Source: https://investors.albemarle.com/node/14191/html
Timestamp: 2020-01-26 11:00:59
Document Index: 272661471

Matched Legal Cases: ['in Fine', 'art\n84', '§ 1350', '§ 906', '§ 1350', '§ 906']

For Quarterly Period Ended June 30, 2007
Number of shares of common stock, $.01 par value, outstanding as of August 1, 2007: 95,526,724
Condensed Consolidated Statements of Income – Three Months and Six Months Ended June 30, 2007 and 2006 3
Condensed Consolidated Balance Sheets – June 30, 2007 and December 31, 2006 4
Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2007 and 2006 5
Condensed Consolidated Statements of Comprehensive Income – Three Months and Six Months Ended June 30, 2007 and 2006 6
Management’s Discussion and Analysis of Financial Condition and Results of Operations 13-28
$ 563,812 $ 568,797 $ 1,153,050 $ 1,176,151
410,430 437,413 839,879 922,314
153,382 131,384 313,171 253,837
59,255 62,202 121,741 120,055
14,924 11,198 30,635 22,643
4,944 — 4,944 —
74,259 57,984 155,851 111,139
(10,417 ) (12,037 ) (19,327 ) (22,656 )
1,631 (2,303 ) 2,583 (1,377 )
65,473 43,644 139,107 87,106
15,585 11,041 32,521 22,378
49,888 32,603 106,586 64,728
(2,746 ) (394 ) (7,697 ) (3,619 )
6,721 11,118 13,082 16,594
$ 53,863 $ 43,327 $ 111,971 $ 77,703
$ 0.57 $ 0.46 $ 1.18 $ 0.82
$ 0.55 $ 0.45 $ 1.15 $ 0.80
Cash dividends declared per share of common stock (Note 7)
$ 0.21 $ 0.0825 $ 0.315 $ 0.165
95,272 94,689 95,280 94,421
97,256 97,159 97,380 96,864
$ 200,406 $ 149,499
Trade accounts receivable, less allowance for doubtful accounts (2007 – $1,519; 2006 – $1,419)
346,601 333,708
41,756 66,345
409,914 378,302
30,130 33,000
1,028,807 960,854
2,210,317 2,169,433
1,220,437 1,188,858
989,880 980,575
43,350 39,361
127,721 111,633
Other assets, deferred charges and noncurrent deferred income taxes
80,381 34,894
248,411 251,100
146,313 151,951
$ 2,644,863 $ 2,530,368
$ 176,895 $ 202,488
132,342 159,822
18,387 50,731
18,068 8,133
7,839 61,775
353,531 482,949
776,856 681,859
58,059 59,324
59,497 54,446
204,845 122,824
100,035 100,868
Common stock, $.01 par value, issued and outstanding – 95,527 in 2007 and 94,860 in 2006
189,608 199,045
6,221 (10,058 )
915,256 838,162
1,112,040 1,028,098
$ 2,664,863 $ 2,530,368
$ 149,499 $ 58,570
111,971 77,703
53,758 57,666
8,695 7,113
7,697 3,619
(13,082 ) (16,594 )
(2,107 ) —
4,944 —
(98,373 ) (11,324 )
4,618 3,720
Net change in pension assets and liabilities
537 7,332
(4,690 ) 379
(3,406 ) (4,955 )
16,300 4,418
(5,549 ) 2,732
81,313 131,809
(49,981 ) (49,012 )
(3,833 ) (2,900 )
(84 ) (168 )
(53,484 ) (52,080 )
(15,234 ) (165,001 )
74,869 130,709
(20,187 ) (15,248 )
(47,695 ) (9,885 )
15,955 12,856
17,156 5,273
(7,548 ) (3,600 )
(1,148 ) —
16,168 (44,896 )
6,910 5,592
50,907 40,425
$ 200,406 $ 98,995
— 138 — (632 )
— (31 ) 21 (10 )
Reclassification adjustment for realized gain on sale of marketable equity securities included in net income
— — (203 ) —
35 34 70 68
— (22 ) — 363
Amortization of prior service benefit, net transition asset and net loss included in net periodic pension cost
1,129 — 2,360 —
Change in benefit plan funded status
(241 ) — (241 ) —
7,901 17,637 14,272 29,027
8,824 17,756 16,279 28,816
$ 62,687 $ 61,083 $ 128,250 $ 106,519
1. In the opinion of management, the accompanying condensed consolidated financial statements of Albemarle Corporation and our wholly owned, majority owned and controlled subsidiaries (collectively, “Albemarle,” “we,” “us,” “our,” or “the Company”) contain all adjustments necessary for a fair presentation, in all material respects, of our condensed consolidated financial position as of June 30, 2007 and December 31, 2006, and our condensed consolidated results of operations and comprehensive income for the three-month and six-month periods ended June 30, 2007 and 2006, and our condensed consolidated cash flows for the six-month periods ended June 30, 2007 and 2006. All adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission, or the SEC, on March 1, 2007. The December 31, 2006 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 and six-month periods ended June 30, 2007 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. On February 7, 2007, the Company’s Board of Directors approved a two-for-one stock split in the form of a share distribution. The Company distributed 47.8 million shares of common stock on March 1, 2007, to shareholders of record as of February 20, 2007. The par value of the common stock remains $0.01 per share. All share and per share amounts have been retroactively adjusted to reflect this two-for-one stock split.
3. The three-month and six-month periods ended June 30, 2007 include a charge amounting to $4.9 million ($3.1 million after income taxes, or $0.03 per share) that relates to the closure of our Dayton, Ohio fine chemistry facility. The operations of this cGMP (pharmaceutical-grade) pilot plant will be moved to our recently acquired, multi-scale cGMP manufacturing facility in South Haven, Michigan, to efficiently utilize equipment and staffing at the two sites. The pre-tax charge is composed of $3.4 million to write-off net asset values and $1.5 million for other closure costs. The charge and related assets and liabilities are reported in our Fine Chemicals segment under Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and Related Information.”
4. Foreign exchange transaction (losses) gains of ($0.9) million and $0.1 million, and ($1.7) million and ($1.9) million are included in our condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2007 and 2006, respectively.
5. 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 and six-month periods ended June 30, 2007 and 2006, respectively, are as follows:
(12.1 ) (5.2 ) (11.6 ) (5.4 )
(1.5 ) (1.1 ) (1.4 ) (0.8 )
(0.8 ) (1.3 ) (0.8 ) (1.1 )
Impact of foreign earnings (b)
1.5 (0.9 ) 0.1 (1.8 )
— (0.3 ) — (0.3 )
0.8 (0.3 ) 1.5 0.4
23.8 % 25.3 % 23.4 % 25.7 %
Includes the benefits of lower foreign tax rates on earnings which management has designated as permanent reinvestment.
Relates mainly to earnings from foreign operations not designated as permanent reinvestment.
Our effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to available tax credits. The three-month and six-month periods ended June 30, 2007 reflect the impact of management’s decision to permanently reinvest the earnings of certain foreign subsidiaries effective September 30, 2006.
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48, we recognized an increase of approximately $4.8 million in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained earnings. The liability for unrecognized tax benefits at adoption, exclusive of interest, is $83.3 million. This liability is reduced by $41.2 million of offsetting benefits associated with the corresponding effects of potential transfer pricing adjustments, state income taxes and temporary adjustments. The net liability of $42.1 million, if recognized, would favorably affect earnings.
In addition, pursuant to FIN 48 we reclassified $32.0 million of income tax liabilities from current to noncurrent liabilities as payment of cash is not anticipated within one year of the balance sheet date. These liabilities are recorded in “Other noncurrent liabilities” in the Condensed Consolidated Balance Sheets.
Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets at January 1, 2007 was $4.1 million, of which $3.6 million was reclassified from current to noncurrent liabilities upon implementation of FIN 48.
The liability for unrecognized tax benefits, including interest and penalties, recorded in “Other noncurrent liabilities” totaled $87.3 million and $93.8 million at January 1, 2007 and June 30, 2007, respectively. Related assets for corresponding offsetting benefits recorded in “Other assets, deferred charges and noncurrent deferred income taxes” totaled $39.0 million and $42.1 million at January 1, 2007 and June 30, 2007, respectively.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2000. The Internal Revenue Service, or IRS, has completed a review of our income tax returns through the year 2004. In 2006, we received tax assessments from the IRS for the years 2000 through 2002. We have taken the issues contested to the appeals process and anticipate a resolution in either late 2007 or early 2008. During the three-month period ended June 30, 2007, we received a tax assessment from the IRS for the years 2003 through 2004. We have taken the issues contested to the appeals process and anticipate a resolution in 2008.
With respect to jurisdictions outside the U.S., we are no longer subject to income tax audits for years before 2002. The Company received examination notifications from three jurisdictions. United Kingdom tax authorities are examining tax year 2003. The German tax authorities are examining the tax years 2002 through 2005. Dutch tax authorities will conduct an examination of tax year 2004.
Since the timing of resolutions and/or closure of tax audits is uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability for unrecognized tax benefits that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability for unrecognized tax benefits, relating to a number of issues, ranging from approximately $9 million to $32 million as a result of settlements with taxing authorities, closure of tax statutes and/or resolution of issues at appeals.
6. Basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2007 and 2006 are calculated as follows:
1,984 2,470 2,100 2,443
7. Cash dividends declared for the six-month period ended June 30, 2007 totaled 31.5 cents per share. Cash dividends declared for the three-month period ended June 30, 2007 totaled 21 cents per share, and included a dividend of 10.5 cents declared on June 20, 2007 and payable on October 1, 2007. Cash dividends declared for the six-month period ended June 30, 2006 totaled 16.5 cents per share. Cash dividends declared for the three-month period ended June 30, 2006 totaled 8.25 cents per share, paid on July 1, 2006.
8. The following table provides a breakdown of inventories at June 30, 2007 and December 31, 2006:
$ 301,407 $ 282,634
63,469 51,680
45,038 43,988
$ 409,914 $ 378,302
9. Long-term debt consists of the following:
$ 277,064 $ 220,772
118,584 101,201
324,747 324,730
45,561 55,203
17,525 18,870
795,243 732,590
$ 776,856 $ 681,859
Maturities of long-term debt are as follows: 2007—$14.7 million; 2008—$7.6 million; 2009—$8.0 million; 2010—$8.5 million; 2011—$8.9 million; 2012—$403.0 million and 2013 through 2021—$344.5 million.
In March 2007, we exchanged our prior senior credit agreement for a new five-year, revolving, unsecured credit facility to improve operating flexibility and to take advantage of favorable market conditions. The new credit agreement (i) exchanged both the $450.0 million five-year term loan facility ($316.7 million outstanding at December 31, 2006) and the $300.0 million revolving credit facility for a $675.0 million unsecured five-year revolving credit facility, (ii) provides for an additional $200.0 million in credit, if needed, upon additional loan commitments by our existing and/or additional lenders, (iii) provides for the ability to extend the maturity date of the revolving credit facility, under certain conditions, at each anniversary of the closing date, (iv) replaced the consolidated fixed charge coverage covenant and debt to capitalization ratio covenant with a maximum leverage ratio covenant, and (v) reduced the interest rate spread and commitment fees applicable to the Company’s borrowings under the credit facility. The total spreads and fees can range from 0.32% to 0.675% over the London inter-bank offered rate (LIBOR) applicable to the currency of denomination of the borrowing based upon our credit rating, applicable from time to time, from one of the major credit rating agencies. The new credit agreement extended the maturity of the credit facility to March 2012 from July 2009. We paid fees and expenses of $1.0 million related to this new agreement.
10. The Company has the following recorded environmental liabilities primarily included in “Other noncurrent liabilities” at June 30, 2007 (in thousands):
The amounts recorded represent our 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 our past operations, in excess of amounts already recorded, could be up to approximately $16.0 million before income taxes.
On July 3, 2006, we received a Notice of Violation, or NOV, from the U.S. Environmental Protection Agency Region 4, or EPA, regarding the implementation of the Pharmaceutical Maximum Achievable Control Technology standards at our plant in Orangeburg, SC. The alleged violations include (i) the applicability of the specific regulations to certain intermediates manufactured at the plant, (ii) failure to comply with certain reporting requirements, (iii) improper evaluation and testing to properly implement the regulations and (iv) the sufficiency of the leak detection and repair program at the plant. We are currently engaged in discussions with the EPA seeking to resolve these allegations, but no assurances can be given that we will be able to reach a resolution that is acceptable to both parties. Any settlement or finding adverse to us could result in the payment by us of fines, penalties, capital expenditures, or some combination thereof. At this time, it is not possible to predict with any certainty the outcome of our discussions with the EPA or the financial impact, which may result therefrom. However, we do not expect any financial impact to have a material adverse effect on the Company.
11. Segment income represents operating profit and equity in net income of unconsolidated investments and is reduced by minority interests in income of our consolidated subsidiaries, Stannica LLC and Jordan Bromine Company Limited, or JBC. 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.
