<PAGE>
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, 1996
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 name 1-8142
ENGELHARD CORPORATION
______________________________________________________
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1586002
_______________________________ ____________________________
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
________________________________________ _________________
(Address of principal executive offices) (Zip Code)
(908) 205-5000
___________________________________________________
(Registrant's telephone number including area code)
Not Applicable
___________________________________________________
(Former name, former address and former fiscal year,
if change 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 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, 1996
--------------------- ----------------------------
$1 par value 143,872,673
1
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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,
------------------ ----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
Net sales ......................... $783,863 $721,144 $1,558,603 $1,415,599
Cost of sales ..................... 655,810 595,309 1,320,705 1,177,814
-------- -------- ---------- ----------
Gross profit ................. 128,053 125,835 237,898 237,785
Selling, administrative and other
expenses ........................ 62,292 68,865 116,152 134,274
-------- -------- ---------- ----------
Earnings from operations ..... 65,761 56,970 121,746 103,511
Equity in earnings (losses) of
affiliates ...................... (546) 979 (1,473) 340
Net interest expense .............. 9,196 7,653 18,723 15,725
-------- -------- ---------- ----------
Earnings before income taxes 56,019 50,296 101,550 88,126
Income tax expense ................ 15,966 13,573 28,942 23,794
-------- -------- ---------- ----------
Net earnings ................. $ 40,053 $ 36,723 $ 72,608 $ 64,332
======== ======== ========== ==========
Net earnings per share ............ $ 0.28 $ 0.26 $ 0.51 $ 0.45
======== ======== ========== ==========
Cash dividends paid per share ..... $ 0.09 $ 0.09 $ 0.18 $ 0.17
======== ======== ========== ==========
Average number of shares
outstanding ..................... 143,795 143,539 143,760 143,227
======== ======== ========== ==========
See the Accompanying Notes to Condensed Consolidated Financial Statements
2
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
June 30, December 31,
1996 1995
---------- ------------
Cash ................................ $ 53,813 $ 40,023
Receivables ......................... 337,717 268,578
Inventories ......................... 315,225 238,002
Other current assets ................ 56,642 54,440
---------- ------------
Total current assets ........... 763,397 601,043
Investments ......................... 229,622 224,721
Property, plant and equipment, net .. 691,050 609,540
Other noncurrent assets ............. 364,821 210,271
---------- ------------
Total assets ................... $2,048,890 $1,645,575
========== ============
Short-term borrowings ............... $ 491,848 $ 183,570
Accounts payable .................... 129,320 101,064
Other current liabilities ........... 210,394 209,875
---------- ------------
Total current liabilities ...... 831,562 494,509
Long-term debt ...................... 225,593 211,533
Other noncurrent liabilities ........ 205,350 201,791
Shareholders' equity ................ 786,385 737,742
---------- ------------
Total liabilities and
shareholders' equity ...... $2,048,890 $1,645,575
========== ============
See the Accompanying Notes to Condensed Consolidated Financial Statements
3
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
1996 1995
---------- ---------
Cash flows from operating activities
Net earnings .......................................... $ 72,608 $ 64,332
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation, depletion and amortization ......... 36,296 33,322
Equity results, net of dividends ................. 3,987 2,817
Change in assets and liabilities .................... (70,422) 3,436
--------- ---------
Net cash provided by operating activities ........ 42,469 103,907
--------- ---------
Cash flows from investing activities
Capital expenditures, net ........................... (58,375) (43,611)
Investments and acquisitions ........................ (263,976) (28,270)
Other ............................................... 8,185 (8,876)
--------- ---------
Net cash used in investing activities ............ (314,166) (80,757)
--------- ---------
Cash flows from financing activities
Net change in short-term borrowings ................. 308,354 1,074
Dividends paid ...................................... (25,905) (24,394)
Other ............................................... 3,610 19,592
--------- ---------
Net cash provided by (used in) financing
activities ..................................... 286,059 (3,728)
Effect of exchange rate changes on cash ............... (572) 2,381
--------- ---------
Net change in cash ............................... 13,790 21,803
Cash at beginning of year ........................ 40,023 26,404
--------- ---------
Cash at end of period ............................ $ 53,813 $ 48,207
========= =========
See the Accompanying Notes to Condensed Consolidated Financial Statements
4
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ENGELHARD CORPORATION
SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
Net Sales
Catalysts and Chemicals ........ $205,808 $183,749 $ 416,794 $ 359,273
Pigments and Additives ......... 120,374 104,903 217,618 206,363
Engineered Materials and
Industrial Commodities
Management ................. 457,681 432,492 924,191 849,963
-------- -------- ---------- ----------
$783,863 $721,144 $1,558,603 $1,415,599
======== ======== ========== ==========
Operating Earnings
Catalysts and Chemicals ........ $ 34,144 $ 27,521 $ 66,346 $ 52,010
Pigments and Additives ......... 22,812 22,562 40,335 41,332
Engineered Materials and
Industrial Commodities
Management ................. 13,043 14,351 25,012 25,384
-------- -------- ---------- ----------
69,999 64,434 131,693 118,726
Equity earnings (losses) ........ (546) 979 (1,473) 340
Interest and other expenses, net (13,434) (15,117) (28,670) (30,940)
-------- -------- ---------- ----------
Earnings before income taxes $ 56,019 $ 50,296 $ 101,550 $ 88,126
======== ======== ========== ==========
See the Accompanying Notes to Condensed Consolidated Financial Statements
5
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Notes to Condensed Consolidated Financial Statements
- ----------------------------------------------------
1. 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. These financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1995 Annual Report to
Shareholders.
2. The Company has been advised that the SEC has issued a formal order of
investigation in connection with trading in the Company's stock during
portions of 1995 following certain public announcements by the Company,
which, as disclosed previously, has been the subject of a pending
securities class action litigation since late 1995.
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
- ------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the Second Quarter of 1996
With the Second Quarter of 1995
- ----------------------------------------
Earnings before income taxes for the second quarter of 1996 were $56.0
million compared with $50.3 million in the second quarter of 1995. Operating
earnings for the second quarter of 1996 increased 9% as the Catalysts and
Chemicals segment reported higher results which more than offset unfavorable
results in the Engineered Materials and Industrial Commodities Management
segment. Including the positive results of the Mearl Corporation ("Mearl", see
"Financial Condition and Liquidity"), operating earnings in the Pigments and
Additives segment were flat. Operating earnings of the Company exclude the
former Engineered Materials businesses placed in the Engelhard-CLAL joint
venture on June 22, 1995. The results of Engelhard-CLAL are reported in equity
in earnings (losses) of affiliates. The decrease in selling, administrative and
other expenses reflects the absence of these Engineered Materials businesses.
Equity losses of affiliates were $.5 million for the second quarter of 1996
compared with income of $1.0 million in 1995. The reduction reflected a slightly
larger loss in Engelhard/ICC, which is involved in new technology development
related to desiccant air conditioning; a small start-up loss at Engelhard
Colortronics, the Company's newest partnership which is dedicated to applying a
unique technology for conducting energy through flexible, colored inks; less
favorable results at N.E. Chemcat, a Japanese affiliate, due to a weak Japanese
market and a shift in autocatalyst production from Japan to the United States;
and the break-even results of Engelhard-CLAL, a precious metal fabrication joint
venture, due to weak industrial and jewelry markets in Europe (primarily in
France).
Higher net interest expense was due to higher average debt balances,
primarily associated with the acquisition of Mearl in May 1996 and the purchase
of the corporate headquarters site in December 1995.
Net earnings for the second quarter of 1996 were $40.1 million compared
with $36.7 million in 1995. The effective tax rate in 1996 was 28.5% compared
with 27.0% for the same period last year.
6
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Net sales for the second quarter of 1996 increased 9% to $783.9 million
from $721.1 million for the same quarter in 1995 with higher sales in all
business segments. The acquisition of Mearl accounted for a small portion of the
increase, see "Pigments and Additives".
Catalysts and Chemicals
- -----------------------
Operating earnings increased 24% to $34.1 million in the second quarter of
1996 from $27.5 million in the same period of 1995 benefitting from increased
volumes and raw material yields resulting from operating efficiencies. Net sales
were up by 12% to $205.8 million in 1996 from $183.7 million in 1995.
The Environmental Technologies Group had higher earnings largely due to
increased volumes in the United States and increased market share and improved
mix in Europe. In the Petroleum Catalysts Group, earnings increased due to
higher volumes of fluid catalytic cracking ("FCC") catalysts and the results of
cost reduction programs which more than offset weaker demand for moving bed
catalysts and unfavorable FCC pricing. The Chemical Catalysts Group benefitted
from higher petrochemical catalyst volumes worldwide.
Pigments and Additives
- ----------------------
Operating earnings were flat at $22.8 million in the second quarter of
1996. Net sales increased 15% to $120.4 million in 1996 from $104.9 million in
1995. Excluding the positive impact of Mearl, the segment would have reported
(as a percentage change from the prior year) a mid-single digit reduction in
operating earnings on a mid-single digit increase in sales.
Lower earnings in the Paper Pigments and Chemicals Group reflected lower
volumes as a result of the continuing weakness in the paper industry. Operating
results for this group in the second half of 1996 are dependent upon an
improvement in economic conditions in the paper industry. These reduced earnings
were offset by higher earnings in the Specialty Minerals and Colors Group due to
the positive results of Mearl.
Engineered Materials and Industrial Commodities Management
- ----------------------------------------------------------
Operating earnings decreased 9% to $13.0 million in the second quarter of
1996 from $14.4 million in the same period of 1995 and net sales increased 6% to
$457.7 million in 1996 from $432.5 million in 1995.
The Engineered Materials Group had lower earnings due to the transfer of
former business units into the Engelhard-CLAL joint venture. The lower earnings
more than offset the favorable results of the Industrial Commodities Management
Group. This group's earnings continue to depend, in large part, on market
conditions.
Comparison of the First Six Months of
1996 With the First Six Months of 1995
- --------------------------------------
Earnings before income taxes for the first six months of 1996 were $101.6
million compared with $88.1 million in the first six months of 1995. Operating
earnings for the first six months of 1996 increased 11% as the Catalysts and
Chemicals segment reported higher results which more than offset slightly
unfavorable results in the Engineered Materials and Industrial Commodities
Management segment. Including the positive results of Mearl, operating earnings
7
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in the Pigments and Additives segment declined slightly. Operating earnings of
the Company exclude the former Engineered Materials businesses placed in the
Engelhard-CLAL joint venture on June 22, 1995. The results of Engelhard-CLAL are
reported in equity in earnings (losses) of affiliates. The decrease in selling,
administrative and other expenses reflects the absence of these Engineered
Materials businesses.
Equity losses of affiliates were $1.5 million for the first six months of
1996 compared with income of $.3 million in 1995. The reduction reflected a
slightly larger loss at Engelhard/ICC, which is involved in new technology
development related to desiccant air conditioning; a small start-up loss at
Engelhard Colortronics, the Company's newest partnership which is dedicated to
applying a unique technology for conducting energy through flexible, colored
inks; less favorable results at N.E. Chemcat, a Japanese affiliate, due to a
weak Japanese market and a shift in autocatalyst production from Japan to the
United States; and a loss from Engelhard-CLAL, a precious metal fabrication
joint venture, due to weak industrial and jewelry markets in Europe (primarily
in France).
Higher net interest expense was due to higher average debt balances,
primarily associated with the Mearl acquisition in May 1996 and the purchase of
the corporate headquarters site in December 1995.
Net earnings for the first six months of 1996 were $72.6 million compared
with $64.3 million in 1995. The effective tax rate in 1996 was 28.5% compared
with 27.0% for the same period last year.
Net sales for the first six months of 1996 increased 10% to $1.6 billion
from $1.4 billion for the same period in 1995 with higher sales in all business
segments. The acquisition of Mearl accounted for a small portion of the
increase; see "Pigments and Additives".
Catalysts and Chemicals
- -----------------------
Operating earnings increased 28% to $66.3 million in the first six months
of 1996 from $52.0 million in the same period of 1995 benefitting from increased
volumes and raw material yields resulting from operating efficiencies. Net sales
increased 16% to $416.8 million in 1996 from $359.3 million in 1995.
The Environmental Technologies Group had higher earnings largely due to
increased volumes in the United States and increased market share and improved
mix in Europe. In the Petroleum Catalysts Group, earnings increased for fluid
catalytic cracking catalysts and for moving bed catalysts. The Chemical
Catalysts Group benefitted from higher petrochemical catalyst volumes worldwide.
Pigments and Additives
- ----------------------
Operating earnings decreased 2% to $40.3 million in the first six months of
1996 from $41.3 million in the same period of 1995. Net sales increased 5% to
$217.6 million in 1996 from $206.4 million in 1995. Excluding the positive
impact of Mearl, the segment would have reported (as a percentage change from
the prior year) a mid-single digit reduction in operating earnings on flat
sales.
Lower earnings in the Paper Pigments and Chemicals Group largely reflected
continuing soft demand in the paper industry. Including the positive results of
Mearl, earnings were lower in the Specialty Minerals and Colors Group due to
poor first quarter demand, driven by extreme weather conditions impacting
primarily on the construction end markets.
8
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Engineered Materials and Industrial Commodities Management
- ----------------------------------------------------------
Operating earnings declined slightly to $25.0 million in the first six
months of 1996 and net sales increased 9% to $924.2 million in 1996 from $850.0
million in 1995.
The Engineered Materials Group had lower earnings due to the transfer of
former business units into the Engelhard-CLAL joint venture. The lower earnings
more than offset the favorable results of the Industrial Commodities Management
Group. This group's earnings continue to depend, in large part, on market
conditions.
Financial Condition and Liquidity
---------------------------------
On May 31, 1996, the Company acquired The Mearl Corporation ("Mearl") from
the stockholders of Mearl pursuant to a Stock Purchase Agreement. The purchase
price was $272.7 million in cash, subject to certain post-closing adjustments.
The Company initially financed the acquisition with bank borrowings. For a more
complete description of the acquisition, see the Company's Form 8-K/A, filed
with the Securities and Exchange Commission ("SEC") on July 12, 1996. The
Company's balance sheet as of June 30, 1996 includes the accounts of Mearl.
Primarily as a result of the financial requirements related to the
acquisition, at June 30, 1996 the Company's current ratio declined to 0.9 from
1.2 as of December 31, 1995 and the total debt to total capital ratio increased
to 48% compared with 35% as of December 31, 1995.
Management believes that the combination of the Company's cash on hand,
ongoing cash flow and the ability to access credit and capital markets will be
adequate to finance its working capital requirements and capital expenditure
programs.
Other Matters
-------------
In accordance with existing policy and as a result of developments in the
second quarter of 1996, management deemed it appropriate to establish a $7.0
million provision for the defense of certain legal proceedings and related
matters involving the Company's PremAir(TM) automotive catalyst system. Also,
the Company recorded an insurance recovery related to an incident of funds
misappropriation which was uncovered and announced during the second quarter of
1996. The positive net impact on net income of these items was less than half a
cent per share.
Subsequent Events
-----------------
In July 1996, the Company called $100.0 million of 10% notes which were
refinanced with short-term debt. In August 1996, the Company issued $250.0
million of long-term debt whose proceeds were used for the acquisition of Mearl
which was initially financed with short-term debt. The new debt consists
of $150.0 million of five year notes and $100.0 million of ten year notes
bearing interest at rates of 7.0% and 7.375%, respectively.
9
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PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K Page
- ------- -------------------------------- ----
(a) (12) Computation of the Ratio of Earnings to Fixed Charges. 12
(b) In a report on Form 8-K filed with the SEC on June 7, 1996, *
the Company reported the acquisition of The Mearl Corporation.
In a report on Form 8-K/A filed with the SEC on July 12, 1996, *
the Company amended the Form 8-K filed with the SEC on
June 7, 1996 to include the financial statements required
under Items 7(a) and 7(b).
* Incorporated by reference as indicated.
10
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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 9, 1996 /s/ Orin R. Smith
--------------------- -----------------------------
Orin R. Smith
Chairman and Chief
Executive Officer
Date August 9, 1996 /s/ William E. Nettles
--------------------- -----------------------------
William E. Nettles
Vice President and
Chief Financial Officer
Date August 9, 1996 /s/ Martin J. Connor, Jr.
---------------------- -----------------------------
Martin J. Connor, Jr.
Controller
11
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<TABLE>
ENGELHARD CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30 Year Ended December 31
---------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
Income from continuing operations
before provision for income taxes $101,550 $185,312 $157,306 $(4,709) $133,858 $117,569
Add /(deduct)
Portion of rents representative
of the interest factor 500 4,700 4,800 4,500 4,000 4,200
Interest on indebtedness 18,723 31,326 21,954 13,696 16,231 21,658
Equity dividends 2,514 3,411 3,800 2,600 3,100 3,200
Equity (earnings)/loss 1,473 (695) (632) (3,443) (7,445) (5,024)
-------- -------- -------- ------- -------- --------
Earnings as adjusted $124,760 $224,054 $187,228 $12,644 $149,744 $141,603
======== ======== ======== ======= ======== ========
Fixed Charges
Portion of rents representative
of the interest factor $ 500 $ 4,700 $ 4,800 $ 4,500 $ 4,000 $ 4,200
Interest on indebtedness 18,723 31,326 21,954 13,696 16,231 21,658
Capitalized Interest 539 1,000 800 2,700 400 110
-------- -------- -------- ------- -------- --------
$ 19,762 $ 37,026 $ 27,554 $20,896 $ 20,631 $ 25,968
======== ======== ======== ======= ======== ========
Ratio of Earnings to Fixed Charges 6.31 6.05 6.79 - (A) 7.26 5.45
(A) For fiscal 1993, earnings were insufficient to cover fixed charges by approximately
$8.3 million. Earnings in 1993 were negatively impacted by a charge of approximately
$148 million for the realignment and consolidation of businesses and environmental
matters. Without such charge, the ratio of earnings to fixed charges for fiscal 1993
would have been 7.14.
</TABLE>
12
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 53813
<SECURITIES> 0
<RECEIVABLES> 337717
<ALLOWANCES> 0
<INVENTORY> 315225
<CURRENT-ASSETS> 763397
<PP&E> 1366423
<DEPRECIATION> 675373
<TOTAL-ASSETS> 2048890
<CURRENT-LIABILITIES> 831562
<BONDS> 225593
0
0
<COMMON> 147295
<OTHER-SE> 639090
<TOTAL-LIABILITY-AND-EQUITY> 2048890
<SALES> 1558603
<TOTAL-REVENUES> 1558603
<CGS> 1320705
<TOTAL-COSTS> 1320705
<OTHER-EXPENSES> 116152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18723
<INCOME-PRETAX> 101550
<INCOME-TAX> 28942
<INCOME-CONTINUING> 72608
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 72608
<EPS-PRIMARY> 0.51
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</TABLE>
