UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the transition period from ________ to _________
Commission file number 1-8142
ENGELHARD CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1586002
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(732) 205-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 26, 2002
--------------------- -----------------------------
$1 par value 129,577,255
1
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------
2002 2001
---------- ----------
Net sales ......................................... $1,001,821 $1,611,317
Cost of sales ..................................... 841,129 1,445,069
---------- ----------
Gross profit ................................. 160,692 166,248
Selling, administrative and other expenses ........ 87,611 87,579
---------- ----------
Operating earnings ........................... 73,081 78,669
Equity in earnings of affiliates .................. 3,662 5,453
Interest expense, net.............................. (6,920) (14,343)
---------- ----------
Earnings before income taxes ................. 69,823 69,779
Income tax expense ................................ 17,456 21,980
---------- ----------
Net earnings ................................. $ 52,367 $ 47,799
========== ==========
Basic earnings per share .......................... $ 0.41 $ 0.37
========== ==========
Diluted earnings per share ........................ $ 0.40 $ 0.37
========== ==========
Cash dividends paid per share ..................... $ 0.10 $ 0.10
========== ==========
Average number of shares outstanding - Basic ...... 128,794 128,233
========== ===========
Average number of shares outstanding - Diluted .... 131,594 130,311
========== ===========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
2
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
March 31, December 31,
2002 2001
------------ ------------
Cash ............................................. $ 57,878 $ 33,034
Receivables, net.................................. 338,122 347,656
Committed metal positions ........................ 474,567 569,109
Inventories ...................................... 406,585 401,647
Other current assets ............................. 143,466 142,301
---------- ----------
Total current assets ...................... 1,420,618 1,493,747
Investments ...................................... 207,454 213,467
Property, plant and equipment, net ............... 814,648 822,520
Goodwill ......................................... 270,390 253,603
Other intangible and noncurrent assets............ 185,554 212,212
---------- ----------
Total assets .............................. $2,898,664 $2,995,549
========== ==========
Short-term borrowings ............................ $ 378,892 $ 389,051
Accounts payable ................................. 158,180 252,319
Hedged metal obligations ......................... 527,321 517,681
Other current liabilities ........................ 322,822 341,749
---------- ----------
Total current liabilities ................. 1,387,215 1,500,800
Long-term debt ................................... 236,923 237,853
Other noncurrent liabilities ..................... 251,701 253,390
Shareholders' equity ............................. 1,022,825 1,003,506
---------- ----------
Total liabilities and
shareholders' equity .................... $2,898,664 $2,995,549
========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
3
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2001
--------- ---------
Cash flows from operating activities
Net earnings ......................................... $ 52,367 $ 47,799
Adjustments to reconcile net earnings to net cash
provided by/(used in) operating activities
Depreciation and depletion ...................... 25,572 22,895
Amortization of intangible assets ............... 899 3,325
Equity results, net of dividends ................ (3,662) (5,453)
Net change in assets and liabilities
Metal related .............................. (16,158) (102,916)
All other .................................. 14,540 (59,679)
-------- ---------
Net cash provided by/(used in) operating
activities.................................. 73,558 (94,029)
-------- ---------
Cash flows from investing activities
Capital expenditures ................................. (19,899) (30,562)
Proceeds from sale of investments..................... - 3,400
Acquisitions and other investments.................... (400) -
-------- ---------
Net cash used in investing activities ...... (20,299) (27,162)
-------- ---------
Cash flows from financing activities
Decrease in short-term borrowings..................... (10,159) (41,295)
Increase in hedged metal obligations.................. 12,217 148,277
Repayment of long-term debt........................... (80) (8,810)
Purchase of treasury stock............................ (45,063) (6,396)
Stock option plan transactions ....................... 29,156 56,982
Dividends paid ....................................... (12,988) (13,005)
-------- ---------
Net cash (used in)/provided by financing
activities ................................. (26,917) 135,753
Effect of exchange rate changes on cash ................... (1,498) (4,510)
-------- ---------
Net increase in cash........................ 24,844 10,052
Cash at beginning of year................... 33,034 33,534
-------- ---------
Cash at end of period....................... $ 57,878 $ 43,586
======== =========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
4
ENGELHARD CORPORATION
BUSINESS SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
---------- ----------
Net Sales
Environmental Technologies .................. $ 164,441 $ 168,482
Process Technologies ........................ 115,445 135,714
Appearance and Performance Technologies...... 152,370 155,969
Materials Services........................... 560,729 1,143,880
---------- ----------
Reportable segments .................... 992,985 1,604,045
All Other ................................... 8,836 7,272
---------- ----------
$1,001,821 $1,611,317
========== ==========
Operating Earnings
Environmental Technologies .................. $ 39,662 $ 42,426
Process Technologies ........................ 17,069 16,334
Appearance and Performance Technologies...... 15,130 10,104
Materials Services........................... 10,178 21,172
---------- ----------
Reportable segments .................... 82,039 90,036
All Other ................................... (8,958) (11,367)
---------- ----------
73,081 78,669
Equity in earnings of affiliates ................. 3,662 5,453
Interest expense, net ............................ (6,920) (14,343)
---------- ----------
Earnings before income taxes ........... $ 69,823 $ 69,779
Income tax expense ............................... 17,456 21,980
---------- ----------
Net earnings ........................... $ 52,367 $ 47,799
========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
5
Notes to the Unaudited Condensed Consolidated Financial Statements
------------------------------------------------------------------
Note 1 - Basis of Presentation
------------------------------
The unaudited condensed consolidated financial statements of Engelhard
Corporation and subsidiaries (the "Company") contain all adjustments, which, in
the opinion of management, are necessary for a fair statement of the results for
the interim periods presented. The financial statement results for interim
periods are not necessarily indicative of financial results for the full year.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 2001 Annual
Report to Shareholders. Certain prior-year amounts have been reclassified
to conform with the current-year presentation.
Note 2 - Inventories
--------------------
Inventories consist of the following (in thousands):
March 31, 2002 December 31, 2001
-------------- -----------------
Raw materials ........................... $ 88,733 $ 91,994
Work in process ......................... 68,705 67,175
Finished goods .......................... 228,755 221,916
Precious metals ......................... 20,392 20,562
-------- --------
Total inventories .................. $406,585 $401,647
======== ========
The majority of the Company's physical metal is carried in committed metal
positions with the remainder carried in inventory. All precious metals included
in inventory are stated at LIFO cost. The market value of the precious metals
inventories exceeded cost by $102.3 million and $111.1 million at March 31, 2002
and December 31, 2001, respectively.
Note 3 - Comprehensive Income
-----------------------------
Comprehensive income is summarized as follows (in thousands):
Three Months Ended
March 31,
---------------------
2002 2001
-------- --------
Net earnings ......................................... $52,367 $47,799
Other comprehensive income/(loss):
Foreign currency translation adjustments......... (17,527) (32,642)
Cash flow hedge adjustment, net of tax........... 3,214 791
-------- --------
Comprehensive income ............................ $38,054 $15,948
======== ========
No provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries because such earnings are
expected to be reinvested indefinitely in the subsidiaries' operations. See Note
5 for details on the cash flow hedge adjustment.
6
Note 4 - Earnings Per Share
---------------------------
The following table represents the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
----------------------
(in thousands, except per share data) 2002 2001
------------------------------------- -------- --------
Basic EPS Computation
---------------------
Net earnings applicable to common shares $ 52,367 $ 47,799
-------- --------
Average number of shares outstanding-basic 128,794 128,233
-------- --------
Basic earnings per share $ 0.41 $ 0.37
======== ========
Diluted EPS Computation
-----------------------
Net earnings applicable to common shares $ 52,367 $ 47,799
-------- --------
Average number of shares outstanding-basic 128,794 128,233
Effect of dilutive stock options
and other incentives 2,800 2,078
-------- --------
Average number of shares outstanding-diluted 131,594 130,311
-------- --------
Diluted earnings per share $ 0.40 $ 0.37
======== ========
Note 5 - Derivatives and Hedging
--------------------------------
The Company reports all derivative instruments on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in earnings or comprehensive income, depending on the designation of the
derivative. Changes in the fair value of derivatives that are not designated as
cash flow hedges are reported immediately in earnings.