Summarized financial information concerning our reportable segments is shown in the following table. The Corporate & Other segment includes corporate-related items not allocated to the reportable segments.
$ 223,950 $ 228,559 $ 438,269 $ 450,430
207,448 194,045 443,275 429,401
132,414 146,193 271,506 296,320
$ 35,311 $ 39,249 $ 71,771 $ 71,364
27,435 19,761 62,016 40,645
Fine Chemicals(a)
(10,796 ) (15,732 ) (25,492 ) (26,477 )
(1,807 ) (1,358 ) (4,059 ) (3,373 )
(971 ) (939 ) (3,706 ) (2,149 )
32 1,903 68 1,903
1,776 1,349 3,291 2,469
4,976 9,757 9,800 14,202
(31 ) 12 (9 ) (77 )
35,280 39,240 71,003 70,460
32,411 29,518 71,816 54,847
(10,795 ) (13,817 ) (25,433 ) (24,651 )
(4,944 ) — (4,944 ) —
(15,585 ) (11,041 ) (32,521 ) (22,378 )
Excludes the Dayton facility closure charge.
$ 2,988 $ 2,927 $ 5,920 $ 5,659
7,312 7,228 14,525 14,689
(9,724 ) (9,630 ) (19,452 ) (19,574 )
(251 ) (408 ) (505 ) (483 )
2,990 3,285 5,912 5,980
$ 3,311 $ 3,399 $ 6,394 $ 6,266
We made nominal contributions to a foreign funded pension plan and made no contributions to our domestic pension plans during the six-month period ended June 30, 2007.
$ 103 $ 192 $ 295 $ 418
984 1,023 1,963 1,958
(138 ) (132 ) (277 ) (265 )
— — (2,107 ) —
(976 ) (976 ) (1,953 ) (1,953 )
135 272 254 389
$ 108 $ 379 $ (1,825 ) $ 547
* During the six-month period ended June 30, 2007, a postretirement medical plan in the Netherlands was eliminated resulting in a gain of $2.1 million (pre-tax). This plan elimination was consistent with the change in the Netherlands law and follows the process of collective bargaining. We assumed the obligation of this postretirement medical plan in connection with the 2004 acquisition of the refinery catalysts business, which would have been effective for certain employees in the Netherlands who retired after August 2009.
We adopted the provisions of FIN 48 on January 1, 2007. For information relating to the implementation of FIN 48, see Note 5 above.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating what impact the adoption of SFAS No. 157 will have on our reported results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” or SFAS No. 159. SFAS No. 159 permits us to choose to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value, or the Fair Value Option. Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. If we elect the Fair Value Option for certain financial assets and liabilities, we will report unrealized gains and losses due to changes in their fair value in earnings at each subsequent reporting date. SFAS No. 159 is effective as of January 1, 2008. We are currently evaluating the potential impact of adopting SFAS No. 159 on our consolidated financial statements.
The following is a discussion and analysis of our financial condition and results of operations since December 31, 2006. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 25.
changes in U.S. and international laws and regulations;
increases in the cost of raw materials and energy, and our inability to pass through such increases;
changes in interest rates, to the extent they (1) affect our ability to raise capital or increase our cost of funds, (2) have an impact on the overall performance of our pension fund investments and (3) increase our pension expense and funding obligations; and
During the second quarter of 2007:
Fine Chemicals segment income margin increased to 16 percent from 9 percent compared to the same period last year;
research and development spending increased by 33 percent compared to the same period last year due to higher investments in new catalysts to satisfy the new needs in the fuels markets and in new polymer additives products;
we announced plans to acquire controlling interests in our two China antioxidant joint ventures;
we opened a new regional sales office in Dubai to meet growing market needs in India and the Middle East;
we were awarded upgrades to our debt rating from both S&P (to BBB with an outlook-stable) and Moody’s (to Baa2);
we repurchased 700,000 shares of our common stock for approximately $29.0 million at an average cost of $41.50 per share; and
we announced the shutdown and planned consolidation of the operations of our Dayton, Ohio fine chemicals facility into our recently acquired manufacturing facility in South Haven, Michigan and recorded a one-time pre-tax charge of $4.9 million ($3.1 million after income taxes, or $0.03 per share).
Polymer Additives: Growth of our Polymer Additives segment is expected to come from increasing demand for electrical and electronic equipment, new construction and increasingly stringent fire-safety regulations in many countries around the world. We expect modest growth in the second half of 2007 in anticipation of strengthening in the printed circuit board and connectors markets this fall. We expect revenue to remain relatively stable until the consumer electronics market rebounds.
We are increasing our presence in China as we build a foundation for expanding our business in Asia. Our technology center in Nanjing is now operational. This center provides technical support for our Polymer Additives customers in the Asia Pacific region. In addition, we believe our phosphorous flame retardant plant in Nanjing will be operational by March, 2008. We intend to produce phosphorous flame-retardants at this site to serve the growing Asian construction and electronic markets.
Catalysts: We expect revenue growth in our Catalysts segment to be driven by global demand for petroleum products, generally deteriorating quality of crude oil feedstock and implementation of more stringent fuel quality requirements as a part of clean air initiatives. We expect Catalysts profit growth in the second half of 2007 to come primarily from new product introductions, new markets that we successfully penetrate, FCC pricing improvements, and the continued growth in our polyolefin catalysts business.
As oil demand remains elevated, we believe refiners will use more sour crudes, which will require HPC catalysts to remove the metals and impurities, further driving demand for these catalysts. Construction is progressing on our new HPC catalysts plant in Bayport, Texas, which is expected to be mechanically complete in early September in time to help satisfy the growing demand for HPC catalysts in 2008. When fully operational, this plant will add approximately 10,000 metric tons to our capacity. We continue to evaluate whether we may need additional HPC capacity expansion in 2009 and thereafter due to expected increased demand. Following a weaker second quarter, we believe HPC catalysts volumes will begin to gain momentum as we enter the second half of 2007. We expect 2008 to be a strong year for HPC catalysts volumes.
Our focus in FCC catalysts is on improving margins to support the value these products bring to the market. In addition, we expect to continue to see incremental benefits in future quarters due to our most recent FCC price increase that went into effect in January 2007. We believe that these price increases will offset increasing raw material and energy costs and will allow margin expansion.
We are focused on new product development in catalysts and have introduced high-throughput experimentation to more rapidly test and develop new technologies. Our marketing and research groups are tightly aligned so we can continue to bring innovative technologies to the market. We will continue to explore new opportunities for our catalysts in the alternative fuels business which include biodiesel, Canadian oil sands, gas to liquids (GTL), and coal to liquids (CTL) markets. These opportunities become increasingly viable as oil remains at historically high levels.
