker non-votes with respect to either the election of directors or the ratification of the Company’s independent registered public accounting firm.
Date: May 10, 2005 By:
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) 30
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) 31
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 32
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 33
1. I have reviewed this Quarterly Report on Form 10-Q of Albemarle Corporation for the period ending March 31, 2005,
1. I have reviewed this Quarterly Report on Form 10-Q of Albemarle Corporation for the period ending March 31, 2005;
In connection with the Quarterly Report on Form 10-Q of Albemarle Corporation (the “Company”) for the period ending March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark C. Rohr, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
In connection with the Quarterly Report on Form 10-Q of Albemarle Corporation (the “Company”) for the period ending March 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul F. Rocheleau, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: