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 June 30, 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)
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 July 31, 2002
--------------------- -----------------------------
$1 par value 128,626,908
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 Six Months Ended
June 30, June 30,
------------------------ ----------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Net sales .................... $ 982,314 $1,471,576 $1,984,135 $3,082,893
Cost of sales ................ 805,158 1,298,506 1,646,287 2,743,575
----------- ---------- ---------- ----------
Gross profit ............ 177,156 173,070 337,848 339,318
Selling, administrative and
other expenses ............. 95,800 87,846 183,411 175,425
Special (credit)/charge ...... (7,862) 7,100 (7,862) 7,100
----------- ---------- ---------- ----------
Operating earnings ...... 89,218 78,124 162,299 156,793
Equity in earnings of
affiliates ................. 4,408 14,955 8,070 20,408
Loss on investments........... (6,659) - (6,659) -
Interest expense, net ........ (6,868) (12,789) (13,788) (27,132)
----------- ---------- ---------- ----------
Earnings before income
taxes ................. 80,099 80,290 149,922 150,069
Income tax expense ........... 20,024 20,790 37,480 42,770
----------- ---------- ---------- ----------
Net earnings ............ $ 60,075 $ 59,500 $ 112,442 $ 107,299
=========== ========== ========== ==========
Basic earnings per share ..... $ 0.47 $ 0.45 $ 0.87 $ 0.83
=========== ========== ========== ==========
Diluted earnings per share ... $ 0.46 $ 0.45 $ 0.85 $ 0.81
=========== ========== ========== ==========
Cash dividends paid per share $ 0.10 $ 0.10 $ 0.20 $ 0.20
=========== ========== ========== ==========
Average number of shares
outstanding - basic ........ 128,707 131,098 128,750 129,674
=========== ========== ========== ==========
Average number of shares
outstanding - diluted ...... 131,673 133,704 131,544 131,877
=========== ========== ========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
2
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
Cash ............................................. $ 57,015 $ 33,034
Receivables, net.................................. 385,462 347,656
Committed metal positions ........................ 453,692 569,109
Inventories ...................................... 413,776 401,647
Other current assets ............................. 165,781 142,301
---------- ----------
Total current assets ...................... 1,475,726 1,493,747
Investments ...................................... 212,309 213,467
Property, plant and equipment, net ............... 824,203 822,520
Goodwill ......................................... 271,910 253,603
Other intangible and noncurrent assets............ 184,470 212,212
---------- ----------
Total assets .............................. $2,968,618 $2,995,549
========== ==========
Short-term borrowings ............................ $ 369,044 $ 389,051
Accounts payable ................................. 156,640 252,319
Hedged metal obligations ......................... 505,852 517,681
Other current liabilities ........................ 347,930 341,749
---------- ----------
Total current liabilities ................. 1,379,466 1,500,800
Long-term debt ................................... 241,184 237,853
Other noncurrent liabilities ..................... 248,471 253,390
Shareholders' equity ............................. 1,099,497 1,003,506
---------- ----------
Total liabilities and
shareholders' equity .................... $2,968,618 $2,995,549
========== ==========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
3
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------
2002 2001
--------- ----------
Cash flows from operating activities
Net earnings .........................................$ 112,442 $ 107,299
Adjustments to reconcile net earnings to net cash
provided by/(used in) operating activities
Depreciation and depletion ...................... 52,632 46,592
Amortization of intangible assets ............... 1,515 6,772
Loss on investments.............................. 6,659 -
Equity results, net of dividends................. (4,317) (16,251)
Net change in assets and liabilities
Metal related .............................. 7,706 (138,808)
All other .................................. (6,449) (32,833)
-------- ---------
Net cash provided by/(used in) operating
activities.................................. 170,188 (27,229)
-------- ---------
Cash flows from investing activities
Capital expenditures ................................. (46,196) (71,743)
Proceeds from sale of investments..................... - 3,400
Acquisitions and other investments.................... (2,400) (3,000)
-------- ---------
Net cash used in investing activities ...... (48,596) (71,343)
-------- ---------
Cash flows from financing activities
Decrease in short-term borrowings..................... (20,008) (77,778)
(Decrease)/increase in hedged metal obligations....... (11,708) 152,103
Repayment of long-term debt........................... (153) (8,910)
Purchase of treasury stock............................ (90,545) (25,183)
Stock option plan transactions........................ 45,335 87,613
Dividends paid ....................................... (25,914) (26,334)
-------- ---------
Net cash (used in)/provided by financing
activities ................................. (102,993) 101,511
Effect of exchange rate changes on cash ................... 5,382 (3,477)
-------- ---------
Net increase/(decrease) in cash...... ...... 23,981 (538)
Cash at beginning of year................... 33,034 33,534
-------- ---------
Cash at end of period....................... $ 57,015 $ 32,996
======== =========
See the Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
4
ENGELHARD CORPORATION
BUSINESS SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
------------ ---------- ----------- ----------
Net Sales
Environmental Technologies .. $ 170,564 $ 176,755 $ 335,005 $ 345,237
Process Technologies ........ 136,407 147,066 251,852 282,780
Appearance and Performance
Technologies............... 170,632 174,629 323,002 330,598
Materials Services........... 495,564 967,137 1,056,293 2,111,017
----------- ----------- ----------- -----------
Reportable segments ... 973,167 1,465,587 1,966,152 3,069,632
All other ................... 9,147 5,989 17,983 13,261
----------- ----------- ----------- -----------
$ 982,314 $1,471,576 $1,984,135 $3,082,893
=========== =========== =========== ===========
Operating Earnings
Environmental Technologies .. $ 27,983 $ 36,707 $ 67,644 $ 79,133
Process Technologies ........ 22,972 22,677 40,041 39,011
Appearance and Performance
Technologies............... 24,720 11,409 39,851 21,513
Materials Services........... 27,245 13,082 37,423 34,254
----------- ----------- ----------- -----------
Reportable segments ... 102,920 83,875 184,959 173,911
All other ................... (13,702) (5,751) (22,660) (17,118)
----------- ----------- ----------- -----------
89,218 78,124 162,299 156,793
Equity in earnings of
affiliates ................. 4,408 14,955 8,070 20,408
Loss on investments........... (6,659) - (6,659) -
Interest expense, net ........ (6,868) (12,789) (13,788) (27,132)
----------- ----------- ----------- -----------
Earnings before income
taxes ............... 80,099 80,290 149,922 150,069
Income tax expense ........... 20,024 20,790 37,480 42,770
----------- ----------- ----------- -----------
Net earnings .......... $ 60,075 $ 59,500 $ 112,442 $ 107,299
=========== =========== =========== ===========
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 presentation 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. The unaudited condensed consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain prior-year amounts have been reclassified to conform with
the current-year presentation.
Note 2 - Special Charges and Credits
------------------------------------
In the second quarter of 2002, the Company recorded a charge of $3.1
million ($1.9 million after tax or $0.01 per share on a diluted basis) primarily
related to a manufacturing consolidation plan within a business that serves the
aerospace turbine-engine overhaul and repair market in the Company's
Environmental Technologies segment. This charge includes asset write-offs of
$1.7 million, employee severance costs of $0.6 million and other exit costs of
$0.8 million related to the plant closure. The employee severance charges
include the reduction of 46 salaried employees.
In the second quarter of 2002, the Company recorded a gain of $11.0 million
($6.8 million after tax or $0.05 per share on a diluted basis) related to
insurance settlements stemming from events in 1997 and 1998 in which Engelhard
and other companies were victimized in an elaborate scheme involving base-metal
inventories held in third-party warehouses in Japan (see Note 10, "Other
Matters," for further detail). A special charge recorded by the Company in 1997
included an inventory loss of approximately $40 million associated with the
Japan matter. An additional $20 million inventory loss was recorded in 1998. In
the first quarter of 1998, the Company recorded a receivable from insurance
carriers and third parties involved for approximately $20 million. As of June
30, 2002, the Company had recovered $11.2 million. In July 2002, the Company
received an additional $19.8 million, net of legal fees, from insurance
settlements reached in June. Accordingly, the Company recorded a gain of $11.0
million in the second quarter of 2002 in its Materials Services segment.
The Company recorded a special charge of $7.1 million ($4.3 million after
tax or $0.03 per share on a diluted basis) in the second quarter of 2001 related
to the redeployment of assets between the Company's kaolin-based operations in
Middle Georgia and its petroleum refining catalysts facility in Savannah,
Georgia. This charge includes employee severance costs of $3.2 million, asset
write-offs of $2.6 million and other costs of $1.3 million related to the asset
redeployment actions and productivity improvements. The employee severance
charges include the reduction of 57 salaried employees primarily located at the
Middle Georgia facility, while an additional 154 hourly employees were
terminated as a result of this action. This charge was recorded in the
Appearance and Performance Technologies segment. These actions are expected to
be substantially complete by the end of 2002.
6
Note 3 - Plug Power Investment Impairment
-----------------------------------------
In the second quarter of 2002, the Company recorded an impairment charge of
$6.7 million ($4.1 million after tax or $0.03 per share on a diluted basis)
associated with an investment. The write down was taken to reflect the lower
current value of an investment in fuel-cell developer Plug Power Inc. This
investment was made as part of agreements between the two companies for
development of advanced materials for fuel cells. The carrying amount of this
investment has been reduced to its estimated fair value based on quoted market
prices. Plug Power designs and develops on-site electric power generation
systems utilizing proton exchange membrane fuel cells for stationary
applications. This impairment charge was reported in the Company's "All Other"
category and was recorded in "Loss on investments" in the Company's "Condensed
Consolidated Statements of Earnings."
Note 4 - Inventories
--------------------
Inventories consist of the following (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Raw materials ........................... $ 100,034 $ 91,994
Work in process ......................... 63,606 67,175
Finished goods .......................... 228,706 221,916
Precious metals ......................... 21,430 20,562
--------- ---------
Total inventories .................. $ 413,776 $ 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 $86.6 million and $111.1 million at June 30, 2002
and December 31, 2001, respectively.
Note 5 - Comprehensive Income
-----------------------------
Comprehensive income is summarized as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net earnings .................. $ 60,075 $ 59,500 $ 112,442 $ 107,299
Other comprehensive income/(loss):
Foreign currency
translation adjustment..... 51,289 (25,269) 33,762 (57,911)
Cash flow hedge adjustment,
net of tax................. 780 (6,005) 3,994 (5,214)
--------- --------- --------- ---------
Comprehensive income .......... $ 112,144 $ 28,226 $ 150,198 $ 44,174
========= ========= ========= =========
7
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
7, "Derivatives and Hedging," for details on the cash flow hedge adjustment.
Note 6 - Earnings Per Share
---------------------------
The following table represents the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(in thousands, except per share data) 2002 2001 2002 2001
------------------------------------- -------- -------- -------- --------
Basic EPS Computation
---------------------
Net earnings applicable to common
shares $ 60,075 $ 59,500 $112,442 $107,299
-------- -------- -------- --------
Average number of shares
outstanding - basic 128,707 131,098 128,750 129,674
-------- -------- -------- --------
Basic earnings per share $ 0.47 $ 0.45 $ 0.87 $ 0.83
======== ======== ======== ========
Diluted EPS Computation
-----------------------
Net earnings applicable to common
shares $ 60,075 $ 59,500 $112,442 $107,299
-------- -------- -------- --------
Average number of shares
outstanding - basic 128,707 131,098 128,750 129,674
Effect of dilutive stock options
and other incentives 2,966 2,606 2,794 2,203
-------- -------- -------- --------
Average number of shares
outstanding - diluted 131,673 133,704 131,544 131,877
-------- -------- -------- --------
Diluted earnings per share $ 0.46 $ 0.45 $ 0.85 $ 0.81
======== ======== ======== ========
Note 7 - 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.
8
The Company documents all relationships between derivative hedging
instruments and items impacted by cash flow hedges at the time the hedges are
initiated, as well as its risk-management objectives and strategy for entering
into various hedge transactions. For the three and six-month periods ended June
30, 2002 and 2001, there was no gain or loss recognized in earnings resulting
from hedge ineffectiveness.
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 sale or purchase transaction.
For the three and six-month periods ended June 30, 2002, the Company
reported after-tax losses of $0.4 million and $0.6 million, respectively, in
accumulated other comprehensive income relating to the change in the fair value
of derivatives designated as foreign exchange cash flow hedges. For the three
and six-month periods ended June 30, 2001, the Company reported after-tax losses
of $0.1 million and after-tax gains of $1.0 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 losses of $0.4 million reported at June 30, 2002 will be reclassified into
earnings within the next six 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 June 30, 2002, the maximum length of time over
which the Company is hedging its exposure to movements in foreign exchange rates
for forecasted transactions is six 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 and six-month periods ended June 30, 2002, the Company
reported after-tax gains of $1.2 million and $4.6 million, respectively, in
accumulated other comprehensive income relating to the change in the fair value
of derivatives designated as cash flow commodity hedges. For the three and six-
month periods ended June 30, 2001, the Company reported after-tax losses of $5.9
million and $6.2 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 losses of $0.2
million reported at June 30, 2002 will be reclassified into earnings within the
next six months. As of June 30, 2002, the maximum length of time over which the
Company is hedging its exposure to movements in commodity prices for forecasted
transactions is six months.
9
Note 8 - 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 did not recognize an impairment loss as a result of the
impairment testing that was 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 for the three and six-month periods ended June 30, 2001 (in thousands,
except per-share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
(as reported) (pro forma) (as reported) (pro forma)
Net Income --------- --------- --------- ---------
Reported net income.......................... $ 60,075 $ 59,500 $ 112,442 $ 107,299
Add back: Goodwill amortization, net of tax.. - 2,177 - 4,163
Tradename amortization, net of tax. - 156 - 312
--------- --------- --------- ---------
Adjusted net income......................... $ 60,075 $ 61,833 $ 112,442 $ 111,774
========= ========= ========= =========
Basic Earnings Per Share
Reported basic earnings per share............ $ 0.47 $ 0.45 $ 0.87 $ 0.83
Add back: Goodwill amortization, net of tax.. - 0.02 - 0.03
Tradename amortization, net of tax. - - - -
---------- --------- ---------- ---------
Adjusted basic earnings per share............ $ 0.47 $ 0.47 $ 0.87 $ 0.86
========== ========= ========== =========
Diluted Earnings Per Share
Reported diluted earnings per share.......... $ 0.46 $ 0.45 $ 0.85 $ 0.81
Add back: Goodwill amortization, net of tax.. - 0.02 - 0.03
Tradename amortization, net of tax. - - - -
---------- --------- ---------- ---------
Adjusted diluted earnings per share......... $ 0.46 $ 0.47 $ 0.85 $ 0.84
========== ========= ========== =========
10
The following table sets forth the gross carrying amount and accumulated
amortization of the Company's acquired amortizable intangible assets (in
thousands):
As of June 30, 2002 As of December 31, 2001
----------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------ ------------- ------------
Acquired Amortizable Intangible Assets
Usage right............................ $ 16,175 $ 1,883 $ 14,611 $ 1,214
Supply agreements...................... 14,673 2,725 13,544 1,895
Technology licenses.................... 7,038 1,313 3,804 1,251
Other (a).............................. 3,578 1,850 24,702 4,295
------------- ------------ ------------- ------------
Total ................................. $ 41,464 $ 7,771 $ 56,661 $ 8,655
============= ============ ============= ============
As of June 30, 2002, the estimated aggregate amortization expense for each
of the five succeeding years is as follows (in thousands):
Estimated Annual Amortization Expense:
--------------------------------------
2002 $ 2,917
2003 2,979
2004 2,904
2005 2,841
2006 2,649
The following table represents the changes in the carrying amount of
goodwill for the six-month period ended June 30, 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 additions 800 - - - 800
Reclass of other intangible asset (a) - - 18,614 - 18,614
Foreign currency translation adjustment 363 (2) 940 - 1,301
Purchase accounting adjustment - (1,900) - - (1,900)
Other (172) - - (336) (508)
------------- ------------ ------------ ----------- -----------
Balance as of June 30, 2002 $ 13,324 $ 106,270 $ 151,828 $ 488 $ 271,910
============= ============ ============ =========== ===========
(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 $18.6 million did not meet
the new criteria and should thus be recognized as goodwill upon adoption
of SFAS No. 142.
11
Note 9 - Committed Metal Positions and Hedged Metal Obligations
---------------------------------------------------------------
Both spot metal and derivative instruments are stated at fair value. Fair
value is based on published market prices. The following table sets forth the
Company's unhedged metal positions included in committed metal positions in the
Company's "Consolidated Balance Sheets":
Metal Positions Information (in millions):
June 30, 2002 December 31, 2001
------------------- -------------------
Gross Gross
Position Value Position Value
-------- --------- -------- ---------
Platinum group metals Long $ 24.1 Long $ 44.3
Gold Long 1.0 Long 0.2
Silver Short 2.9 Long 0.9
Base Metals Short 4.1 Short 5.9
--------- ---------
Total unhedged metal positions $ 32.1 $ 51.3
========= =========
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 by a total of $177.4 million. This
excess may grow or may be eliminated based on market price changes. The Company
expects it will be settled through the receipt of cash or metals and that no
loss will be incurred due to non-performance.
Derivative metal and foreign currency instruments are used to hedge metal
positions and obligations. Over 99% of these instruments have settlement terms
of less than one year. The remaining instruments are expected to settle within
two years. These derivative metal and foreign currency instruments consist of
the following:
Metal Hedging Instruments (in millions):
June 30, 2002 December 31, 2001
------------------- -------------------
Buy Sell Buy Sell
--------- -------- --------- --------
Metal forwards/futures $ 1,826.7 $ 970.7 $ 1,510.5 $ 699.1
Eurodollar futures 263.9 182.4 93.2 127.2
Swaps 37.1 38.1 38.3 24.1
Options 55.1 63.6 72.0 64.4
Foreign exchange forwards/futures 17.9 0.3 - 24.8
12
Note 10 - Other Matters
-----------------------
In 1998, Management learned that Engelhard and several other companies
operating in Japan had been victims of an elaborate 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. 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. As of June 30, 2002, the Company had recovered $11.2 million. In July
2002, the Company received an additional $19.8 million, net of legal fees, from
insurance settlements reached in June. Accordingly, the Company recorded a gain
of $11.0 million ($6.8 million after tax or $0.05 per share on a diluted basis)
in the second quarter of 2002 in its Materials Services segment.
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.
13
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the Second Quarter of 2002
with the Second Quarter of 2001
---------------------------------------
Net earnings increased slightly to $60.1 million in the second quarter of
2002 from $59.5 million in the same period of 2001. Operating earnings for the
second quarter of 2002 increased 14% to $89.2 million from $78.1 million in the
same period of 2001. Excluding an $11.0 million insurance settlement gain and a
$3.1 million manufacturing consolidation charge reported in the second quarter
of 2002, and a $7.1 million charge reported in the second quarter of 2001
relating to asset redeployment actions and productivity improvements, operating
earnings would have decreased 5% from the same period of 2001. Lower operating
earnings from Environmental Technologies were partially offset by higher
operating earnings from Appearance and Performance Technologies and Materials
Services. Operating earnings from Process Technologies were essentially flat
from the year-ago quarter. Operating earnings in the Company's "All-Other"
category decreased primarily from increased professional fees, increased
information technology expenses and increased insurance costs.
The effective tax rate was 25.0% in the second quarter of 2002 compared
with 25.9% 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. As a result of specific developments that are
anticipated, the effective tax rate is expected to be below 25.0% for the full
year.
The Company's share of earnings from affiliates was $4.4 million for the
second quarter of 2002 compared with $15.0 million for the same period in 2001.
The decrease was primarily from lower equity earnings from Engelhard-CLAL, a
50%-owned precious-metal-fabrication joint venture. Equity earnings from
Engelhard-CLAL were lower primarily from gains reported in the prior year
related to a change in the mix of platinum group metals used in its operations.
As of June 30, 2002, the Company's accumulated other comprehensive loss
included a foreign currency translation loss of approximately $10.8 million
relating to its Engelhard-CLAL joint venture. At this time, in accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation," the joint venture's assets are held for use and therefore the
associated foreign currency translation loss has not been included in the
carrying value of the investment when assessing the investment for impairment.
Accordingly, at June 30, 2002, the investment is not impaired. The Company, in
conjunction with its partner, is in the process of developing a plan to
reorganize the joint venture and distribute a significant portion of its assets
to the Company and its partner. At such time when an agreement is reached, the
Company will commit to a plan and include the foreign currency translation loss
as part of the carrying amount of this investment when evaluating the investment
for impairment. If and when this happens, it will be likely that the carrying
value of the joint venture will exceed the fair value of the investment, thus
resulting in the recognition of an impairment loss in current earnings.
Net interest expense decreased 46% to $6.9 million in the second quarter of
2002 from $12.8 million for the same period of 2001. Lower net interest expense
was due to decreased borrowings and lower short-term interest rates.
14
Net sales decreased 33% to $1.0 billion in the second quarter of 2002 from
$1.5 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.
Environmental Technologies
--------------------------
Operating earnings decreased 24% to $28.0 million in the second quarter of
2002 from $36.7 million in the same period of 2001. Excluding the $3.1 million
manufacturing consolidation charge reported in the second quarter of 2002,
operating earnings would have decreased 15% from the same period of 2001 (see
Note 2, "Special Charges and Credits," for further detail). Net sales for the
second quarter of 2002 decreased 4% to $170.6 million from $176.8 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 increased
primarily from higher sales volumes in North America and a more favorable
vehicle platform mix. Sales volumes were favorably impacted by an estimated 3%
increase in worldwide production of light-duty vehicles.
Operating earnings were lower in the segment's non-automotive markets,
primarily from decreased sales volumes of emission-control systems for gas
turbines and increased development and start-up costs related to new
technologies for diesel OEM and power generation applications.
Process Technologies
--------------------
Operating earnings increased slightly to $23.0 million in the second
quarter of 2002 from $22.7 million in the same period of 2001. Net sales for the
second quarter of 2002 decreased 7% to $136.4 million from $147.1 million in
the same period of 2001.
Operating earnings were up as the benefits of lower energy and raw material
costs and a favorable product mix were partially offset by lower sales volumes
to chemical-production markets. Sales were negatively impacted by lower precious
metal prices, which are passed through to chemical-production catalyst customers
in Europe.
Appearance and Performance Technologies
---------------------------------------
Operating earnings increased 117% to $24.7 million in the second quarter of
2002 from $11.4 million in the same period of 2001. Excluding the $7.1 million
charge reported in the second quarter of 2001 relating to asset redeployment
actions and productivity improvements, operating earnings would have increased
34% from the same period of 2001 (see Note 2, "Special Charges and Credits," for
further detail). Net sales decreased 2% to $170.6 million for the second quarter
of 2002 from $174.6 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 was partially offset
by lower sales volumes. Sales decreased as lower volumes to the paper market
were partially offset by higher volumes to the coatings market.
15
Materials Services
------------------
Operating earnings increased 108% to $27.2 million in the second quarter of
2002 from $13.1 million in the same period of 2001. Excluding the $11.0 million
insurance settlement gain reported in the second quarter of 2002, operating
earnings would have increased 24% from the same period of 2001 (see Note 2,
"Special Charges and Credits," for further detail). Net sales for the second
quarter of 2002 decreased 49% to $495.6 million from $967.1 million in the same
period of 2001.
Operating earnings increased as the favorable impact from the timing of
platinum group metal transactions was partially offset by lower volumes and
lower results from the recycling (refining) of platinum group metals. Income
related to certain platinum-group-metal transactions realized previously but
deferred pending the resolution of certain pricing provisions was recognized in
the second quarter of 2002 when those pricing provisions were agreed upon
contractually. Sales decreased from lower platinum-group-metals prices and lower
volumes.
Comparison of the First Six Months of 2002
with the First Six Months of 2001
------------------------------------------
Net earnings increased 5% to $112.4 million in the first six months of 2002
from $107.3 million in the same period of 2001. Operating earnings for the first
six months of 2002 increased 4% to $162.3 million from $156.8 million in the
same period of 2001. Excluding an $11.0 million insurance settlement gain and a
$3.1 million manufacturing consolidation charge reported in the second quarter
of 2002, and a $7.1 million charge reported in the second quarter of 2001
relating to asset redeployment actions and productivity improvements, operating
earnings would have decreased 6% from the same period of 2001. Lower operating
earnings from two reportable segments -- Environmental Technologies and
Materials Services -- were partially offset by higher operating earnings from
Appearance and Performance Technologies and Process Technologies. Operating
earnings in the Company's "All-Other" category decreased primarily from
increased professional fees, increased information technology expenses and
increased insurance costs.
The effective tax rate was 25.0% in the first six months of 2002 compared
with 28.5% for 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. As a result of specific developments that are
anticipated, the effective tax rate is expected to be below 25.0% for the full
year.
The Company's share of earnings from affiliates was $8.1 million for the
first six months of 2002 compared with $20.4 million for the same period in
2001. The decrease was primarily from lower equity earnings from Engelhard-CLAL,
a 50%-owned precious-metal-fabrication joint venture. Equity earnings from
Engelhard-CLAL were lower primarily from gains reported in the prior year
related to a change in the mix of platinum group metals used in its operations.
Net interest expense decreased 49% to $13.8 million in the first six months
of 2002 from $27.1 million in the same period of 2001. Lower net interest
expense was due to decreased borrowings and lower short-term interest rates.
Net sales decreased 36% to $2.0 billion in the first six months of 2002
from $3.1 billion in 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.
16
Environmental Technologies
--------------------------
Operating earnings decreased 15% to $67.6 million in the first six months
of 2002 from $79.1 million in the same period of 2001. Excluding the $3.1
million manufacturing consolidation charge reported in the second quarter of
2002, operating earnings would have decreased 11% from the same period of 2001.
Net sales for the first six months of 2002 decreased 3% to $335.0 million from
$345.2 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 in Europe and a less favorable vehicle
platform mix.
Operating earnings were lower in the segment's non-automotive markets,
primarily from decreased sales volumes of emission-control systems for gas
turbines and increased development and start-up costs related to new
technologies for diesel OEM and power generation applications. This decrease was
partially offset by the reversal of a warranty 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.
Process Technologies
--------------------
Operating earnings increased 3% to $40.0 million in the first six months
of 2002 from $39.0 million in the same period of 2001. Net sales for the first
six months of 2002 decreased 11% to $251.9 million from $282.8 million in the
same period of 2001.
Operating earnings were up as the benefits of lower energy and raw material
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.
Appearance and Performance Technologies
---------------------------------------
Operating earnings increased 85% to $39.9 million in the first six months
of 2002 from $21.5 million in the same period of 2001. Excluding the $7.1
million charge reported in the second quarter of 2001 relating to asset
redeployment actions and productivity improvements, operating earnings would
have increased 39% from the same period of 2001. Net sales for the first six
months of 2002 decreased 2% to $323.0 million from $330.6 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 was 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.
17
Materials Services
------------------
Operating earnings increased 9% to $37.4 million in the first six months of
2002 from $34.3 million in the same period of 2001. Excluding the $11.0 million
insurance settlement gain reported in the second quarter of 2002, operating
earnings would have decreased 23% from the same period of 2001. Net sales for
the first six months of 2002 decreased 50% to $1.1 billion from $2.1 billion in
the same period of 2001.
Operating earnings were down as lower volumes and lower results from the
recycling (refining) of platinum group metals were partially offset by the
favorable impact from the timing of platinum-group-metal transactions and a
contractual benefit realized in the first quarter of 2002. Income related to
certain platinum-group-metal transactions realized previously but deferred
pending the resolution of certain pricing provisions was recognized in the
second quarter of 2002 when those pricing provisions were agreed upon
contractually. Sales decreased from lower platinum-group-metals prices and
lower volumes.
Financial Condition and Liquidity
---------------------------------
Working capital was $96.3 million at June 30, 2002 compared with a deficit
of $7.1 million at December 31, 2001. The Company's current ratio was 1.1 at
June 30, 2002 compared to 1.0 at December 31, 2001. The percentage of total debt
to total capitalization decreased to 36% at June 30, 2002 from 38% at December
31, 2001 due to decreased borrowings and increased retained earnings.
The variance in cash flows from operating activities primarily occurred in
the Materials Services segment and reflects changes in metal positions used to
facilitate requirements of the Company, its metals customers and suppliers.
Materials Services routinely enters into a variety of arrangements for the
sourcing of metals. Generally, transactions are hedged on a daily basis. Hedging
is accomplished primarily through forward, future and option contracts. However,
in closely monitored situations for which exposure levels 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. The bulk of hedged metal obligations represents spot short positions.
As these positions generate cash, their cash effect is included in the financing
activities section of the Company's "Consolidated Statements of Cash Flows."
Other than in closely monitored situations, these positions are hedged with
forward purchases. In addition, the aggregate fair value of derivatives in a
loss position are reported in hedged metal obligations (derivatives in a gain
position are included in committed metal positions). 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
by a total of $177.4 million. This excess may grow or may be eliminated based on
market price changes. The Company expects it will be settled through the receipt
of cash or metals and that no loss will be incurred due to non-performance.
18
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.
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 June 30, 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.
19
Part II - OTHER INFORMATION
---------------------------
Item 4. Results of Matters to a Vote of Security Holders
------- ------------------------------------------------
(a) The Company's Annual Meeting of the Shareholders was held on
Thursday, May 2, 2002.
(b) Results of votes of security holders.
1. Election of Directors For Withheld
--------------------- ----------- ------------
Barry W. Perry 92,767,125 22,138,855
Douglas G. Watson 108,705,200 6,200,780
Marion H. Antonini, James V. Napier, Norma T. Pace and Henry R.
Slack continued as Directors after the annual meeting.
2. Approval of the Engelhard Corporation 2002 Long Term Incentive
Plan:
For Against Abstain
----------- ----------- ------------
96,988,141 17,038,868 878,971
Item 6. Exhibits and Reports on Form 8-K Pages
------- -------------------------------- -----
(a)(10) Material Contracts
(a) 2002 Share Performance Incentive Plan, effective May 2, 2002. 22-25
(b) Engelhard Corporation 2002 Long Term Incentive Plan,
effective May 2, 2002 (incorporated by reference to the 2001
Proxy Statement filed with the Securities and Exchange
Commission on March 26, 2002). *
(12) Computation of the Ratio of Earnings to Fixed Charges. 26-27
(b) In a report on Form 8-K filed with the Securities and Exchange *
Commission on May 3, 2002, the Company reported that it
changed its certifying accountant.
In a report on Form 8-K filed with the Securities and Exchange *
Commission on August 9, 2002, the Company reported that its
Principal Executive Officer and its Principal Financial
Officer had filed sworn statements with the Securities and
Exchange Commission pursuant to order of the Commission dated
June 27, 2002.
* Incorporated by reference as indicated.
20
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: August 13, 2002 /s/ Barry W. Perry
--------------------- -----------------------------
Barry W. Perry
Chairman and Chief
Executive Officer
Date: August 13, 2002 /s/ Michael A. Sperduto
---------------------- -----------------------------
Michael A. Sperduto
Vice President and Chief
Financial Officer
21
EXHIBIT (10) (a)
2002 Share Performance Incentive Plan
-------------------------------------
22
2002 Share Performance Incentive Plan
---------------------------------------
1. Provided the conditions set forth in Section 2 or Section 4 below are
met, a cash bonus shall be awarded to Barry W. Perry (the "Employee") on the
terms and subject to the conditions set forth herein.
2. Except as otherwise set forth in Section 4 below, in order for a bonus
award to be made to the Employee hereunder, the following conditions must be
satisfied: (a) the average closing price per share of the Company's common stock
on the New York Stock Exchange for the period from April 1, 2002 through
December 31, 2002 (the "Award Period"), computed by averaging the closing price
on each day on which the New York Stock Exchange was open for trading during the
Award Period (the "Average Share Price"), must exceed $32; (b) the Return on the
Company's common stock for the Award Period must exceed the Return on the S&P
All Chemicals Index (except as discussed below, as constituted for purposes of
the Company's proxy statement) for the Award Period, and for all purposes of
this Plan, (x) Return shall be computed based on share price without regard to
dividends, (y) Return on the Company's common stock for the Award Period shall
mean (Average Share Price during Award Period less closing price per share of
the Company common stock on March 28, 2002) divided by the closing price per
share of Company common stock on March 28, 2002, and (z) Return on the S&P All
Chemicals Index for the Award Period shall mean the average, weighted on the
basis of market capitalization on March 28, 2002, of the Return of each company
constituting such index, where each such Return is (the average closing share
price of the applicable company during the Award Period less the closing price
per share of the applicable company on March 28, 2002) divided by the closing
price per share of the applicable company on March 28, 2002; and (c) the
Employee must be actively employed as the Chairman and Chief Executive Officer
of the Company on January 7, 2003. If the composition of the S&P All Chemicals
Index changes during the Award Period, the Return on the shares of the
constituent companies shall be taken into account for the period during which
they are included in the S&P All Chemicals Index with appropriate adjustments to
the weighting of such Returns, all as determined reasonably and in good faith by
the Company subject to the review of the Compensation Committee of the Company's
Board of Directors.
3. If the conditions set forth in Section 2 above are met, the amount of
the bonus award granted to the Employee shall be computed by first determining
the excess of the Return on the Company's common stock for the Award Period over
the Return on the S&P All Chemicals Index for the Award Period (the "Excess
Total Return Percentage"). The amount of the bonus will then be determined by
multiplying the number of shares of issued and outstanding Company common stock
on March 28, 2002 by the opening price per share on such date and then
multiplying that product by 0.0033 times the Excess Total Return Percentage
(stated as a decimal).
4. Notwithstanding any provision hereof to the contrary, provided the
average closing price per share of the Company's common stock for the last
twenty trading days of calendar year 2002 exceeds $31.75 per share, a bonus
award shall be granted to the Employee under this Section 4 in an amount equal
to $750,000. For the avoidance of doubt, any bonus award in the amount of
$750,000 granted pursuant to this Section 4 shall not be in addition to any
amount granted pursuant to Section 3 above, and it is intended that any award
granted under this 2002 Share Performance Incentive Plan shall be the higher of
the amount, if any, determined under either Section 3 or Section 4 hereof.
23
5. In the event of the first to occur of (i) a public announcement of an
intention by an individual, entity or group (within the meaning of Section 13(d)
or 14(d)(2) of the Securities Exchange Act of 1934) to engage in a transaction
the consummation of which would result in a Change in Control (as defined in
clauses (a), (c) or (d) of Section 5(b) of the Company's 1991 Stock Option Plan)
or (ii) the occurrence of a Change in Control (as so defined), for purposes of
determining the Average Share Price and the Excess Total Return Percentage and
the amount of the bonus award, if any, the closing trading price and the fair
market value of a share of Company common stock for the date of such public
announcement or Change in Control, as the case may be, and each following day
shall not exceed the closing trading price per share on the New York Stock
Exchange on the trading day immediately preceding such public announcement or
Change in Control, as the case may be. Such limitation on value of the Company
common stock will continue for purposes hereof until such time as the Board of
Directors determines, in good faith, that a Change in Control (as so defined) is
unlikely to occur, and the fair market value of Company common stock for each
day thereafter shall be the actual closing trading price on the New York Stock
Exchange.
6. Any bonus award granted hereunder will be credited to an account for the
Employee as of January 7, 2003, and it will be increased by an interest factor
from the date of grant through the date of payment. The interest rate utilized
to calculate such increase shall be set monthly and shall be equal to 120% of
the long-term federal rate, compounded monthly (within the meaning of Section
1274(d) of the Internal Revenue Code of 1986, as amended) as in effect for the
month for which interest is being computed. Any such award (together with
interest on the award) will vest in three equal annual installments, beginning
on the first anniversary of the date of grant. The award shall be payable as set
forth in Sections 8 and 9 below.
7. Any unvested portion of an award (together with interest attributable to
such unvested portion) will be forfeited immediately upon the termination of
employment of the Employee, except that: (i) if such termination is by reason of
disability or retirement at normal, deferred or early retirement age, under any
retirement plan maintained by the Company or any of its subsidiaries, or for any
other reason specifically approved in advance by the Compensation Committee of
the Company's Board of Directors, any unvested portion of an award held by the
Employee shall thereupon become vested in full; (ii) if such termination is by
action of the Company or a subsidiary other than as provided in (i) above and
other than discharge by reason of willful violation of the rules of the Company
or instructions of superior(s), the unvested portion of any award shall continue
to vest on its regular vesting schedule, notwithstanding such termination of
employment; and (iii) in the event of the death of the Employee while employed,
any unvested portion of any awards then held by the Employee shall thereupon
become vested in full.
8. The amount of any bonus award granted hereunder which is (or becomes)
vested at the time of termination of employment of the Employee (together with
interest accrued thereon) shall be paid to the Employee as soon as practicable
following such termination of employment; provided, however, that if the
Employee's termination of employment is described in Section 7(ii) above, then
the bonus award shall be paid on the date of vesting, if later; provided
further, however, that the Employee may elect in writing at least one year prior
to termination of his employment to receive payment of all amounts hereunder in
up to ten annual installments, beginning upon termination of employment or the
first anniversary of termination of employment, as so elected by the Employee
(or, if later, the date of vesting). If amounts are payable hereunder in
installments, the amount of each installment shall be determined by dividing the
unpaid amount credited to the Employee under the Plan at such date (together
with interest accrued thereon) by the number of installments remaining to be
paid.
24
9. Upon the occurrence of a Change in Control (as defined in the Company's
1991 Stock Option Plan), the unvested portion of an award shall immediately
become vested in full, and the entire amount payable hereunder (together with
interest accrued thereon) shall be paid in cash to the Employee immediately upon
the Change in Control. In the event of a Change in Control the Employee shall be
entitled to an additional payment computed as set forth in the last paragraph of
Section 6 of the Company's Deferred Compensation Plan for Key Employees.
10. In the event of a stock split, stock dividend, combination of shares,
recapitalization, reorganization, merger, consolidation, rights offering,
acquisition or divestiture by the Company, or any other change in the corporate
structure or shares of the Company, the Board of Directors shall make such
adjustments, if any, as it deems appropriate in the provisions hereof in order
to equitably reflect such change.
11. This 2002 Share Performance Incentive Plan shall be an unfunded
incentive compensation arrangement. Nothing contained herein, and no action
taken pursuant hereto, shall create or be construed to create a trust of any
kind. The Employee's right to receive payments hereunder shall not be
transferable (other than by will or the laws of descent and distribution) and
shall be no greater than the right of an unsecured general creditor of the
Company. All amounts payable hereunder shall be paid from the general funds of
the Company.
12. No award payable hereunder shall be deemed salary or compensation for
the purpose of computing benefits under any benefit plan or other arrangement of
the Company or its subsidiaries for the benefit of its employees unless the
Company shall determine otherwise; provided, however, any award payable
hereunder shall be taken into account in computing benefits payable under
Section 3 of the Company's Change in Control Agreements.
13. This 2002 Share Performance Incentive Plan shall be interpreted,
construed and administered in accordance with the laws of the state of New
Jersey, without giving effect to principles of conflict of laws thereof.
14. The Company shall deduct from any amount payable hereunder the amount
of any taxes required to be withheld by any governmental authority.
25
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
26
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30, Years Ended December 31,
------------------ -----------------------------------------------------------------
2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
Earnings from continuing operations
before provision for income taxes $149,922 $305,224 $245,687 $284,118 $260,563 $ 85,812
Add/(deduct)
Portion of rents representative
of the interest factor 4,200 8,400 8,800 7,000 3,500 3,000
Interest on indebtedness 13,788 43,994 62,649 56,555 58,887 52,776
Equity dividends 3,753 4,158 4,363 2,431 2,022 3,803
Equity in (earnings) losses
of affiliates (8,070) (29,095) (24,187) (16,266) (10,077) 47,833
-------- -------- -------- --------- --------- --------
Earnings, as adjusted $163,593 $332,681 $297,312 $333,838 $314,895 $193,224
======== ======== ========= ========= ========= ========
Fixed Charges
Portion of rents representative
of the interest factor $ 4,200 $ 8,400 $ 8,800 $ 7,000 $ 3,500 $ 3,000
Interest on indebtedness 13,788 43,994 62,649 56,555 58,887 52,776
Capitalized interest 1,500 3,000 3,880 2,580 1,897 651
-------- -------- -------- --------- --------- --------
Fixed charges $19,488 $55,394 $75,329 $ 66,135 $ 64,284 $ 56,427
======== ======== ======== ========= ========= ========
Ratio of Earnings to Fixed Charges 8.39 (a) 6.01 3.95 (b) 5.05 4.90 3.42 (c)
======== ======== ======== ========= ========= ========
(a) Earnings in 2002 were impacted by an insurance settlement of $11.0 million, an investment impairment of $6.7 million, and
a manufacturing consolidation charge of $3.1 million. Excluding these items, the ratio of earnings to fixed charges would
have been 8.33.
(b) Earnings in 2000 were negatively impacted by pre-tax special and other charges of $134.2 million for a
variety of events. Excluding these charges, the ratio of earnings to fixed charges would have been 5.73.
(c) Earnings in 1997 were negatively impacted by 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.
27
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
The undersigned, Barry W. Perry, Chairman and Chief Executive Officer of
Engelhard Corporation (the "Company"), and Michael A. Sperduto, Vice President
and Chief Financial Officer of the Company, each hereby certifies that the
Quarterly Report of the Company on Form 10-Q for the period ended June 30, 2002
(the "Report") (1) fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and the
results of operations of the Company.
Date: August 13, 2002 /s/ Barry W. Perry
------------------- -------------------------------
Barry W. Perry
Chairman and Chief
Executive Officer
Date: August 13, 2002 /s/ Michael A. Sperduto
------------------- -------------------------------
Michael A. Sperduto
Vice President and
Chief Financial Officer
28