Fine Chemicals: The Fine Chemicals segment continues to benefit from the continued rapid pace of innovation and the introduction of new products, coupled with a movement by pharmaceutical companies to outsource certain research, product development and manufacturing functions. We believe the turnaround of our Fine Chemicals segment in 2007 is fundamentally complete with additional modest portfolio adjustments. We expect stable growth throughout the remainder of 2007 and into 2008. In addition to an overall focus on margin improvement, our two strategic areas of focus in Fine Chemicals have been to maximize our bromine franchise value and to continue the growth of our fine chemistry services business.
Corporate and Other: We believe our global effective tax rate will approximate 23.8%, but the rate can vary based on the locales in which we earn incremental income. We continue to focus on reducing working capital and repaying debt in 2007. We increased our quarterly dividend payout in 2007 to $0.105 per share. Under our existing share repurchase program, we expect to accelerate the amount of shares repurchased in 2007 as compared to 2006. For the six-month period ended June 30, 2007, we repurchased more shares of our common stock than in the entire 2006 year. We continue to evaluate the merits of any opportunities that may arise for acquisitions that complement our business footprint.
Second Quarter 2007 Compared with Second Quarter 2006
$ 563.8 $ 568.8 (1 )%
410.4 437.4 (6 )%
153.4 131.4 17 %
27.2 % 23.1 %
59.3 62.2 (5 )%
14.9 11.2 33 %
4.9 — *
74.3 58.0 28 %
13.2 % 10.2 %
(10.4 ) (12.1 ) (14 )%
1.6 (2.3 ) *
65.5 43.6 50 %
15.6 11.0 42 %
23.8 % 25.3 %
49.9 32.6 53 %
(2.7 ) (0.4 ) 575 %
6.7 11.1 (40 )%
$ 53.9 $ 43.3 24 %
9.6 % 7.6 %
$ 0.57 $ 0.46 24 %
$ 0.55 $ 0.45 22 %
For the three-month period ended June 30, 2007, we recorded net sales of $563.8 million, a nominal decrease compared to net sales of $568.8 million for the three-month period ended June 30, 2006. This decrease was due primarily to reduced volumes in all segments and the disposition of our Thann, France facility, partially offset by improved pricing in all segments. Overall price/mix increased 7%, foreign currency increased 2% and volumes declined 10% compared to the same period last year.
Polymer Additives’ net sales decreased $4.6 million, or 2%, for the three-month period ended June 30, 2007 compared to the same period in 2006. Compared to the same period last year, price/mix improved 6%, foreign currency increased 2% and volume declined 10%. Catalysts’ net sales increased by $13.4 million, or 7%, due mainly to a 7% improvement in price/mix. Fine Chemicals’ net sales decreased $13.8 million, or 9%, primarily due to the disposition of our Thann, France facility in addition to reduced volumes of 4%, partially offset by improved price/mix of 7% and an increase in foreign currency of 2%. For a detailed discussion of revenues and segment income before taxes for each segment see “Segment Information Overview” below.
For the three-month period ended June 30, 2007, our gross profit increased $22.0 million, or 17%, to $153.4 million from the corresponding 2006 period due to improved pricing and the disposition of our Thann, France facility, which had historically low operating margins. These increases were partially offset by reduced volumes and increased manufacturing and raw material costs. Our gross profit margin for the three-month period ended June 30, 2007 increased to 27.2% from 23.1% for the corresponding period in 2006.
For the three-month period ended June 30, 2007, our selling, general and administrative, or SG&A, expenses decreased $2.9 million, or 5%, from the three-month period ended June 30, 2006. This decrease was primarily due to a reduction in certain employee benefit expenses.
For the three-month period ended June 30, 2007, our research and development, or R&D, expenses increased $3.7 million, or 33%, from the three-month period ended June 30, 2006. This increase was primarily due to higher investments in new catalysts to satisfy the new needs in the fuels markets and in new polymer additives and fine chemicals products.
Interest and financing expenses for the three-month period ended June 30, 2007 decreased $1.7 million to $10.4 million from the corresponding 2006 period due to lower average outstanding debt levels and slightly lower interest rates.
Other income (expenses), net for the three-month period ended June 30, 2007 increased $3.9 million to $1.6 million from the corresponding 2006 period due to a $3.0 million foreign exchange adjustment on foreign denominated debt of our consolidated joint venture Jordan Bromine Company Limited, or JBC, which occurred in 2006 and an increase in interest income of $0.5 million.
Our effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to available tax credits. For the three-month period ended June 30, 2007, our effective income tax rate was 23.8% as compared to 25.3% for the three-month period ended June 30, 2006. The effective tax rate in the three-month period ended June 30, 2007 reflects the impact of management’s decision to permanently reinvest the earnings of certain foreign subsidiaries effective September 30, 2006.
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 June 30, 2007 and 2006, respectively, are as follows:
(12.1 ) (5.2 )
1.5 (0.9 )
For the three-month period ended June 30, 2007, minority interests’ share of net income was $2.7 million compared to $0.4 million in the same period last year. This increase of $2.3 million is due primarily to increased earnings (and related minority interest expense) of JBC primarily due to improved pricing. In addition, the expense for the same period last year includes a benefit for the minority interest portion of the foreign exchange adjustment on foreign denominated debt of JBC. See Other Income (Expenses), Net above.
Equity in net income of unconsolidated investments was $6.7 million for the three-month period ended June 30, 2007 compared to $11.1 million in the same period last year. This decrease of $4.4 million is due primarily to lower equity earnings from our Catalysts segment joint venture Nippon Ketjen as a result of decreased volumes.
Our net income increased 24% to $53.9 million in the three-month period ended June 30, 2007 from $43.3 million in the three-month period ended June 30, 2006 primarily due to improved margins.
Segment Information Overview. We have identified three reportable segments as required by Statement of Financial Accounting Standards, or SFAS, No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Our Polymer Additives segment is comprised of the flame retardants and stabilizers and curatives product areas. Our Catalysts segment is comprised of the refinery catalysts and polyolefin catalysts product areas. Our Fine Chemicals segment is comprised of the performance chemicals and fine chemistry services and intermediates product areas. Segment income represents operating profit and equity in net income of unconsolidated investments and is reduced by minority interests in income of our consolidated subsidiaries, Stannica LLC and JBC. Segment data includes intersegment transfers of raw materials at cost and foreign exchange transaction gains and losses, allocations for certain corporate costs, equity in net income of unconsolidated investments, and is reduced by minority interests in income of consolidated subsidiaries.
$ 224.0 $ 228.6 (2 )%
207.4 194.0 7 %
132.4 146.2 (9 )%
$ 35.3 $ 39.2 (10 )%
27.4 19.8 38 %
Fine Chemicals (a)
27.3 14.7 86 %
(10.8 ) (15.7 ) 31 %
79.2 58.0 37 %
(1.8 ) (1.4 ) 29 %
(1.0 ) (0.9 ) 11 %
0.1 1.9 *
1.8 1.4 29 %
5.0 9.7 (48 )%
(0.1 ) — *
35.3 39.2 (10 )%
32.4 29.5 10 %
26.3 13.8 91 %
(10.8 ) (13.8 ) 22 %
83.2 68.7 21 %
(4.9 ) — *
(15.6 ) (11.0 ) 42 %
The Polymer Additives segment recorded net sales for the three-month period ended June 30, 2007 of $224.0 million, down $4.6 million, or 2%, versus the three-month period ended June 30, 2006. Net sales declined in our flame retardant portfolio primarily due to reduced volumes in our tetrabrom product line, partially offset by higher year over year pricing and increased sales in certain of our proprietary products. Net sales improved in stabilizers and curatives due to the effects of improved pricing and favorable foreign exchange rates partially offset by slightly reduced volumes. Segment income declined 10%, or $3.9 million, to $35.3 million due mainly to lower tetrabrom volumes, partially offset by improved pricing, for the three-month period ended June 30, 2007 as compared to the three-month period ended June 30, 2006.
Our Catalysts segment recorded net sales for the three-month period ended June 30, 2007 of $207.4 million, up $13.4 million, or 7%, versus the three-month period ended June 30, 2006. This increase is a result of pricing improvements in FCC and HPC refinery catalysts and higher pricing and volumes in polyolefin catalysts, partially offset by lower volumes in HPC refinery catalysts. Segment income increased 10%, or $2.9 million, to $32.4 million due mainly to higher pricing, partially offset by $4.2 million lower equity earnings from our Nippon Ketjen joint venture.
Fine Chemicals segment net sales for the three-month period ended June 30, 2007 were $132.4 million, down $13.8 million, or 9%, versus the three-month period ended June 30, 2006. This decrease was due mainly to the disposition of our Thann, France facility. Excluding the impact of the Thann facility divestiture, net sales increased 5% primarily due to improved pricing/mix in our fine chemistry services business. Segment income for the three-month period ended June 30, 2007 was $26.3 million, up $12.5 million, or 91% from the three-month period ended June 30, 2006 due mainly to increased pricing across our pharmaceuticals product pipeline and improved plant production efficiencies.
For the three-month period ended June 30, 2007, our Corporate and Other expenses decreased $3.0 million, or 22%, to $10.8 million from the three-month period ended June 30, 2006. This decrease was primarily due to a reduction in certain employee benefit expenses.
Six-Months 2007 Compared with Six-Months 2006
$ 1,153.1 $ 1,176.1 (2 )%
839.9 922.3 (9 )%
313.2 253.8 23 %
27.2 % 21.6 %
121.8 120.1 1 %
30.6 22.6 35 %
155.9 111.1 40 %
13.5 % 9.4 %
(19.3 ) (22.7 ) (15 )%
2.5 (1.3 ) *
139.1 87.1 60 %
32.5 22.4 45 %
23.4 % 25.7 %
106.6 64.7 65 %
(7.7 ) (3.6 ) 114 %
13.1 16.6 (21 )%
$ 112.0 $ 77.7 44 %
9.7 % 6.6 %
$ 1.18 $ 0.82 44 %
$ 1.15 $ 0.80 44 %
For the six-month period ended June 30, 2007, we recorded net sales of $1,153.1 million, a decrease of $23.0 million, or 2%, compared to net sales of $1,176.1 million for the six-month period ended June 30, 2006. This decrease was due primarily to reduced volumes in all segments and the disposition of our Thann, France facility, partially offset by improved pricing in all segments. Overall price/mix increased 6%, foreign currency increased 3% and volumes declined 11% compared to the same period last year.
Polymer Additives’ net sales decreased $12.1 million, or 3%, for the six-month period ended June 30, 2007 compared to the same period in 2006. Compared to the first six-months of last year, price/mix improved 7%, foreign currency increased 2% and volume declined 12%. Catalysts’ net sales increased $13.9 million, or 3%, due mainly to a 6% improvement in price/mix and an increase of 3% related to foreign currency, partially offset by a 6% decline in volume. Fine Chemicals’ net sales decreased $24.8 million, or 8%, primarily due to the disposition of our Thann, France facility in addition to reduced volumes of 2%, partially offset by improved price/mix of 6% and an increase of 2% in foreign currency. For a detailed discussion of revenues and segment income before taxes for each segment see “Segment Information Overview” below.
For the six-month period ended June 30, 2007, our gross profit increased $59.4 million, or 23%, to $313.2 million from the corresponding 2006 period due to improved pricing and the disposition of our Thann, France facility, which had historically low operating margins. These increases were partially offset by reduced volumes and increased manufacturing and raw material costs. Our gross profit margin for the six-month period ended June 30, 2007 increased to 27.2% from 21.6% for the corresponding period in 2006.
For the six-month period ended June 30, 2007, our SG&A expenses increased $1.7 million, or 1%, from the six-month period ended June 30, 2006. This increase was primarily due to higher SG&A costs from increased wages.
For the six-month period ended June 30, 2007, our R&D expenses increased $8.0 million, or 35%, from the six-month period ended June 30, 2006. This increase was primarily due to higher investments in new catalysts to satisfy the new needs in the fuels markets and in new polymer additives and fine chemicals products.
Interest and financing expenses for the six-month period ended June 30, 2007 decreased $3.4 million to $19.3 million from the corresponding 2006 period due to lower average outstanding debt levels partially offset by slightly higher interest rates.
Other income (expenses), net for the six-month period ended June 30, 2007 increased $3.8 million to $2.5 million from the corresponding 2006 period due to a $3.0 million foreign exchange adjustment on foreign denominated debt of JBC which occurred in 2006 and an increase in interest income of $1.0 million.
Our effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to available tax credits. For the six-month period ended June 30, 2007, our effective income tax rate was 23.4% as compared to 25.7% for the six-month period ended June 30, 2006. The effective tax rate in the six-month period ended June 30, 2007 reflects the impact of management’s decision to permanently reinvest the earnings of certain foreign subsidiaries effective September 30, 2006.
The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the six-month periods ended June 30, 2007 and 2006, respectively, are as follows:
(11.6 ) (5.4 )
Relates mainly to benefits from foreign tax credits associated with high taxed earnings from foreign operations not designated as permanent reinvestment.