In order to manage in a manner consistent with historical processes,
procedures and systems and to achieve operating economies, certain economic
hedge transactions are not designated as hedges for accounting purposes. In
those cases, which primarily relate to platinum group metals, the Company will
continue to mark to market both the hedge instrument and the related position
constituting the risk hedged, recognizing the net effect in current earnings.
The Company documents all relationships between derivative hedging
instruments and hedged items, as well as its risk-management objectives and
strategy for entering into various hedge transactions. For the quarter ended
March 31, 2002, there was no gain or loss recognized in earnings resulting from
hedge ineffectiveness.
7
Foreign Exchange Contracts
--------------------------
The Company designates as cash flow hedges certain foreign currency
forward contracts entered into as hedges against anticipated receivables or
payables which will arise from forecasted transactions that are denominated in
currencies other than the functional currency of the entity which will hold
those assets or liabilities. The ultimate maturities of the contracts are timed
to coincide with the expected occurrence of the underlying transaction.
For the three-month period ended March 31, 2002 and 2001, the Company
reported after-tax losses of less than $0.1 million and after-tax gains of $1.1
million, respectively, in accumulated other comprehensive income relating to the
change in the fair value of derivatives designated as foreign exchange cash flow
hedges. It is expected that the loss reported at March 31, 2002 will be
reclassified into earnings within the next twelve months. There was no gain or
loss reclassified from accumulated other comprehensive income into earnings as a
result of the discontinuance of cash flow hedges due to the probability of
forecasted transactions not occurring. As of March 31, 2002, the maximum length
of time over which the Company is hedging its exposure to movements in foreign
exchange rates for forecasted transactions is nine months.
A second group of forward contracts entered into to hedge the exposure to
foreign currency fluctuations associated with certain monetary assets and
liabilities is not designated as hedging instruments for accounting purposes.
Changes in the fair value of these items are recorded in earnings to offset the
foreign exchange gains and losses arising from the related monetary assets and
liabilities.
Commodity Contracts (Primarily Energy Related)
-----------------------------------------------
The Company enters into contracts that are designated as cash flow hedges
to protect a portion of its exposure to movements in certain commodity prices.
The ultimate maturities of the contracts are timed to coincide with the expected
purchase of these commodities.
For the three-month period ended March 31, 2002 and 2001, the Company
reported after-tax losses of $1.3 million and $0.3 million, respectively, in
accumulated other comprehensive income relating to the change in the fair value
of derivatives designated as cash flow commodity hedges. These losses primarily
relate to derivatives designated as natural gas cash flow hedges. It is expected
that the loss of $1.3 million will be reclassified into earnings within the next
twelve months. As of March 31, 2002, the maximum length of time over which the
Company is hedging its exposure to movements in commodity prices for forecasted
transactions is nine months.
8
Note 6 - Goodwill and Other Intangible Assets
---------------------------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," for all acquisitions made after June 30, 2001.
This statement requires that all business combinations be accounted for by the
purchase method and that intangible assets be recognized apart from goodwill if
they meet certain criteria. Adoption of this statement did not have a material
effect on the Company's financial statements.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," on January 1, 2002. SFAS No. 142
addresses post-acquisition financial accounting and reporting for acquired
goodwill and other intangible assets. Under this new statement, goodwill and
other intangible assets that have indefinite useful lives will not be amortized,
but rather will be tested for impairment based on the specific guidance of SFAS
No. 142. The Company is currently evaluating its goodwill and other intangible
assets that have indefinite useful lives. The first phase of this assessment
will be completed by June 30, 2002.
The following table sets forth the pro forma impact of applying the new
non-amortization provisions of SFAS No. 142 on net income and earnings per
share reported in the first quarter of 2001 (in thousands, except per-share
amounts):
Three Months Ended
March 31,
-------------------------
2002 2001
(as reported) (pro forma)
Net Income --------- ---------
Reported net income.......................... $ 52,367 $ 47,799
Add back: Goodwill amortization, net of tax.. - 1,986
Tradename amortization, net of tax. - 156
--------- ---------
Adjusted net income......................... $ 52,367 $ 49,941
========= =========
Basic Earnings Per Share
Reported basic earnings per share............ $ 0.41 $ 0.37
Add back: Goodwill amortization, net of tax.. - 0.02
Tradename amortization, net of tax. - -
---------- ---------
Adjusted basic earnings per share............ $ 0.41 $ 0.39
========== =========
Diluted Earnings Per Share
Reported diluted earnings per share.......... $ 0.40 $ 0.37
Add back: Goodwill amortization, net of tax.. - 0.01
Tradename amortization, net of tax. - -
---------- ---------
Adjusted diluted earnings per share......... $ 0.40 $ 0.38
========== =========
9
The following information relates to acquired amortizable intangible assets
(in thousands):
As of March 31, 2002 As of December 31, 2001
----------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------ ------------- ------------
Acquired Amortizable Intangible Assets
Usage right............................ $ 14,305 $ 1,427 $ 14,611 $ 1,214
Supply agreements...................... 13,323 2,109 13,544 1,895
Technology licenses.................... 4,038 1,371 3,804 1,251
Other (a).............................. 4,484 2,379 24,702 4,295
------------- ------------ ------------- ------------
Total ................................. $ 36,150 $ 7,286 $ 56,661 $ 8,655
============= ============ ============= ============
Estimated Annual Amortization Expense:
--------------------------------------
2002 $ 2,598
2003 2,584
2004 2,509
2005 2,458
2006 2,307
The following table represents the changes in the carrying amount of
goodwill for the quarter ended March 31, 2002 (in thousands):
Appearance &
Environmental Process Performance All
Technologies Technologies Technologies Other Total
------------- ------------ ------------ ----------- -----------
Balance as of January 1, 2002 $ 12,333 $ 108,172 $ 132,274 $ 824 $ 253,603
Goodwill acquired during the year 800 - - - 800
Reclass of other intangible asset (a) - - 18,346 - 18,346
Foreign currency translation adjustment (171) (10) (106) - (287)
Purchase accounting adjustment - (1,900) - - (1,900)
Other (172) - - - (172)
------------- ------------ ------------ ----------- -----------
Balance as of March 31, 2002 $ 12,790 $ 106,262 $ 150,514 $ 824 $ 270,390
============= ============ ============ =========== ===========
(a) SFAS No. 141 provides that an intangible asset shall be recognized
apart from goodwill if it arises from contractual or other legal rights
or if it is separable from the acquired entity. In accordance with the
transition provisions of the statement, the Company reviewed its intangible
assets to determine if they met the new criteria. As a result, it was
determined that an other intangible asset of $18.3 million did not meet
the new criteria and should thus be recognized as goodwill upon adoption
of SFAS No. 142.
10
Note 7 - Other Matters
----------------------
In 1998, management learned that Engelhard and several other companies
operating in Japan had been victims of a fraudulent scheme involving base-metal
inventory held in third-party warehouses in Japan. The inventory loss was
approximately $40 million in 1997 and $20 million in 1998. The Company is
vigorously pursuing recovery, including litigation in several cases. The most
significant case, a claim against one of Engelhard's insurance carriers, is now
on trial in New Jersey Superior Court. In the first quarter of 1998, Engelhard
recorded a receivable from the insurance carriers and third parties involved for
approximately $20 million. This amount represented management's and counsel's
best estimate of the minimum probable recovery from the various insurance
policies and other parties involved in the fraudulent scheme. In 2001, the
Company recovered $3.7 million, reducing the receivable discussed above to $16.3
million. The Company is scheduled to receive an additional $7.5 million in the
second quarter of 2002 as the result of recently completed settlements. The
Company continues to pursue recovery from insurance and other parties.
