<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 September 30, 1997
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)
(732) 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 October 31, 1997
--------------------- -------------------------------
$1 par value 144,466,135
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 Nine Months Ended
September 30, September 30,
------------------ ----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
Net sales ......................... $836,117 $800,894 $2,617,052 $2,359,497
Cost of sales ..................... 696,000 676,810 2,180,681 1,997,515
-------- -------- ---------- ----------
Gross profit ................. 140,117 124,084 436,371 361,982
Selling, administrative and other
expenses ........................ 69,896 61,556 223,827 177,708
-------- -------- --------- ----------
Earnings from operations ..... 70,221 62,528 212,544 184,274
Equity in losses of affiliates .... (3,071) (607) (2,587) (2,080)
Gain on sale of investment ........ - - 305 -
Net interest expense .............. (12,427) (13,009) (38,707) (31,732)
-------- -------- -------- ---------
Earnings before income taxes 54,723 48,912 171,555 150,462
Income tax expense ................ 15,903 13,940 50,952 42,882
-------- -------- -------- ---------
Net earnings ................. $ 38,820 $ 34,972 $120,603 $ 107,580
======== ======== ======== =========
Net earnings per share ............ $ 0.27 $0.24 $ 0.84 $ 0.75
======== ======== ======== =========
Cash dividends paid per share ..... $ 0.10 $0.09 $ 0.28 $ 0.27
======== ======== ======== =========
Average number of shares
outstanding ..................... 144,349 143,869 144,201 143,796
======== ======== ======== =========
See the Accompanying Note to the Condensed Consolidated Financial Statements
2
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
September 30, December 31,
1997 1996
------------ ------------
Cash ................................ $ 50,633 $ 39,683
Receivables ......................... 337,310 385,904
Committed metal positions ........... 353,055 357,087
Inventories ......................... 362,638 337,098
Other current assets ................ 45,064 68,557
---------- ------------
Total current assets ........... 1,148,700 1,188,329
Investments ......................... 196,889 221,364
Property, plant and equipment, net .. 776,830 744,655
Other noncurrent assets ............. 371,683 336,156
---------- ------------
Total assets ................... $2,494,102 $2,490,504
========== ============
Short-term borrowings ............... $ 317,192 $ 304,895
Accounts payable .................... 132,752 166,202
Hedged metal obligations ............ 402,607 414,097
Other current liabilities ........... 193,238 187,803
---------- ------------
Total current liabilities ...... 1,045,789 1,072,997
Long-term debt ...................... 373,776 375,075
Other noncurrent liabilities ........ 199,047 209,276
Shareholders' equity ................ 875,490 833,156
---------- ------------
Total liabilities and
shareholders' equity ...... $2,494,102 $2,490,504
========== ============
See the Accompanying Note to the Condensed Consolidated Financial Statements
3
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
---------- ---------
Cash flows from operating activities
Net earnings ........................................ $ 120,603 $ 107,580
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation, depletion and amortization ......... 64,798 54,898
Equity results, net of dividends ................. 6,390 4,595
Net change in assets and liabilities
Metal related ............................... 86,986 (133,978)
All other ................................... (60,296) (99,988)
--------- ---------
Net cash provided by (used in) operating
activities ..................................... 218,481 (66,893)
--------- ---------
Cash flows from investing activities
Capital expenditures, net ........................... (80,454) (95,466)
Proceeds from sale of business ...................... 1,128 500
Acquisitions and investments, net ................... (24,541) (269,516)
Other ............................................... (1,893) 3,736
--------- ---------
Net cash used in investing activities ............ (105,760) (360,746)
--------- ---------
Cash flows from financing activities
Net change in short-term borrowings ................. 11,801 192,572
Net change in hedged metal obligations .............. (82,696) 140,632
Proceeds from issuance of long-term debt ............ 950 249,726
Repayment of long-term debt ......................... (1,732) (100,225)
Purchase of treasury stock .......................... - (7,357)
Stock bonus and option plan transactions ............ 11,355 12,346
Dividends paid ...................................... (40,404) (38,828)
--------- ---------
Net cash provided by (used in) financing
activities ..................................... (100,726) 448,866
Effect of exchange rate changes on cash ............... (1,045) (506)
--------- ---------
Net change in cash ............................... 10,950 20,721
Cash at beginning of year ........................ 39,683 40,023
--------- ---------
Cash at end of period ............................ $ 50,633 $ 60,744
========== =========
See the Accompanying Note to the Condensed Consolidated Financial Statements
4
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ENGELHARD CORPORATION
BUSINESS SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Net Sales
Catalysts and Chemicals ...... $217,316 $211,168 $ 671,927 $ 627,962
Pigments and Additives ....... 154,953 147,660 449,447 365,278
Engineered Materials and
Industrial Commodities
Management ............... 463,848 442,066 1,495,678 1,366,257
-------- -------- ---------- ----------
$836,117 $800,894 $2,617,052 $2,359,497
======== ======== ========== ==========
Operating Earnings
Catalysts and Chemicals ...... $ 28,724 $ 28,033 $ 101,591 $ 94,379
Pigments and Additives ....... 30,524 29,697 86,665 70,032
Engineered Materials and
Industrial Commodities
Management ............... 18,230 9,417 43,230 34,432
-------- -------- ---------- ----------
77,478 67,147 231,486 198,843
Equity in losses of
affiliates .................. (3,071) (607) (2,587) (2,080)
Interest and other expenses, net (19,684) (17,628) (57,344) (46,301)
-------- -------- ---------- ----------
Earnings before income taxes $ 54,723 $ 48,912 $ 171,555 $ 150,462
======== ======== ========== ==========
See the Accompanying Note to the Condensed Consolidated Financial Statements
5
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Note to the Condensed Consolidated Financial Statements
- -------------------------------------------------------
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 1996 Annual Report to Shareholders. Certain prior year
amounts have been reclassified to conform with the current year presentation.
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
- ------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the Third Quarter of 1997
With the Third Quarter of 1996
- ---------------------------------------
Earnings before income taxes for the third quarter of 1997 were $54.7
million compared with $48.9 million in the third quarter of 1996. Operating
earnings for the third quarter of 1997 increased 15% as all segments reported
higher earnings.
The Company's share of losses from affiliates was $3.1 million for the
third quarter of 1997 compared with losses of $0.6 million in 1996. The increase
largely reflected the less favorable results of Engelhard-CLAL, a precious metal
fabrication joint venture. The sharp increase in the cost of leasing certain
precious metals significantly impacted their results. These extraordinary lease
costs are expected to continue through the fourth quarter.
Net earnings for the third quarter of 1997 were $38.8 million compared with
$35.0 million in 1996. The effective tax rate was 29.1% compared with 28.5% for
the same period last year. The higher effective rate was primarily due to a
shift in the geographic mix of earnings and a changing product slate.
Net sales for the third quarter of 1997 increased 4% to $836.1 million from
$800.9 million for the same quarter of 1996 with higher sales in all business
segments.
Catalysts and Chemicals
- -----------------------
Operating earnings increased 2% to $28.7 million in the third quarter of
1997 from $28.0 million in the same period of 1996 benefitting from increased
volumes and raw material yields resulting from operating efficiencies. Net sales
were up 3% to $217.3 million in 1997 from $211.2 million in 1996.
The Environmental Technologies Group had higher earnings largely due to
increased volumes in Europe, a favorable product mix in North America and
manufacturing efficiencies, which more than offset higher raw material costs
6
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stemming from a new, less-favorable precious-metal supply contract and weakness
in demand for stationary source emission control systems. In the Petroleum
Catalysts Group, earnings improved slightly as demand for fluid catalytic
cracking catalysts increased modestly in North America and in Asia. The Chemical
Catalysts Group had lower earnings largely due to higher operating expenses and
unfavorable exchange rates.
Pigments and Additives
- ----------------------
Operating earnings increased 3% to $30.5 million in the third quarter of
1997 from $29.7 million in 1996. Net sales increased 5% to $155.0 million in
1997 from $147.7 million in 1996.
Earnings in the Performance Additives Group were up significantly due to
higher demand for color pigments in the ink and traffic grade markets and for
pearlescent pigments in the automotive and cosmetics markets. Lower earnings in
the Paper Pigments and Additives Group reflected higher manufacturing costs and
continuing pricing pressures, which more than offset a modest improvement in
sales volume to the paper industry.
Engineered Materials and Industrial Commodities Management
- ----------------------------------------------------------
Operating earnings nearly doubled to $18.2 million in the third quarter of
1997 from $9.4 million in the same period of 1996. Net sales increased 5% to
$463.8 million in 1997 from $442.1 million in 1996.
The Industrial Commodities Management Group generated significantly higher
earnings by continuing to capitalize on unusual market volumes and volatility.
The Engineered Materials Group had higher earnings primarily due to
manufacturing efficiencies and increased demand for metal joining products,
which more than offset higher raw material costs stemming from a new,
less-favorable precious-metal supply contract.
Comparison of the First Nine Months of
1997 With the First Nine Months of 1996
- ---------------------------------------
Earnings before income taxes for the first nine months of 1997 were $171.6
million compared with $150.5 million in the first nine months of 1996. The 1997
results included the positive impact of about 13% from Mearl, a May 31, 1996
acquisition. Results from Mearl (excluding the related interest cost) are
included in the Pigments and Additives segment. Operating earnings for the first
nine months of 1997 increased 16% as all segments reported higher earnings.
The Company's share of losses from affiliates was $2.6 million for the
first nine months of 1997 compared with losses of $2.1 million in 1996. The
increase largely reflected the less favorable results of Engelhard-CLAL, a
precious metal fabrication joint venture. Beginning in the second quarter of
1997, this joint venture incurred a sharp increase in the cost of leasing
certain precious metals. These extraordinary lease costs are expected to
continue through the fourth quarter.
Higher net interest expense was primarily due to the acquisition of Mearl.
7
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Net earnings for the first nine months of 1997 were $120.6 million compared
with $107.6 million in 1996. The effective tax rate in 1997 was 29.7% compared
with 28.5% for the same period last year. The higher effective rate was
primarily due to a shift in the geographic mix of earnings and a changing
product slate.
Net sales for the first nine months of 1997 increased 11% to $2.6 billion
from $2.4 billion for the same period in 1996 with higher sales in all business
segments. The acquisition of Mearl accounted for about 30% of the increase in
net sales and about 25% of the increase in selling, administrative and other
expenses; see "Pigments and Additives".
Catalysts and Chemicals
- -----------------------
Operating earnings increased 8% to $101.6 million in the first nine months
of 1997 from $94.4 million in the same period of 1996 benefitting from increased
volumes and raw material yields resulting from operating efficiencies. Net sales
increased 7% to $671.9 million in 1997 from $628.0 million in 1996.
The Environmental Technologies Group had significantly higher earnings
largely due to increased volumes in the United States and Europe, a favorable
product mix in North America and manufacturing efficiencies, which more than
offset higher raw material costs stemming from a new, less-favorable
precious-metal supply contract and weakness in demand for stationary source
emission control systems. In the Petroleum Catalysts Group, earnings declined
significantly due to continuing weak demand for fluid catalytic cracking
catalysts and for moving bed catalysts. The Chemical Catalysts Group had
slightly lower earnings largely due to lower base-metal product sales and
unfavorable exchange rates.
Pigments and Additives
- ----------------------
Operating earnings increased 24% to $86.7 million in the first nine months
of 1997 from $70.0 million in the same period of 1996. Net sales increased 23%
to $449.4 million in 1997 from $365.3 million in 1996. Most of these
improvements were due to Mearl.
Performance Additives Group earnings were up significantly due to the
timing of the Mearl acquisition (May 1996) and higher demand for pearlescent
pigments in the automotive and cosmetics markets. Lower earnings in the Paper
Pigments and Additives Group reflected higher manufacturing costs and continuing
pricing pressures, which more than offset a modest improvement in sales volume
to the paper industry.
Engineered Materials and Industrial Commodities Management
- ----------------------------------------------------------
Operating earnings increased 26% to $43.2 million in the first nine months
of 1997 from $34.4 million in 1996. Net sales increased 9% to $1.5 billion in
1997 from $1.4 billion in 1996.
8
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The Industrial Commodities Management Group generated significantly higher
earnings by capitalizing on unusual market volumes and volatility. The
Engineered Materials Group had significantly lower earnings due to the absence
of a one-time order for precious-metal coated products in 1996, an unfavorable
sales mix for electro metallic products, and higher raw material costs stemming
from a new, less-favorable precious-metal supply contract.
Financial Condition and Liquidity
---------------------------------
At September 30, 1997 the Company's current ratio was 1.1, the same as at
December 31, 1996. The Company's total debt to total capital ratio was 44%, a
slight improvement compared with 45% at year-end. A reduction in committed metal
positions resulted in a decrease in hedged metal obligations, excluding the
impact of changes in the fair value of commodity derivative instruments which
had no effect on cash. The nature of the Industrial Commodities Management
business can result in significant fluctuations in cash flow. Management
believes that the Company will continue to have adequate access to credit and
capital markets to meet its needs for the foreseeable future, and that
obligations relating to Year 2000 issues will not have a material adverse effect
on financial condition, operating results or cash flows.
Possible Fourth Quarter Charges
-------------------------------
In response to the weak results of certain Company operations, management
is considering a number of corrective actions. The operations involved include:
Engelhard-CLAL, a 50/50 joint venture in precious metal fabricated products;
Engelhard/ICC, a 50/50 joint venture in desiccant-based, climate-control
systems; the Company's stationary source business, which manufactures and
markets air handling systems used in the abatement of stationary source
emissions; and certain of the Company's fluid catalytic cracking catalyst
operations. While the Company has not completely defined the scope of the
actions contemplated with respect to such operations, other than its previously
announced restructuring of Engelhard/ICC, such actions are likely to result in
special charges in the fourth quarter of 1997.
Other Matters
-------------
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" (EPS) was issued in February 1997 and becomes effective on December 31,
1997. SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
becomes effective on December 31, 1998. Had these new guidelines been in effect
on September 30, 1997, the Company would have experienced no material impact
from adoption.
A ruling by the U.S. District Court, Middle District of Georgia, allowed
the Company to complete the acquisition of certain assets of the Floridin
Company from U.S. Borax in June 1997. The Justice Department appealed the
District Court ruling, and on October 23, 1997 the U.S. Court of Appeals (11th
Circuit) affirmed the District Court's ruling.
9
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PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K Pages
- ------- -------------------------------- -----
(a) (12) Computation of the ratio of earnings to fixed charges. 12-13
(b) There were no reports on Form 8-K filed during the quarter
ended September 30, 1997.
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 November 14, 1997 /s/ Orin R. Smith
--------------------- -----------------------------
Orin R. Smith
Chairman and Chief
Executive Officer
Date November 14, 1997 /s/ Thomas P. Fitzpatrick
--------------------- -----------------------------
Thomas P. Fitzpatrick
Vice President and
Chief Financial Officer
Date November 14, 1997 /s/ David C. Wajsgras
---------------------- -----------------------------
David C. Wajsgras
Controller
11
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EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
12
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<TABLE>
<CAPTION>
EXHIBIT 12
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30, Years Ended December 31,
----------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Income from continuing operations
before provision for income taxes $171,555 $209,955 $185,312 $157,306 ($4,709) $133,858
Add /(deduct)
Portion of rents representative
of the interest factor 2,925 3,900 4,700 4,800 4,500 4,000
Interest on indebtedness 38,707 45,009 31,326 21,954 13,696 16,231
Equity dividends 3,803 2,515 3,411 3,800 2,600 3,100
Equity (earnings)/losses 2,587 5,008 (695) (632) (3,443) (7,445)
-------- -------- -------- -------- ------- --------
Earnings as adjusted $219,577 $266,387 $224,054 $187,228 $12,644 $149,744
======== ======== ======== ======== ======= ========
Fixed Charges
Portion of rents representative
of the interest factor $2,925 $3,900 $4,700 $4,800 $4,500 $4,000
Interest on indebtedness 38,707 45,009 31,326 21,954 13,696 16,231
Capitalized interest 565 1,053 1,000 800 2,700 400
-------- -------- -------- -------- ------- --------
$42,197 $49,962 $37,026 $27,554 $20,896 $20,631
======== ======== ======== ======== ======= ========
Ratio of Earnings to Fixed Charges 5.20 5.33 6.05 6.79 - (a) 7.26
======== ======== ======== ======== ======= ========
(a) For fiscal 1993, earnings were insufficient to cover fixed charges by approximately $8.3 million. Earnings in 1993
were negatively impacted by a special charge of $148.0 million for the realignment and consolidation of businesses and
environmental matters. Without such charge, the ratio of earnings to fixed charges for 1993 would have been 7.69.
</TABLE>
13
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 50633
<SECURITIES> 0
<RECEIVABLES> 337310
<ALLOWANCES> 0
<INVENTORY> 362638
<CURRENT-ASSETS> 1148700
<PP&E> 1518689
<DEPRECIATION> 741859
<TOTAL-ASSETS> 2494102
<CURRENT-LIABILITIES> 1045789
<BONDS> 373776
0
0
<COMMON> 147295
<OTHER-SE> 728195
<TOTAL-LIABILITY-AND-EQUITY> 2494102
<SALES> 2617052
<TOTAL-REVENUES> 2617052
<CGS> 2180681
<TOTAL-COSTS> 2180681
<OTHER-EXPENSES> 223827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38707
<INCOME-PRETAX> 171555
<INCOME-TAX> 50952
<INCOME-CONTINUING> 120603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120603
<EPS-PRIMARY> 0.84
<EPS-DILUTED> .00
</TABLE>