For the six-month period ended June 30, 2007, minority interests’ share of net income was $7.7 million compared to $3.6 million in the same period last year. This increase of $4.1 million is due primarily to increased earnings (and related minority interest expense) of JBC primarily due to improved pricing and volume. In addition, the expense for the same period last year includes a benefit for the minority interest portion of the foreign exchange adjustment on foreign denominated debt of JBC. See Other Income (Expenses), Net above.
Equity in net income of unconsolidated investments was $13.1 million for the six-month period ended June 30, 2007 compared to $16.6 million in the same period last year. This decrease of $3.5 million is due primarily to lower equity earnings from our Catalysts segment joint venture Nippon Ketjen as a result of decreased volumes. This decrease is partially offset by additional equity earnings in our other Catalysts segment joint ventures as well as our Polymer Additives segment joint ventures.
Our net income increased 44% to $112.0 million in the six-month period ended June 30, 2007 from $77.7 million in the six-month period ended June 30, 2006 primarily due to improved margins and the Fine Chemicals facility restructuring.
$ 438.3 $ 450.4 (3 )%
443.3 429.4 3 %
271.5 296.3 (8 )%
$ 71.8 $ 71.4 1 %
62.0 40.6 53 %
52.5 25.6 105 %
(25.5 ) (26.5 ) 4 %
160.8 111.1 45 %
(4.1 ) (3.4 ) 21 %
(3.7 ) (2.1 ) 76 %
3.3 2.5 32 %
9.8 14.2 (31 )%
— (0.1 ) *
71.0 70.5 1 %
71.8 54.8 31 %
48.8 23.5 108 %
(25.4 ) (24.7 ) (3 )%
166.2 124.1 34 %
(32.5 ) (22.4 ) 45 %
The Polymer Additives segment recorded net sales for the six-month period ended June 30, 2007 of $438.3 million, down $12.1 million, or 3%, versus the six-month period ended June 30, 2006. Net sales declined in our flame retardant portfolio primarily due to reduced volumes in our tetrabrom product line, partially offset by higher year over year pricing and increased sales in certain of our proprietary products. Net sales improved in stabilizers and curatives due to the effects of improved pricing and favorable foreign exchange rates partially offset by slightly reduced volumes. Segment income increased by a nominal amount to $71.0 million due mainly to improved pricing, offset in part by lower volumes and increased raw material and other costs, for the six-month period ended June 30, 2007 as compared to the six-month period ended June 30, 2006.
Our Catalysts segment recorded net sales for the six-month period ended June 30, 2007 of $443.3 million, up $13.9 million, or 3%, versus the six-month period ended June 30, 2006. This increase is a result of pricing improvements in FCC and HPC refinery catalysts and increased pricing and volume in polyolefin catalysts offset by a reduced volume in refinery catalysts. Segment income increased 31%, or $17.0 million, to $71.8 million due mainly to higher pricing and increased polyolefin catalysts volumes, partially offset by increased raw material costs and a decrease in equity earnings from our Nippon Ketjen joint venture. In addition, Catalysts segment income for the six-month period ended June 30, 2007 includes a $2.1 million pre-tax benefit from the elimination of an employee benefit plan.
Fine Chemicals segment net sales for the six-month period ended June 30, 2007 were $271.5 million, down $24.8 million, or 8%, versus the six-month period ended June 30, 2006. This decrease was due mainly to the disposition of our Thann, France facility. This decrease was partially offset by the acquisition of the South Haven facility and improved pricing in our bromine portfolio and fine chemistry services business. Segment income for the six-month period ended June 30, 2007 was $48.8 million, up $25.3 million, or 108% from the six-month period ended June 30, 2006 due mainly to increased pricing and improved plant production efficiencies.
For the six-month period ended June 30, 2007, our Corporate and Other expenses increased $0.7 million, or 3%, to $25.4 million from the six-month period ended June 30, 2006. This increase was primarily due to the higher SG&A costs related to increased wages and incentive compensation.
We expect business activity levels to increase over the next twelve to twenty-four months. The increase in business activity may cause our working capital needs to increase. We are continuing our program to improve working capital efficiency and working capital metrics particularly in the areas of accounts receivable and inventory. We expect our current cash balances and our availability under our revolving credit facility, which is discussed below, to be sufficient to fund working capital requirements for the foreseeable future.
Our cash balance increased by $50.9 million to $200.4 million at June 30, 2007 from $149.5 million at December 31, 2006. For the six-month period ended June 30, 2007, our operations provided $81.3 million of cash compared to $131.8 million in the six-month period ended June 30, 2006. This decrease of $50.5 million is primarily due to an increase in inventory and a decrease in accrued expenses and income taxes payable offset by an increase in net income and collections of value added tax, or VAT, receivables in our European trading company. Cash flows from operating activities funded investing activities of $53.5 million, which consisted principally of capital expenditures for plant machinery and equipment improvements. Remaining cash provided from operating activities together with proceeds from borrowings of $74.9 million and the proceeds of stock option exercises of $16.0 million, funded long-term debt repayments of $15.2 million, purchases of our common stock of $47.7 million and quarterly dividends to shareholders of $20.2 million. Subsequent to June 30, 2007, we funded an additional long-term debt repayment of approximately $100.0 million with excess cash on hand.
Net current assets increased $197.4 million to $675.3 million at June 30, 2007 from $477.9 million at December 31, 2006. The increase in net current assets was due primarily to an increase in cash and inventory as well as a decrease in accrued expenses, accounts payable, income taxes payable and current portion of long-term debt partially offset by a decrease in VAT receivables in our European trading company.
Our foreign currency translation adjustments, net of related deferred taxes, included in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets on page 4 increased from December 31, 2006, primarily due to the weakening of the U.S. Dollar against the euro. Accumulated other comprehensive income (loss) also includes unrecognized losses and prior service benefit for our defined benefit plans in accordance with SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of certain requirements of FASB Statements No. 87, 106 and 132 (R).”
Capital expenditures for the six-month period ended June 30, 2007 of $50.0 million were used to expand capacities at existing facilities and were comparable to 2006 expenditures of $49.0 million. We expect our capital expenditures to be approximately $100 to $110 million in 2007 and 2008. 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 revolving credit facility. The amount and timing of any additional borrowings will depend on our specific cash requirements.
We maintained a senior credit agreement with several banks and other financial institutions that consisted of a $300.0 million revolving credit facility and a $450.0 million five-year term loan facility. In March 2007, we exchanged our prior senior credit agreement for a new five-year, revolving, unsecured credit facility to improve operating flexibility and to take advantage of favorable market conditions. The new credit agreement (i) exchanged both the $450.0 million five-year term loan facility ($316.7 million outstanding at December 31, 2006) and the $300.0 million revolving credit facility for a $675.0 million unsecured five-year revolving credit facility, (ii) provides for an additional $200.0 million in credit, if needed, upon additional loan commitments by our existing and/or additional lenders, (iii) provides for the ability to extend the maturity date of the revolving credit facility, under certain conditions, at each anniversary of the closing date, (iv) replaced the consolidated fixed charge coverage covenant and debt to capitalization ratio covenant with a maximum leverage ratio covenant, and (v) reduced the interest rate spread and commitment fees applicable to the Company’s borrowings under the credit facility. The total spreads and fees can range from 0.32% to 0.675% over the London inter-bank offered rate (LIBOR) applicable to the currency of denomination of the borrowing based upon our credit rating, applicable from time to time, from one of the major credit rating agencies. The new credit agreement extended the maturity of the credit facility to March 2012 from July 2009. Fees and expenses of $1.0 million were paid related to this new agreement. There were aggregate borrowings outstanding under the new agreement of $316.9 million at June 30, 2007. The aggregate of $316.9 million equivalent outstanding was comprised of $220.0 million of borrowings denominated in U.S. Dollars and €72.0 million ($96.9 million based on the applicable exchange rate on June 30, 2007) of borrowings denominated in euros borrowed by a subsidiary in the Netherlands. Borrowings under the new agreement bear interest at variable rates, which was a weighted average of 5.30% at June 30, 2007.
Borrowings under our new senior credit agreement are conditioned upon compliance with the following covenants: (a) consolidated funded debt, as defined, must be less than or equal to 3.50 times consolidated EBITDA, as defined, as of the end of any fiscal quarter; (b) consolidated tangible domestic assets, as defined, must be greater than or equal to $750.0 million for us to make investments in entities and enterprises that are organized outside the United States; and (c) 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 plus unsecured indebtedness, other than indebtedness incurred under the revolving credit facility, at our subsidiaries would exceed 20% of consolidated net worth, as defined. We believe that as of June 30, 2007, we were, and currently are, in compliance with all of our debt covenants.
We currently have $325.0 million of 5.10% senior notes that are due in 2015. These notes are senior unsecured obligations and will rank equally with all of our other senior unsecured indebtedness from time to time outstanding. The senior notes will be effectively subordinated to any of our future secured indebtedness and to existing and future indebtedness of our subsidiaries. We may redeem the senior notes before their maturity, in whole at any time or in part from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the senior notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the indenture governing the senior notes) plus 15 basis points, plus, in each case, accrued interest thereon to the date of redemption.
The principal amount of the senior 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 senior 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 remedy a breach of covenants within prescribed periods; an event of default on any of our other indebtedness or certain of our subsidiaries of $40.0 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. We believe that as of June 30, 2007, we were, and currently are, in compliance with all of our senior notes covenants.
The non-current portion of our long-term debt amounted to $776.9 million at June 30, 2007, compared to $681.9 million at December 31, 2006. In addition, at June 30, 2007, we had the ability to borrow an additional $445.2 million under our various credit arrangements.
$ 11,000 $ 2,135 $ 13,135 $ 4,382 $ 4,617 $ 4,866 $ 5,130 $ 401,054 $ 344,534
— 1,539 1,539 3,211 3,398 3,594 3,801 1,982 —
9,487 9,061 18,548 34,240 31,098 27,931 24,741 18,874 34,155
2,308 2,308 4,616 7,315 5,686 4,889 3,686 2,914 20,804
61,489 61,488 122,977 154,735 26,292 9,225 7,399 4,995 16,976
4,184 2,891 7,075 44,402 6,896 1,022 1,220 13 —
16,789 3,146 19,935 1,130 689 723 504 — —
3,517 3,516 7,033 2,344 — — — — —
— 57 57 75 21 20 — — —
$ 108,774 $ 86,141 $ 194,915 $ 251,834 $ 78,697 $ 52,270 $ 46,481 $ 429,832 $ 416,469
* These amounts are based on a weighted-average interest rate of 5.6% for the credit facility and revolver loan, 5.5% for variable rate long-term debt obligations and capital lease, and 5.1% interest rate for the senior notes for 2007. The weighted average rate for years 2008 and thereafter is 5.7% for the credit facility, revolver loan, variable rate long-term debt obligations, and capital lease, and 5.1% for the senior notes.
We are 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 expect to continue to comply in all material respects with applicable environmental laws, regulations, statutes and ordinances. Compliance with existing federal, state, local, and foreign environmental protection laws is not expected to have in the future a material effect on earnings or our competitive position, but the costs associated with increased legal or regulatory requirements could have an adverse effect on our results.
As previously mentioned, we implemented FIN 48 effective January 1, 2007. The liability for unrecognized tax benefits, including interest and penalties, recorded in “Other noncurrent liabilities” totaled $87.3 million and $93.8 million at January 1, 2007 and June 30, 2007, respectively. Related assets for corresponding offsetting benefits recorded in “Other assets, deferred charges and noncurrent deferred income taxes” totaled $39.0 million and $42.1 million at January 1, 2007 and June 30, 2007, respectively. We cannot estimate the amounts of any cash payments during the next twelve months associated with these liabilities and are unable to estimate the timing of any such cash payments in the future at this time.
We anticipate that cash provided from operating activities 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 for the foreseeable future. For flexibility, we maintain a shelf registration statement that permits us to issue from time to time a range of securities, including common stock, preferred stock and senior and subordinated debt of up to $220.0 million. In addition, as we have historically done, we will continue to evaluate the merits of any opportunities that may arise for acquisitions of businesses or assets, which may require additional liquidity.
There have been no significant changes in our interest rate risk, marketable securities price risk or raw material price risk from the information we provided in the Annual Report on Form 10-K for the year ended December 31, 2006 except as noted below.
We had outstanding variable interest rate borrowings at June 30, 2007 of $406.6 million, bearing an average interest rate of 5.31%. A hypothetical 10% change (approximately 50 basis points) in the interest rate applicable to these borrowings would change our annualized interest expense by approximately $2.2 million. We may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs.