The Company is involved in a value-added tax dispute in Peru. Management
believes the Company was targeted by corrupt officials within a former Peruvian
government. On December 2, 1999, Engelhard Peru, S.A., a wholly owned
subsidiary, was denied refund claims of approximately $28 million. The Peruvian
tax authority also determined that Engelhard Peru, S.A. is liable for
approximately $63 million in refunds previously paid, fines and interest as of
December 31, 1999. Interest and fines continue to accrue at rates established by
Peruvian law. Engelhard Peru, S.A. is contesting these determinations
vigorously, and management believes, based on consultation with counsel, that
Engelhard Peru, S.A. is entitled to all refunds claimed and is not liable for
these additional taxes, fines or interest. In late October 2000, a criminal
proceeding alleging tax fraud and forgery related to this value-added tax
dispute was initiated against two Lima-based officials of Engelhard Peru, S.A.
Although Engelhard Peru, S.A. is not a defendant, it may be civilly liable in
Peru if its representatives are found responsible for criminal conduct.
Accordingly, Engelhard Peru, S.A. is assisting in the vigorous defense of this
proceeding. Management believes the maximum economic exposure is limited to the
aggregate value of all assets of Engelhard Peru, S.A., including unpaid refunds,
which is approximately $30 million.
11
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the First Quarter of 2002
with the First Quarter of 2001
---------------------------------------
Net earnings increased 10% to $52.4 million in the first quarter of 2002
from $47.8 million in the same period of 2001. Operating earnings for the first
quarter of 2002 decreased 7% to $73.1 million from $78.7 million in the same
period of 2001. Lower operating earnings from two reportable segments --
Materials Services and Environmental Technologies -- were partially offset by
higher operating earnings from Process Technologies and Appearance and
Performance Technologies.
The effective tax rate was 25.0% in the first quarter of 2002 compared with
31.5% in the same period of 2001. The decrease in the effective tax rate was
primarily due to the recognition of foreign tax credits, the recognition of
favorable tax variances from percentage depletion deductions and a shift in the
geographic mix of earnings. The effective tax rate is expected to be
approximately 25.0% for the remainder of the year.
The Company's share of earnings from affiliates was $3.7 million for the
first quarter of 2002 compared with $5.5 million for the same period in 2001.
Lower equity earnings from Engelhard-CLAL, a 50%-owned precious-metal-
fabrication joint venture were partially offset by higher equity earnings of
Heesung Engelhard, a 49%-owned environmental catalyst joint venture in Korea.
Net interest expense decreased 52% to $6.9 million in the first quarter of
2002 from $14.3 million for the same period of 2001. Lower net interest expense
was due to decreased borrowings and lower short-term interest rates.
Net sales decreased 38% to $1.0 billion in the first quarter of 2002 from
$1.6 billion for the same period in 2001. Lower sales were primarily from
decreased sales in the Materials Services segment as a result of lower platinum
group metals prices and volumes.
12
Environmental Technologies
--------------------------
Operating earnings decreased 7% to $39.7 million in the first quarter of
2002 from $42.4 million in the same period of 2001. Net sales for the first
quarter of 2002 decreased 2% to $164.4 million from $168.5 million in the same
period of 2001.
The majority of this segment's sales and operating earnings are derived
from technologies to control pollution from mobile sources, including gasoline
and diesel-powered passenger cars, sport-utility vehicles, trucks, buses and
off-road vehicles. Operating earnings from auto-emission catalysts decreased
primarily from lower sales volumes and a less favorable vehicle platform mix.
Sales volumes were adversely impacted by an estimated 4% decline in worldwide
production of light-duty vehicles.
Operating earnings were higher in the segment's non-automotive markets,
primarily from increased sales volumes of emission-control systems for gas
turbines used in peak-power-generation facilities and the reversal of an expense
accrual that was no longer necessary. In the first quarter of 2002, the Company
reduced its warranty accrual for the stationary-source, emission-control
capital equipment business by $4.9 million ($3.0 million after tax or $0.02 per
share on a diluted basis) as a result of improved catalyst technology. The
reversal of this accrual was reported in cost of sales in the Company's
"Condensed Consolidated Statements of Earnings."
Process Technologies
--------------------
Operating earnings increased 4% to $17.1 million in the first quarter of
2002 from $16.3 million in the same period of 2001. Net sales for the first
quarter of 2002 decreased 15% to $115.4 million from $135.7 million in the same
period of 2001.
Operating earnings were up as the benefits of lower energy costs and a
favorable product mix were partially offset by lower sales volumes to chemical-
production and petroleum-refining markets. Sales were negatively impacted by
lower precious metal prices, which are passed through to chemical-production
catalyst customers in Europe. Excluding the impact of these pass-through metal
costs, sales would have decreased 12%.
Appearance and Performance Technologies
---------------------------------------
Operating earnings increased 50% to $15.1 million in the first quarter of
2002 from $10.1 million in the same period of 2001. Net sales decreased 2% to
$152.4 million for the first quarter of 2002 from $156.0 million in the same
period of 2001.
Operating earnings were up as the benefit from the redeployment of assets
in 2001, improved productivity and lower operating costs were partially offset
by lower sales volumes. Sales decreased as lower volumes to the paper and
automotive finish markets were partially offset by higher volumes to the
coatings market.
13
Materials Services
------------------
Operating earnings declined 52% to $10.2 million in the first quarter of
2002 from $21.2 million in the same period of 2001. Net sales for the first
quarter of 2002 decreased 51% to $0.6 billion from $1.1 billion in the
same period of 2001.
Operating earnings and sales were down due to lower prices for platinum
group metals, lower volumes and lower results from the recycling (refining) of
platinum group metals. Operating earnings also include a previously unrecognized
contractual benefit realized in the current period. The results of this segment
returned to more typical levels in the first quarter of 2002, compared with the
higher levels reported in 2001.
Financial Condition and Liquidity
---------------------------------
Working capital was $33.4 million at March 31, 2002 compared with a deficit
of $7.1 million at December 31, 2001. The Company's current ratio was 1.0 at
March 31, 2002 and December 31, 2001. The percentage of total debt to total
capitalization was 38% at March 31, 2002 and December 31, 2001.
The variance in cash flows from operating activities primarily occurred in
the Materials Services segment and reflects changes in metal positions used to
facilitate requirements of the Company, its metals customers and suppliers.
Materials Services routinely enters into a variety of arrangements for the
sourcing of metals. Generally, transactions are hedged on a daily basis. Hedging
is accomplished primarily through forward, future and option contracts. However,
in closely monitored situations for which exposure levels have been set by
senior management, the Company from time to time holds large unhedged industrial
commodity positions that are subject to future market price fluctuations. These
positions are included in committed metal positions along with hedged metal
holdings. Hedged metal obligations (primarily amounts payable for metal
purchased forward as an economic hedge) are considered financing activities and
are included in that section of the Company's "Consolidated Statements of Cash
Flows." Materials Services works to ensure that the Company and its customers
have an uninterrupted source of metals, primarily platinum group metals,
utilizing supply contracts and commodities markets around the world. Committed
metal positions include significant advances made for the purchase of precious
metals that have been delivered to the Company but are as yet unpriced. As of
the end of the quarter, the aggregate market value of those metals had fallen
below the amounts advanced; however, the Company does not expect any loss on
these purchases due to contractual exchanges of metals/cash or future price
changes.
The variance in cash flows from financing activities is primarily related
to a change in hedged metal obligations, an increase in the purchase of
treasury stock and a decrease in stock option plan transactions associated with
the exercise of stock options.
The Company has filed a shelf registration for $300 million of
Corporate debt. Plans to issue debt under the shelf registration are under
consideration by management.
14
The Company has consistently derived considerable cash flow from
operations, which has been used, along with both short- and long-term debt, to
pay for capital expenditures, acquisitions, dividends and other corporate
requirements. The continuation of these levels of cash flow is expected but is
subject to risk factors disclosed in the Company's 2001 Form 10-K and in the
Forward-Looking Statements section below. In addition, the Company has always
maintained investment-grade credit ratings that it considers important for
cost-effective and ready access to the credit markets. Management fully expects
to be able to obtain future funding from both short- and long-term debt for cash
requirements in excess of those from operations. In the event that any of these
sources prove to be below expectations, the Company has access to committed
lines of credit aggregating $800 million as of March 31, 2002. Management is
currently in the process of renewing $400 million of this committed line of
credit that expires in May 2002.
Forward-Looking Statements
--------------------------
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
the future prospects, developments and business strategies of Engelhard. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These forward-looking statements involve risks and
uncertainties that may cause Engelhard's actual future activities and results of
operations to be materially different from those suggested or described in this
document.
These risks include: competitive pricing or product development activities;
Engelhard's ability to achieve and execute internal business plans; global
economic trends; worldwide political instability and economic growth; markets,
alliances and geographic expansions developing differently than anticipated;
fluctuations in the supply and prices of precious and base metals; government
legislation and/or regulation (particularly on environmental issues);
technology, manufacturing and legal issues; and the impact of any economic
downturns and inflation. Investors are cautioned not to place undue reliance
upon these forward-looking statements, which speak only as of their dates.
Engelhard disclaims any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
15
Part II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K Pages
------- -------------------------------- -----
(a)(12) Computation of the Ratio of Earnings to Fixed Charges 18-19
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 2002.
16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENGELHARD CORPORATION
-----------------------------
(Registrant)
Date May 1, 2002 /s/ Barry W. Perry
--------------------- -----------------------------
Barry W. Perry
Chairman and Chief
Executive Officer
Date May 1, 2002 /s/ Michael A. Sperduto
---------------------- -----------------------------
Michael A. Sperduto
Vice President and Chief
Financial Officer
17
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
18
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31, Years Ended December 31,
------------------ -----------------------------------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Earnings from continuing operations
before provision for income taxes $69,823 $305,224 $245,687 $284,118 $260,563 $ 85,812
Add/(deduct)
Portion of rents representative
of the interest factor 2,100 8,400 8,800 7,000 3,500 3,000
Interest on indebtedness 6,920 43,994 62,649 56,555 58,887 52,776
Equity dividends - 4,158 4,363 2,431 2,022 3,803
Equity in (earnings) losses
of affiliates (3,662) (29,095) (24,187) (16,266) (10,077) 47,833
-------- -------- -------- --------- --------- --------
Earnings, as adjusted $75,181 $332,681 $297,312 $333,838 $314,895 $193,224
======== ======== ========= ========= ========= ========
Fixed Charges
Portion of rents representative
of the interest factor $ 2,100 $ 8,400 $ 8,800 $ 7,000 $ 3,500 $ 3,000
Interest on indebtedness 6,920 43,994 62,649 56,555 58,887 52,776
Capitalized interest 750 3,000 3,880 2,580 1,897 651
-------- -------- -------- --------- --------- --------
Fixed charges $ 9,770 $55,394 $75,329 $ 66,135 $ 64,284 $ 56,427
======== ======== ======== ========= ========= ========
Ratio of Earnings to Fixed Charges 7.70 6.01 3.95 (a) 5.05 4.90 3.42 (b)
======== ======== ======== ========= ========= ========
(a) Earnings in 2000 were negatively impacted by pre-tax special and other charges of $134.2 million for a
variety of events. Excluding these charges, the ratio of earnings to fixed charges would have been 5.73.
(b) Earnings in 1997 were negatively impacted by pre-tax special and other charges of $149.6 million for a variety of events.
Excluding these charges, the ratio of earnings to fixed charges would have been 5.28.
19