In 2004, we entered into treasury lock agreements, or T-locks, with a notional value of $275.0 million, to fix the yield on the U.S. Treasury security used to set the yield for approximately 85% of our January 2005 public offering of senior notes. The T-locks fixed the yield on the U.S. Treasury security at approximately 4.25%. The value of the T-locks resulted from the difference between (1) the yield-to-maturity of the 10-year U.S. Treasury security that had the maturity date most comparable to the maturity date of the notes issued and (2) the fixed rate of approximately 4.25%. The cumulative loss effect of the T-lock agreements was $2.2 million and is being amortized over the life of the notes as an adjustment to the notes interest expense. At June 30, 2007, there were losses of approximately $1.6 million ($1.1 million after income taxes) in accumulated other comprehensive income (loss) that remain to be expensed.
Our natural gas hedge transactions are executed with a major financial institution. Such derivatives are held to secure natural gas at fixed prices and not for trading. Our natural gas contracts qualify as cash flow hedges and are marked to market. The unrealized gains and/or losses on these contracts are deferred and accounted for in accumulated other comprehensive income (loss) to the extent that the unrealized gains and losses are offset by the forecasted transaction. At June 30, 2007, there were no natural gas hedge contracts outstanding and no natural gas contracts were purchased in the three-month period ended June 30, 2007. Additionally, any unrealized gains and/or losses on the derivative instrument that are not offset by the forecasted transaction are recorded in earnings as appropriate, but do not have a significant impact on results of operations.
No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the second quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006, except that the following risk factor appearing in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, is amended and restated in its entirety as follows:
Regulation, or the threat of regulation, of some of our products could have an adverse effect on our sales and profitability.
We manufacture or market a number of products that are or have been the subject of attention by regulatory authorities and environmental interest groups. For example, for many years we have marketed methyl bromide, a chemical that is particularly effective as a soil fumigant. In recent years, the market for methyl bromide has changed significantly, driven by the Montreal Protocol of 1990 and related regulation prompted by findings regarding the chemical’s potential to deplete the ozone layer. Completion of the phase-out of methyl bromide as a fumigant took effect January 1, 2005 with continued use for critical uses allowed on an annual basis until feasible alternatives are available.
Recently, there has been increased scrutiny by regulatory authorities, legislative bodies and environmental interest groups in various countries in the world of certain brominated flame retardants. We manufacture a broad range of brominated flame retardant products which are used in a variety of applications. Concern about the impact of some of our products on human health or the environment may lead to regulation, or reaction in our markets independent of regulation, that could reduce or eliminate markets for such products.
In the United States, a number of state legislatures are considering draft legislation which would impose limitations on, or prohibit the use of, certain brominated flame retardants for specific applications. For example, in 2007, the State of Washington passed a law that bans the use of decabromodiphenyl ether as a flame retardant in mattresses after January 1, 2008 and in televisions, computers and residential upholstered furniture after January 1, 2011 if a safer and technically feasible alternative is discovered. The State of Maine passed a bill that bans the use of decabromodiphenyl ether as a flame retardant in mattresses, mattress pads and textiles used in residential furniture after January 1, 2008 and in the casings of televisions and computers after January 1, 2010. Similar bills are currently under consideration in a number of other states, and we expect additional states to consider similar measures in the future.
Additionally, agencies in the European Union continue to evaluate the risks to human health and the environment associated with certain brominated flame retardants, including decabromodiphenyl ether, hexabromocyclododecane and tetrabromobisphenol A. We manufacture each of these brominated flame retardants. A number of actions are currently pending between the European Union and certain of its member states whereby the European Union is challenging the respective member state’s rights to impose limitations on, or prohibit the use of, certain brominated flame retardants.
The only brominated flame retardant that we currently sell that has been banned for specified applications to date is decabromodiphenyl ether, which was banned for limited applications in the states of Washington and Maine as described above. Sweden banned the use of decabromodiphenyl ether for use in non-electronic applications as of January 1, 2007, but the European Commission is challenging this action. In 2006, less than 2% of our net sales were derived from decabromodiphenyl ether. Neither the Maine nor the Swedish legislation will have an adverse effect on our sales or profitability. However, additional government regulations, including limitations or bans on the use of brominated flame retardants, would likely result in a decline in our net sales of brominated flame retardants and have an adverse effect on our sales and profitability. In addition, the threat of additional regulation or concern about the impact of brominated flame retardants on human health or the environment could lead to a negative reaction in our markets that could reduce or eliminate our markets for these products, which could have an adverse effect on our sales and profitability.
The following table summarizes our repurchases of equity securities for the three-month period ended June 30, 2007:
or Program *
— — — 6,172,102
500,000 $ 42.36 500,000 5,672,102
200,000 $ 39.34 200,000 5,472,102
700,000 $ 41.50 700,000 5,472,102
* The stock repurchase plan, which was authorized by our Board of Directors, became effective on October 25, 2000 and included ten million shares. The stock repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless the repurchase plan is earlier terminated by action of our Board of Directors.
On April 25, 2007, we entered into Stock Purchase Agreements, with each of William M. Gottwald and John D. Gottwald, pursuant to which we agreed to purchase an aggregate of 100,000 shares of our common stock from William M. Gottwald and an aggregate of 400,000 shares of our common stock from John D. Gottwald at a price of $42.36 per share. The purchase price was $0.03 less than the average closing price of a share of our common stock on the New York Stock Exchange for April 26, 2007 through April 30, 2007 (inclusive). The remaining repurchases of our common stock summarized in the table above for the three-month period ended June 30, 2007 were open market transactions.
The annual meeting of our shareholders was held on April 11, 2007. As of the record date for the annual meeting, there were 95,098,254 shares of common stock outstanding and entitled to vote, of which 87,611,976 were represented in person or by proxy at the annual meeting. The voting shareholders elected the directors named in our Proxy Statement sent to shareholders in connection with the annual meeting with the following affirmative votes and votes withheld:
Affirmative Votes Withheld Votes
84,121,733 3,490,243
84,861,991 2,749,985
84,114,483 3,497,493
84,107,193 3,504,783
84,882,103 2,729,873
84,872,793 2,739,183
84,112,323 3,499,653
84,870,393 2,741,583
84,096,883 3,515,093
84,877,185 2,734,791
Harriet Tee Taggart
84,874,643 2,737,333
In addition, shareholders ratified the appointment of our independent registered public accounting firm. Votes cast with respect to the ratification of the appointment of PricewaterhouseCoopers LLP as independent auditors for 2007 were as follows:
86,543,326
87,611,976
There were no broker non-votes with respect to the election of directors or the ratification of our independent registered public accounting firm.
1. I have reviewed this Quarterly Report on Form 10-Q of Albemarle Corporation for the period ended June 30, 2007;
In connection with the Quarterly Report on Form 10-Q of Albemarle Corporation (the “Company”) for the period ended June 30, 2007 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 ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Diemer, Jr., 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: