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1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1997
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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 No.)
incorporation or organization)
101 WOOD AVENUE, ISELIN, NJ 08830
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (732) 205-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------------- -----------------------------------------
Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. |X|
Number of shares of common stock outstanding as of March 13, 1998 - 144,605,129.
Aggregate market value of common stock held by non-affiliates as of March 13,
1998 - $1,861,900,762.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Proxy Statement
for the 1998 Annual Meeting of Shareholders.
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Table of Contents
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Page
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1997
Form Proxy
Item 10-K Statement
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Part I
1. Business
(a) General development of business 3 -
(b) Segment and geographic area data 3-8 -
(c) Description of business 3-8, 42-44 -
2. Properties 9 -
3. Legal Proceedings 9-10 -
4. Submission of Matters to a Vote of 10 -
Security Holders
Part II
5. Market for Registrant's 10 -
Common Equity and Related
Stockholder Matters
6. Selected Financial Data 11, 52 -
7. Management's Discussion and 12-23 -
Analysis of Financial Condition
and Results of Operations
8. Financial Statements and 24-51 -
Supplementary Data
9. Changes in and Disagreements with 52 -
Accountants on Accounting and Financial
Disclosure
Part III
10. Directors and Executive Officers of 53-54 3-6
the Registrant
11. Executive Compensation 54 11-22
12. Security Ownership of Certain 54 2-3,7-8
Beneficial Owners and Management
13. Certain Relationships and Related 54 2-7,10
Transactions
Part IV
14. Exhibits, Financial Statement 55-86 -
Schedules, and Reports on Form 8-K
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PART I
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Item 1. Business
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Engelhard Corporation (which together with its Subsidiaries, is
collectively referred to as the Company) was formed under the laws of Delaware
in 1938 and became a public company in 1981. The Company's principal executive
offices are located at 101 Wood Avenue, Iselin, NJ, 08830 (telephone number
(732) 205-5000).
The Company develops, manufactures and markets technology-based performance
products and engineered materials for a wide spectrum of industrial customers,
and provides services to precious and base metals customers and markets
energy-related services.
The Company employed approximately 6,400 people as of January 1, 1998 and
operates on a worldwide basis with corporate and operating headquarters and
principal manufacturing facilities and mineral reserves in the United States
with other operations conducted in the Asia-Pacific region, Canada, the European
Community, the Russian Federation and South America.
The Company's businesses are organized into three segments - Catalysts and
Chemicals, Pigments and Additives, and Engineered Materials and Industrial
Commodities Management.
Information concerning the Company's net sales, operating earnings and
identifiable assets by industry segment and by geographic area; inter-area
transfers by geographic area; and export sales is included in Note 15, "Business
Segment and Geographic Area Data", of the Notes to Consolidated Financial
Statements on pages 42-44 of this Form 10-K.
Catalysts and Chemicals
The Catalysts and Chemicals segment comprises three business groups: the
Environmental Technologies Group, consisting of Automotive Emission Systems,
Heavy-Duty Power Systems and Process Emission Systems, serving the automotive,
off-road vehicle, light and heavy duty truck, aircraft, power generation and
process industries; the Petroleum Catalysts Group, serving the petroleum
refining industries; and the Chemical Catalysts Group, serving the chemical,
petrochemical, pharmaceutical and food processing industries.
Environmental technology catalysts are used in applications such as the
abatement of carbon monoxide, oxides of nitrogen and hydrocarbons from gasoline,
diesel and alternate fueled vehicle exhaust gases to meet emission control
standards. These catalysts are also used for the removal of odors, fumes and
pollutants generated by a variety of process industries including but not
limited to the painting of automobiles, appliances and other equipment; printing
processes; the manufacture of nitric acid and tires; in the curing of polymers;
and power generation sources. In 1997, the Company dissolved its Metreon joint
venture, formed in 1995 with W. R. Grace, to develop and market metallic
substrate catalytic converters for cars. Also in 1997, the Company purchased the
assets of W. R. Grace's Camet Metal Monolith business, which manufactures and
markets pre-coated catalyzed metal monoliths for mobile-source applications as
well as stationary NOx and carbon dioxide emission-control products.
The Company also participates in the manufacture and supply of automobile
exhaust emission-control catalysts through affiliates serving the Asia-Pacific
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region: N.E. Chemcat Corporation (Japan) - 38.8% owned; and Heesung-Engelhard
(South Korea) - 49% owned, both of which also produce other catalysts and
products.
The petroleum refining catalyst products consist of a variety of catalysts
and processes used in the petroleum refining industry. The principal products
are zeolitic cracking catalysts which are widely used to provide economies in
petroleum processing. The Company commercially offers a full line of fluid
catalytic cracking (FCC) catalysts many of which are based on patented
technology which can be used to control selectivity and cracking activity
virtually independently of one another. This characteristic permits custom
catalysts formulation for a large number of users.
The Company manufactures reforming, isomerization and hydrotreating
catalysts for a variety of petroleum refining processes. These catalysts are
marketed in North America and the Caribbean by Acreon Catalysts, a jointly owned
partnership formed by the Company and Procatalyse. In 1995, the Company and
Procatalyse announced plans to expand the production capacity of their joint
venture. To serve market needs more effectively, in 1997 they added alumina and
hydrotreating catalyst manufacturing capacity in North America.
The chemical catalysts products consist of catalysts and sorbents used in
the production of a variety of products or intermediates, including synthetic
fibers, fragrances, antibiotics, vitamins, polymers, plastics, detergents, fuels
and lube oils, solvents, oleochemicals and edible products. These catalysts are
generally used in both batch and continuous operations requiring special
catalysts for each application. Chemical catalysts are based on the Company's
proprietary technology and many times are developed in close cooperation with
specific customers. Sorbents are used to purify and decolorize naturally
occurring fats and oils for manufacture into shortenings, margarines and cooking
oils.
In early 1998, Engelhard and Mallinckrodt Inc. reached an agreement in
principle for the Company to buy Mallinckrodt's catalyst business for $210
million, pending board approvals by both companies, execution of a definitive
agreement and other relevant government approvals. The acquisition would provide
immediate opportunities for Engelhard's chemical catalysts business to
manufacture and market new catalyst product lines.
The products of the Catalysts and Chemicals segment compete in the
marketplace on the basis of cost and value performance. No single competitor is
dominant in the markets in which the Company operates.
The manufacturing operations of the Catalysts and Chemicals segment are
carried out in 12 states in the United States. Subsidiary operations are located
in Germany, Italy, The Netherlands, South Africa and the United Kingdom with
equity investments located in the United States, Japan and South Korea. The
products are sold principally through the Company's sales organizations or its
equity investments, supplemented by independent distributors and
representatives.
The principal raw materials used by the Catalysts and Chemicals segment
include metals, procured by the Engineered Materials and Industrial Commodities
Management segment; kaolin, supplied by the Pigments and Additives segment; and
a variety of minerals and chemicals which are generally readily available. For
more information about precious-metal supply contracts, see the "Engineered
Materials and Industrial Commodities Management" section below on page 6 of
this Form 10-K.
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As of January 1, 1998 the Catalysts and Chemicals segment had approximately
2,800 employees worldwide. Most hourly employees are covered by collective
bargaining agreements. Employee relations have generally been good.
Pigments and Additives
The Pigments and Additives segment is comprised of performance products
based on kaolin and used as coating and extender pigments for the paper industry
and mineral based performance additives products. The segment's pearlescent and
color specialty pigments and additives businesses serve the plastics, coatings,
paint, ink, cosmetics, packaging, and allied industries in a variety of
applications. The segment also supplies iridescent films used in an assortment
of creative, decorative, packaging and security applications.
Products for the paper market include Miragloss (registered trademark)
pigment for coating applications requiring superior gloss and brightness;
Luminex (registered trademark) pigment, a high brightness material for
high-quality paper coating: Ansilex (registered trademark) pigments that provide
the desired opacity, brightness, gloss and printability in paper products;
Nuclay (registered trademark) specialized coating pigment for lightweight
publication papers; Exsilon (registered trademark) structured pigment that
improves the printability of lightweight coated paper and carbonless forms; and
Spectrafil (registered trademark) pigments for the newsprint and groundwood
specialties markets.
Minerals based performance additives products are used principally as
extender pigments for a variety of purposes in the manufacture of plastic,
rubber, ink, ceramic, adhesive products and in paint. Principal products include
Satintone (registered trademark) products, ASP (registered trademark) pigments
and Translink (registered trademark) surface modified reinforcements. The
segment also produces a variety of organic and inorganic color and pearlescent
and natural pearl pigments for a wide range of applications. Additionally, the
segment also produces gellants and sorbents with an assortment of uses as well
as Mearlcrete and Metamax (registered trademarks) for the concrete industry.
The products of the Pigments and Additives segment compete with other
pigments and extenders on the basis of cost and value performance. No single
competitor is dominant in the markets in which the Company competes.
Pigments and Additives manufacturing operations are carried out in nine
states in the United States, Finland, Japan, and South Korea. Subsidiary
sales and distribution centers are located in France, Hong Kong, Mexico, The
Netherlands, and Turkey. An equity investment is located in the Ukraine.
Products are sold through the Company's sales organization supplemented by
independent distributors and representatives.
The principal raw materials used by the Pigments and Additives segment
include kaolin, attapulgite, and mica from mineral reserves owned or leased by
the Company and a variety of other minerals and chemicals which are readily
available.
As of January 1, 1998 the Pigments and Additives segment had approximately
2,400 employees worldwide. Most hourly employees are covered by collective
bargaining agreements. Employee relations have generally been good.
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Engineered Materials and Industrial Commodities Management
The Engineered Materials and Industrial Commodities Management segment
includes the Engineered Materials Group, serving a broad spectrum of industries
and the Industrial Commodities Management Group, which is responsible for
precious and base metals sourcing and dealing, for managing the precious and
base metals requirements of the Company, and for power marketing.
The products of the Engineered Materials Group consist of performance
products primarily employing metal-based materials, such as temperature-sensing
devices, precious metals coating and electroplating materials, conductive pastes
and powders and brazing alloys. These products are used in the manufacture of
automotive components, industrial devices, ceramics, chemicals, instruments,
control devices, medical supplies, hardware, furniture and air conditioners.
The products of the Engineered Materials Group compete on the basis of cost
and value performance. No single competitor is dominant in the markets in which
the Company operates.
Engineered Materials manufacturing operations are carried out in five
states in the United States and in facilities located in Canada and the United
Kingdom. The products are sold principally through the Company's sales
organization, supplemented by independent distributors and representatives.
The principal raw materials used by these operations are precious metals
including those of the platinum group (platinum, palladium, rhodium, iridium and
ruthenium), silver and gold, all of which are generally available.
The Industrial Commodities Management Group is responsible for procuring
precious and base metals to meet the requirements of the Company's operations
and its customers. Supplies of newly mined platinum group metals are obtained
primarily from South Africa and the Russian Federation and to a lesser extent
from the United States and Canada, which four regions are the only known
significant sources. Most of these platinum group metals are obtained pursuant
to a number of contractual arrangements with different durations and terms. Gold
and silver are purchased from various sources. In addition, in the normal course
of business, certain customers and suppliers deposit significant quantities of
precious metals with the Company under a variety of arrangements. Equivalent
quantities of precious metals are returnable as product or in other forms.
The Industrial Commodities Management Group also engages in precious and base
metals dealing operations with industrial consumers, dealers, central banks,
miners and refiners. It also participates in refining of precious metals and
marketing of energy-related services. For more information regarding precious
metals operations, see Note 7, "Metal Positions and Obligations", on pages 35
and 36 and Note 14, "Financial Instruments", on pages 40 and 41 of this Form
10-K. Offices are located in the United States, Japan, Peru, the Russian
Federation, Switzerland and the United Kingdom.
As of January 1, 1998 the Engineered Materials and Industrial Commodities
Management segment had approximately 475 employees worldwide. Most hourly
employees are covered by collective bargaining agreements. Employee relations
have generally been good.
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Major Customer
For the year ended December 31, 1996, Engelhard-CLAL, a related party and a
customer of the Engineered Materials and Industrial Commodities Management
segment, accounted for 16% of the Company's net sales. Sales to Engelhard-CLAL
include both fabricated products and precious metals and were therefore
significantly influenced by fluctuations in precious-metal prices as well as the
quantity and type of metal purchased. In such cases, market price fluctuations,
quantities and types purchased can result in material variations in sales
reported, but do not usually have a direct or substantive effect on earnings.
Research and Patents
The Company currently employs approximately 425 scientists, technicians and
auxiliary personnel engaged in research and development in the field of
chemistry and metallurgy. These activities are conducted in the United States
and abroad. Research and development expense was $61.4 million in 1997, $56.5
million in 1996 and $53.0 million in 1995.
Research facilities include fully staffed instrument analysis laboratories,
which the Company maintains in order to achieve the high level of precision
necessary for its various business groups and to assist customers in
understanding how Engelhard's products and services can add value to their
businesses.
The Company owns or is licensed under numerous patents which have been
secured over a period of years. It is the policy of the Company to normally
apply for patents whenever it develops new products or processes considered to
be commercially viable and, in appropriate circumstances, to seek licenses when
such products or processes are developed by others. While the Company deems its
various patents and licenses to be important to certain aspects of its
operations, it does not consider any significant portion or its business as a
whole to be materially dependent on patent protection.
Environmental Matters
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing, environmental investigations
and cleanup plans at several currently or formerly owned and/or operated
sites, including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The
Company is continuing to investigate contamination at Plainville under a 1993
agreement with the United States Environmental Protection Agency (EPA) and is
awaiting approval of a decommissioning plan by the State of Massachusetts
under authority delegated by the Nuclear Regulatory Commission. Investigation
of the environmental status at Salt Lake City continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at Attapulgus, under a 1994 consent order with the Georgia Department
of Natural Resources, Environmental Protection Division, is expected to be
completed in 1998.
In addition, 17 sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
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substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many
cases, the dollar amount of the claim is unspecified and claims have been
asserted against a number of other entities for the same relief sought from
the Company. Based on existing information, the Company believes that it is a
de minimis contributor of hazardous substances at many of the sites referenced
above. Subject to the reopening of existing settlement agreements for
extraordinary circumstances or natural resource damages, the Company has
settled a number of other cleanup proceedings. The Company has also responded
to information requests from EPA and state regulatory authorities in
connection with other Superfund sites.
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1997 and 1996 were $43.6 million
and $49.6 million, respectively, including $3.8 million and $4.6 million,
respectively, for Superfund sites. These amounts represent those costs which
the Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 60% of what it believes are the reasonably possible
environmental cleanup related costs of a noncapital nature. The estimate of
reasonably possible costs is less certain than the probable estimate upon
which the accrual is based.
During the past three-year period, cash payments for environmental cleanup
related matters were $6.0 million, $7.0 million and $7.6 million for 1997,
1996 and 1995, respectively. The amounts accrued in connection with
environmental cleanup related matters were not significant over this time
period.
For the past three-year period, environmental related capital projects have
averaged less than 10 percent of the Company's total capital expenditure
programs, and the expense of environmental compliance (environmental testing,
permits, consultants and in-house staff) was not significant.
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations.
Based on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup related matters are
projected to be $10.0 million for 1998, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, management
believes that environmental cleanup related reserves at December 31, 1997 are
reasonable and adequate and that environmental matters are not expected to
have a material adverse effect on financial condition. These matters, if
resolved in a manner different from the estimates, could have a material
adverse effect on operating results or cash flows when resolved in a future
reporting period.
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Item 2. Properties
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The Company owns approximately 22 acres of land and four buildings with a
combined area of approximately 420,000 square feet in Iselin, NJ. These
buildings serve as the principal executive and administrative offices of the
Company and its operating segments as well as the major research and development
facilities for the Company's operations. The Company also owns research
facilities in Gordon, GA; Union, NJ; Buchanan and Ossining, NY; Beachwood, OH;
and DeMeern, The Netherlands.
The Catalysts and Chemicals segment owns and operates a complex of plants
in Georgia that manufactures petroleum cracking catalysts, and other plants
located in Huntsville, AL; Santa Barbara, CA; East Windsor, CT; Mangonk, FL;
Wilmington, MA; South Lyon, MI; Jackson, MS; Union, NJ; Elyria and Hiram,
OH; Duncan and Seneca, SC; Salt Lake City, UT; Hannover and Nienburg, Germany;
Rome, Italy; Terneuzen and DeMeern, The Netherlands; Port Elizabeth, South
Africa; and Coleford, United Kingdom. In addition, the segment owns a mine in
Mississippi and leases a mine in Arizona.
The Pigments and Additives segment owns and operates five kaolin mines and
five milling facilities in Middle Georgia which serve an 85 mile network of
pipelines to three processing plants. It also owns land containing kaolin and
leases, on a long-term basis, kaolin mineral rights to additional acreage. In
addition, the Company owns sales and manufacturing facilities in Helsinki, Kotka
and Rauma, Finland. The segment also owns and operates attapulgite processing
plants in Quincy, FL and Attapulgus, GA near the area containing its attapulgite
reserves, plus a mica mine and processing facilities in Hartwell, GA. Management
believes that the Company's crude kaolin, attapulgite and mica reserves will be
sufficient to meet its needs for the foreseeable future. The segment also owns
and operates color, pearlescent pigments and film manufacturing facilities in
Sylmar, CA; Louisville, KY; Eastport, ME; Roselle Park, NJ; Peekskill, NY;
Elyria, OH; Charleston, SC; Haarlem, The Netherlands; and Inchon, South Korea.
In addition, the segment owns mines in Florida.
The Engineered Materials and Industrial Commodities Management segment owns
and operates manufacturing facilities in East Newark, NJ; Anaheim, CA; Lincoln
Park, MI; Warwick, RI; Ontario, Canada; and Cinderford, United Kingdom. Other
operations are conducted at owned facilities in Iselin, NJ; Tokyo, Japan; Lima,
Peru; Zug, Switzerland; and London, United Kingdom.
Management believes that the Company's processing and refining facilities,
plants and mills are suitable and have sufficient capacity to meet its normal
operating requirements for the foreseeable future.
Item 3. Legal Proceedings
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The Company and certain of its officers and directors are defendants in a
consolidated class action complaint pending in the U.S. District Court for the
District of New Jersey on behalf of persons who bought Engelhard stock between
April 1995 and November 1995. The complaint claims that defendants made false
statements and omissions and traded on nonpublic information. The Company
believes the class action to be without merit and is vigorously defending
against it.
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The Company is one of a number of defendants in numerous proceedings which
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to talc, asbestos or other "toxic" substances purportedly supplied by
the Company and other defendants. The Company is also subject to a number of
environmental contingencies and is a defendant in a number of lawsuits covering
a wide range of other matters. In some of these matters, the remedies sought or
damages claimed are substantial. While it is not possible to predict with
certainty the ultimate outcome of these lawsuits or the resolution of the
environmental contingencies, management believes, after consultation with
counsel, that resolution of these matters is not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on the
operating results or cash flows when resolved in a future reporting period.
In July 1996, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation concerning the sales of Engelhard stock by certain
of the Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company has provided
documents to the SEC and witnesses have been examined by the SEC staff.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
PART II
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Market for Registrant's Common Equity
Item 5. and Related Stockholder Matters
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As of March 13, 1998, there were 8,313 holders of record of the Company's
common stock, which is traded on the New York Stock Exchange (ticker symbol
"EC"), as well as on the London and Swiss stock exchanges.
The range of market prices and cash dividends paid for each quarterly
period were as follows:
NYSE Cash
market price dividends paid
High Low per share
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1997
First quarter $23 3/4 $18 3/4 $0.09
Second quarter 22 1/4 18 5/8 0.09
Third quarter 22 15/16 19 9/16 0.10
Fourth quarter 21 5/8 17 1/16 0.10
1996
First quarter $24 3/8 $19 3/8 $0.09
Second quarter 26 1/8 22 3/8 0.09
Third quarter 23 3/4 19 1/8 0.09
Fourth quarter 23 1/2 17 7/8 0.09
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Item 6. Selected Financial Data
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Selected Financial Data
($ in millions, except per
share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
Operating Results 1997 1996 1995 1994 1993
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Net sales $3,630.6 $3,184.4 $2,840.1 $2,385.8 $2,150.9
Net earnings(1) 47.8 150.4 137.5 118.0 0.7
Basic earnings per share(2) 0.33 1.05 0.96 0.82 -
Diluted earnings per share(2) 0.33 1.03 0.94 0.82 -
Total assets $2,586.3 $2,490.5 $1,943.3 $1,777.8 $1,436.2
Long-term debt 373.6 375.1 211.5 111.8 112.2
Shareholders' equity 785.3 833.2 737.7 614.7 531.3
Cash dividends paid per share(2) $0.38 $0.36 $0.35 $0.30 $0.28
Return on average shareholders' equity 5.9% 19.2% 20.3% 20.6% 0.1%
Unless otherwise indicated, all per-share amounts are presented as basic earnings per share, as calculated under
SFAS No. 128, "Earnings Per Share".
(1) Results in 1997 include special and other charges of $117.7 million ($0.82 per share) for a variety of events,
(including restructuring actions and a loss from the base-metal fraud in Japan).
Results in 1994 include a special credit of $5.0 million ($0.03 per share) representing the reversal of excess
restructuring reserves and a net charge of $5.3 million ($0.04 per share) for a change in the Company's estimate of
compensation expense relating to stock awards.
Results in 1993 include a special charge of $91.8 million ($0.63 per share) for realignment and consolidation of
businesses and environmental matters; a gain of $6.3 million ($0.04 per share) from the sale of the Company's
interest in M&T Harshaw, a base-metal plating business; and a charge for the cumulative effect of an accounting
change of $16.0 million ($0.11 per share) as a result of adopting the provisions of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits".
Results in 1992 include a charge for the cumulative effect of accounting changes of $89.5 million ($0.59 per share)
as a result of adopting the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and No. 109,"Accounting for Income Taxes."
(2) Reflects the three-for-two stock splits as of June 30, 1995 and September 30, 1993.
</TABLE>
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Management's Discussion and Analysis
Item 7. of Financial Condition and Results of Operations
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Management's Discussion and Analysis of Financial Condition
and Results of Operations/Engelhard Corporation
Unless otherwise indicated, all per-share amounts are presented as basic
earnings per share, as calculated under SFAS No. 128, "Earnings per Share."
RESULTS OF OPERATIONS
Note: Net earnings in 1997 include special and other charges of $117.7 million
($0.82 per share) for a variety of events (including restructuring actions and
a loss from the base-metal fraud in Japan, see pages 39 and 40 for detail).
CATALYSTS AND CHEMICALS
The Catalysts and Chemicals segment comprises three business groups:
Environmental Technologies, Petroleum Catalysts and Chemical Catalysts. These
business groups provide a wide range of catalyst-based technologies and
related performance products and processes to help customers comply with
environmental regulations and improve their processes and productivity.
1997 compared with 1996: Sales up 6% and operating earnings up 8%, excluding
the impact of special and other charges. Operating earnings were down 41%,
including the impact of these charges.
Segment Discussion: (Excludes the impact of 1997 special and other charges of
$65.0 million -- see pages 39 and 40 for discussion.) Environmental Technologies
and Chemical Catalysts posted record years for operating results, while
Petroleum Catalysts declined considerably.
ENVIRONMENTAL TECHNOLOGIES
The Environmental Technologies Group develops and markets sophisticated
emission-control technologies and systems that enable customers to meet
stringent environmental regulations at the lowest overall cost.
1997 Performance: Record sales and operating earnings (before the impact of
special and other charges).
Discussion: Automotive catalyst sales and earnings grew driven by continuing
demand for more sophisticated technologies needed to meet stricter
environmental regulations. New business from several European automakers
spurred volume growth. In the United States, market-share gains were more
modest, although Engelhard began catalyst shipments to General Motors.
Shipments to GM are expected to grow in 1998 (for the 1999 model year),
specifically for full-size pick-up trucks and sport utility vehicles.
Improved efficiency at major manufacturing plants in Huntsville, Alabama, and
Nienburg, Germany partially offset the cost impact of a less favorable
precious-metal supply contract that took effect on January 1, 1997.
Revenues and operating earnings from the heavy-duty power systems business
rose on increased sales of thermal coatings that reduce emissions and improve
the fuel economy of gas and jet turbine engines. Sales of Engelhard's CMX
catalytic mufflers to the urban transit retrofit market also increased. During
the year, Engelhard's next-generation ETX-2002 engine upgrade system became
the first technology certified by the U.S. Environmental Protection Agency to
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enable compliance with stricter emission standards that went into effect in
the fourth quarter of 1997.
Sales of equipment and systems to control emissions from stationary sources
declined as uncertainty over the direction of U.S. regulations slowed
installation of more advanced technology. Engelhard restructured its
stationary-source equipment business, leading to the 1998 sale of the portion of
the business related to capital equipment (see Note 12, "Special and Other
Charges," on pages 39 and 40). Engelhard will continue to sell catalyst and
related technology for stationary-source pollution control.
Outlook: Demand for auto-emission catalysts and other environmental
technologies is expected to increase steadily for the rest of the decade
driven by tightening regional emission standards. To meet the growing demand,
Engelhard is prepared to add manufacturing capacity at its plants in the
United States, Germany and South Africa, while continuing to implement
productivity initiatives.
Auto catalyst sales will benefit from new applications on major automotive
platforms, including engines designed to meet ultra-low emission standards.
New regulations in the United States now require transit bus operators in
highly populated areas to install equipment such as Engelhard's ETX-2002
engine upgrade system during scheduled engine rebuilds. However, expected
benefits from this new regulation could be offset by the loss of sales of
older technology to diesel-truck manufacturers.
PETROLEUM CATALYSTS
The Petroleum Catalysts Group's advanced cracking and hydroprocessing
technologies enable petroleum refiners to more efficiently produce gasoline,
transportation fuels and heating oils.
1997 Performance: Slightly lower sales and sharply lower operating earnings
(before the impact of special and other charges).
Discussion: Operating earnings were down considerably, reflecting continuing
losses from European operations. A manufacturing plant in The Netherlands is
scheduled to be mothballed in the second quarter of 1998 (see Note 12, "Special
and Other Charges," on pages 39 and 40). Worldwide sales essentially were flat
versus 1996. Sales of the group's major product line, fluid catalytic cracking
(FCC) catalysts, were up despite maintenance down time at U.S. refineries early
in the year. The sales increase was driven by favorable volume gains outside
Europe and a 2% price increase implemented in August. However, a decline in
sales of hydroprocessing and moving-bed catalysts offset the improved sales of
FCC catalysts. Sales gains were achieved in Asia, particularly for FCC
catalysts, although the stronger dollar impacted pricing to Asian customers.
Outlook: Demand for FCC catalysts is expected to be relatively flat over the
next few years, and competing technologies have become less differentiated.
Competitors have maintained share through price concessions, although prices
now are beginning to stabilize. In this market environment, Engelhard will
aggressively manage costs and improve productivity to strengthen its position
as a low-cost provider. Engelhard also will aggressively pursue both
technology and cost opportunities inherent in its proprietary process
technology.
13
<PAGE>
Mothballing the manufacturing plant in The Netherlands will lower total
operating costs and better position the business for earnings growth. Global
customer needs will be met from North American facilities.
CHEMICAL CATALYSTS
The Chemical Catalysts Group enables customers to improve their process
productivity and efficiency through advanced chemical catalysts, sorbents and
separation products and related manufacturing expertise.
1997 Performance: Record sales and operating earnings (before the impact of
special and other charges).
Discussion: New alliances and the continuing trend toward decaptivation --
producing catalysts for customers that formerly made their own -- drove
increased sales and earnings. Strong sales continued for a unique Engelhard
catalyst used in M.W. Kellogg's advanced process for ammonia production.
Engelhard, the exclusive supplier of this catalyst, began shipments in 1997 to
what will be the world's two largest ammonia production facilities, which are
being constructed in Trinidad.
A new alliance with Mobil expanded the sale of specialty zeolites to the
petrochemical industry. However, 1997 catalyst sales for the production of
styrene and PVC plastics were affected by customers slowing down replacements
of these catalysts. Sales of Engelhard's ATS line of water-purification
products were bolstered by a new distribution agreement that expanded North
American marketing efforts.
Outlook: Forging new alliances continues to be a key growth strategy.
Alliances were created in 1997 with some of the chemical industry's leading
companies, including Dow and Mobil. These alliances will significantly enhance
Engelhard's manufacturing and marketing capabilities for styrene monomer
catalysts, specialty zeolites, fats and oils catalysts and water-purification
technologies. In early 1998, a new alliance was created with Koch-Glitsch,
Inc. that expands Engelhard's range of services and solutions beyond chemical
catalysts to include diagnostic and field services for chemical reactors. The
Chemical Catalysts Group is also pursuing growth opportunities that expand its
presence in Asia.
CATALYSTS AND CHEMICALS -- PRIOR YEAR COMPARISONS
1996 compared with 1995: Sales up 19% and operating earnings up 24%. Strong
sales and operating earnings growth for Environmental Technologies and Chemical
Catalysts. A $2.6 million pretax charge for the revaluation of certain petroleum
catalyst inventories is included in the segment results. Auto catalyst sales and
operating earnings grew despite flat auto production worldwide. Sales and
operating earnings from heavy-duty power systems were up significantly driven by
sales of diesel catalysts to truck-engine makers and catalytic converters for
diesel buses. Sales and operating earnings from petroleum catalysts were up
slightly despite difficult market conditions in the refining industry. Strong
economic conditions in the chemical industry and success in new business
programs led to growth in sales and operating earnings for the chemical
catalysts business.
1995 compared with 1994: Sales up 20% and operating earnings up 10%. Strong
sales and operating earnings growth for Environmental Technologies and
Chemical Catalysts were offset by lower earnings from petroleum catalysts.
Auto catalyst volumes were up due to the success of new products. Chemical
catalyst sales and operating earnings were aided by improved economic
14
<PAGE>
conditions in the chemical industry and success in new business programs.
Unfavorable conditions in the refining industry led to flat sales and lower
operating earnings for petroleum catalysts.
PIGMENTS AND ADDITIVES
The Pigments and Additives Group enables customers to improve the look,
performance and overall cost of their products.
1997 compared with 1996: Sales up 18% and operating earnings up 16% (includes
the positive impact of Mearl, acquired in 1996, and the impact of special and
other charges of $0.8 million in 1997).
Segment Discussion: Strong sales and earnings were driven by the successful
integration of Mearl, acquired in May 1996. Capitalizing on cost, technology
and market-channel synergies, Engelhard continued to build its leadership in
pearlescent and color pigments, particularly in the automotive and cosmetics
industries. In 1997, Engelhard introduced a unique product line called
Cellini, which combines pearlescent and organic pigments. These unique
products better position Engelhard to capitalize on the growing, high-fashion
trend toward bright, vibrant color.
Engelhard also continued to maintain its strong position in paper pigments. In
1997, a joint venture in Ukraine began producing paper pigments. Gains were
made in ongoing efforts to reduce this segment's vulnerability to the cyclical
nature of the markets it serves -- particularly the paper industry. In 1997,
paper pigments accounted for less than 40% of pretax profit, down from about
65% five years ago. This was achieved by growing the segment's other markets
not by shrinking revenues from the paper industry.
In 1997, Engelhard expanded its attapulgite business with the acquisition of
certain assets of the Floridin Company. Attapulgite-based products improve the
performance of paints, coatings, caulks, sealants, pet litter and agricultural
products.
Segment Outlook: Pearlescent pigments are expected to drive growth
opportunities as the segment continues to leverage distribution, product and
technology synergies created by the Mearl acquisition. In early 1998, the
segment strengthened its Asian presence with the acquisition of a small
pearlescent pigments business in South Korea. In paper pigments, Engelhard
will focus on aggressively managing costs and capital investments, maintaining
price leadership and continuously enriching product mix. The segment also will
build its specialty films business, leveraging growing interest in iridescent
film for packaging, fashion and security applications.
PIGMENTS AND ADDITIVES -- PRIOR YEAR COMPARISONS
1996 compared with 1995: Sales up 24% and operating earnings up 9%. Sales growth
was due to stronger revenues from performance additives and color pigments, as
well as the addition of pearlescent pigment sales resulting from the acquisition
of Mearl (see Note 2, "Acquisition," on page 30). Paper pigment revenues were
down slightly. Operating earnings benefited from reduced manufacturing costs,
the success of new paper pigments and performance additives and the Mearl
acquisition. Without the acquisition and the impact of an improved
transportation-cost management system, segment operating earnings would have
declined. Lower operating earnings from paper pigments were due to depressed
economic conditions in the paper industry.
15
<PAGE>
1995 compared with 1994: Sales up 7% and operating earnings up 26%.
Significant productivity improvements and a higher margin product mix resulted
in earnings growth despite a sales decline in the fourth quarter which
reflected a turndown in the paper industry. In performance additives and
colors, sales were favorable for all product lines. Higher volumes of high-
performance, surface-treated mineral products were partially offset by lower
volumes of sorbents and color products.
ENGINEERED MATERIALS AND INDUSTRIAL COMMODITIES MANAGEMENT
The Engineered Materials and Industrial Commodities Management segment
delivers precious-metal-based technologies and commodities management
expertise to a variety of industrial customers.
1997 compared with 1996: Sales up 17% and operating earnings up 29%, excluding
the impact of special and other charges. Operating earnings were down 48%,
including the impact of these charges. Included in the 1997 and 1996 operating
earnings are gains of $2.8 million and $5.4 million, respectively, from the
sale of certain LIFO inventories (see Note 8, "Inventories," on page 36).
Segment Discussion: (Excludes the impact of 1997 special and other charges of
$39.0 million -- see pages 39 and 40 for discussion.) Industrial Commodities
Management (ICM) posted strong increases in both sales and operating earnings
driven by volatility in the platinum-group-metals market. These increases more
than offset sharp declines in Engineered Materials.
Customers often supply the precious metals for manufactured products. In those
cases, precious-metal values are not included in sales numbers. The mix of
such arrangements and the extent of market-price fluctuation can significantly
affect the level of reported sales, but do not usually have a material effect
on earnings. Precious metals are considered as sales if the metal was supplied
by Engelhard. Purchase of metal generally is hedged (see Note 1, "Summary of
Significant Accounting Policies," on pages 28-30).
ENGINEERED MATERIALS
The Engineered Materials Group provides precious-metal- fabricated products and
coatings to a wide range of industrial customers.
1997 Performance: Slightly lower sales and significantly lower operating
earnings.
Discussion: Sales were affected by lower demand for metal-joining products for
air conditioners and household appliances and by an unfavorable mix of
electro-metallic products. Although manufacturing process improvements raised
overall efficiency, year-over-year earnings were lower due to a large, one-
time order in 1996 and higher raw material costs stemming from a less
favorable precious-metal supply contract that took effect on January 1, 1997.
Outlook: Engineered Materials will continue to pursue sales growth in Asia and
develop new products.
INDUSTRIAL COMMODITIES MANAGEMENT
ICM utilizes its expertise in commodities dealing and management to ensure that
Engelhard and its customers have the raw materials they need to cost-effectively
make their products.
1997 Performance: Record sales and operating earnings (before the impact of
special and other charges).
16
<PAGE>
Discussion: Sales and earnings rose significantly due to unusually high
volatility in platinum-group-metals markets. Volatility generally increases
the spread on transactions. Refining operations, although down slightly, also
benefited from increased activity generated by the market volatility.
Outlook: Year-over-year earnings are expected to decline as the volatility
experienced in 1997 is not expected to continue. The group will continue to
pursue product and service expansions.
ENGINEERED MATERIALS AND INDUSTRIAL COMMODITIES MANAGEMENT -- PRIOR YEAR
COMPARISONS
1996 compared with 1995: Sales up 6% and operating earnings up 4%. The majority
of the industrial business units in this segment were transferred to a joint
venture, Engelhard-CLAL, in June 1995 (see Note 9, "Investments," on pages 36
and 37). On a comparable year-to-year basis, sales and operating earnings were
up. When comparing total results, 1996 operating earnings, excluding a $5.4
million pretax gain (resulting from the sale of certain LIFO inventories) were
down slightly.
1995 compared with 1994: Sales up 22% and operating earnings up 32%. Strong
growth in ICM more than offset reduced sales and flat earnings in Engineered
Materials, the result of the formation of the Engelhard-CLAL joint venture in
June 1995. Sales and operating earnings in the retained businesses were up
substantially.
SPECIAL AND OTHER CHARGES
In response to the weak results of certain Company operations and as a result of
the base-metal fraud in Japan, the Company recorded, in the fourth quarter of
1997, Special and Other Charges of $149.6 million ($117.7 million after tax).
The following table sets forth the impact of the Special and Other Charges in
the 1997 Consolidated Statement of Earnings:
CAPTION IMPACTED Special and
(in millions, except per share amounts) Other Charges
-------------
Cost of sales $ 6.1
Selling, administrative and other expenses 12.7
Special charge 86.0
------
Earnings from operations 104.8
Equity in earnings (losses) of affiliates 44.8
------
Earnings before income taxes 149.6
Income tax expense 31.9
------
Net earnings $117.7
======
Basic earnings per share $ 0.82
======
Diluted earnings per share $ 0.81
======
Generally, these charges cover asset impairments and employee severance costs
related to Engelhard-CLAL, a joint venture in precious-metal-fabricated
products; the mothballing of a petroleum catalysts facility in The Netherlands
17
<PAGE>
used for the manufacture of FCC catalysts; the sale of the stationary-source,
emission-control capital equipment business of the Environmental Technologies
Group; the restructuring of Engelhard/ICC, a joint venture in desiccant-based,
climate-control systems; a loss related to the base-metal fraud in Japan (see
"Subsequent Event" on pages 21 and 22 for further detail); and other asset
impairments. See Note 12 of the Notes to Consolidated Financial Statements for
further detail. Beginning in the second half of 1998, the activities covered by
the charges are expected to yield annual pretax savings of about $20.0 million
as a result of lower manufacturing costs and the elimination of operating
losses, and yield annual cash savings of about $10.0 million as a result of
lower employee and plant operating costs.
The Engelhard-CLAL joint venture continues to face pressures of declining
demand for French-manufactured jewelry and increasing competition from other
international fabricators of precious-metal products. In response to these
pressures and other market conditions, Engelhard and its partner, FIMALAC, in
the fourth quarter of 1997, agreed to rationalize certain operations and
determined that it is more likely than not that certain deferred tax assets
will not be realized and reduced those assets to an estimate of realizable
value. In addition, Engelhard recognized an impairment of its goodwill
associated with this joint venture.
In the fourth quarter of 1997, management approved a plan to improve the
profitability of the Petroleum Catalysts Group, primarily by lowering its cost
structure and optimizing its manufacturing resources. The most significant
action calls for the mothballing of the FCC catalysts facility in The
Netherlands. This decision was driven by industry overcapacity and the
determination that the Company's European customers could be served more
efficiently by U.S. FCC catalysts operations. As a result, the Company
provided for employee severance obligations and site closure costs and reduced
the carrying value of the related assets to an estimate of fair value.
Also in the fourth quarter of 1997, management approved a plan to sell the
stationary-source, emission-control capital equipment business. This decision
was based on market growth projections combined with low technological
barriers to enter this market. Management believes that this strategy will
allow the Company to concentrate on its core competency -- catalyst
technology. The Company will continue to sell catalysts for stationary-source
pollution abatement. Engelhard provided for business exit costs and reduced
the carrying value of the related assets to an estimate of fair value. In
February 1998, substantially all of the assets of the capital equipment
business were sold to Durr Environmental, Inc.
In August 1997, the Company reached an agreement in principle with its partner
ICC Technologies, Inc. to restructure Engelhard/ICC. Under the final agreement,
which was approved by ICC shareholders in February 1998, Engelhard/ICC was split
into two companies. One of the new companies, 80% owned by Engelhard, is focused
on manufacturing and marketing desiccant-coated rotors and related products. The
other new company, 10% owned by Engelhard, manufactures and markets complete
climate-control equipment systems. Management believes that the new structure
will allow each partner to concentrate on core competencies as well as share in
anticipated growth of the market for desiccant-based, climate-control systems.
18
<PAGE>
ACQUISTIONS AND PARTNERSHIPS
<TABLE>
<CAPTION>
Other Party Business Arrangement Transaction Date Business Opportunity
- ----------- -------------------- ---------------- --------------------
<S> <C> <C> <C>
Mearl Corporation Acquired business May 1996 Rationalization of costs and expansion of pigment markets
FIMALAC Formed Paris-based June 1995 Development of the low-cost position in manufacturing and
50/50 joint venture marketing precious-metal containing products
</TABLE>
SELLING ADMINISTRATIVE AND OTHER EXPENSES
Selling, administrative and other expenses of $327.8 million in 1997 were up
from $255.5 million in 1996 and $244.7 million in 1995. The 1997 amount
reflects a full year of Mearl (acquired in May 1996), the impact of the
special and other charges (see pages 39 and 40 for detail), a 1996 insurance
recovery ($5.7 million after tax or $0.04 per share) and general growth in our
businesses due to new programs and strategic alliances. The 1995 amount
reflects the transfer of certain sites and businesses to the Engelhard-CLAL
joint venture in June.
EQUITY EARNINGS/LOSSES
Equity in losses of affiliates was $47.8 million in 1997 and $5.0 million in
1996, compared with equity in earnings of affiliates of $0.7 million in 1995.
The 1997 loss reflects the 1997 special and other charges of $44.8 million
related to Engelhard-CLAL and Engelhard/ICC (see pages 39 and 40 for detail).
1996 reflects a larger loss in Engelhard/ICC and a $2.5 million restructuring
charge in Engelhard-CLAL.
GAIN ON SALE OF INVESTMENT
In 1996, the Company sold its share of Heraeus Engelhard Electrochemistry
Corp., a marketer of electrochemical products. The Company realized a gain of
$2.4 million ($1.5 million after tax or $0.01 per share) on the sale.
INTEREST
Net interest expense was $52.8 million in 1997, compared with $45.0 million in
1996 and $31.3 million in 1995. The 1997 and 1996 increases primarily reflect
the incremental financing costs associated with acquiring Mearl in May 1996.
Excluding the impact of Mearl financing, higher net interest expense in all
three years was primarily due to higher average debt balances as a result of
acquisitions and investments.
Interest income, included as a component of net sales, was $1.1 million in
1997, $1.8 million in 1996 and $2.2 million in 1995.
TAXES
Income tax expense was $38.0 million in 1997, $59.5 million in 1996 and $47.8
million in 1995. Excluding the tax benefit associated with the 1997 special
and other charges, the effective income tax rate was 29.7% in 1997, 28.3% in
1996 and 25.8% in 1995. The increasing effective rates are primarily due to a
shift in the geographic mix of earnings.
The effective tax rate associated with the 1997 special and other charges is a
benefit of 21.3%. The tax benefit reflects the recording of a valuation
allowance primarily against the capital loss carryforwards expected to be
generated by some of these charges. The allowance recognizes management's view
that it is more likely than not that these tax benefits may expire unused.
19
<PAGE>
At year-end 1997, the net deferred tax asset was $88.1 million, primarily for
accrued postretirement and postemployment benefit obligations, the special and
other charges, the environmental clean-up reserve and other accruals.
Management believes Engelhard will generate sufficient taxable income and
employ tax planning strategies to ensure deferred tax benefits are realized.
FINANCIAL CONDITION AND LIQUIDITY
Working capital was $15.0 million at December 31, 1997, compared with $115.3
million last year. The decrease was primarily due to lower receivables and the
impact of special and other charges. The year-end market value of the
Company's precious-metal inventories exceeded carrying cost by $49.7 million,
compared with $25.9 million last year. The increase in excess value reflects
higher market values which more than offset the impact of slightly reduced
levels of LIFO inventory. (See Note 8, "Inventories," on page 36.) The current
ratio was 1.0, compared with 1.1 in 1996.
The Company's total debt was $622.9 million at December 31, 1997, compared
with $680.0 million last year.
The ratio of total debt to total capital was 44% at December 31, 1997,
compared with 45% last year. The Company currently has one $600 million, five-
year facility with a group of major U.S. and overseas banks. Additional
unused, uncommitted lines of credit available exceeded $700 million at year-
end 1997.
Operating activities provided net cash of $196.5 million in 1997, compared
with $24.8 million in 1996 and $133.8 million in 1995.
The variance in cash flows from operating activities primarily occurred in the
Industrial Commodities Management Group (ICM) and reflects changes in metal
positions used to facilitate both supplier and customer requirements. ICM
routinely enters into a variety of arrangements for the sourcing of industrial
commodities. Generally, all such transactions are hedged on a daily basis (see
Note 1, "Summary of Significant Accounting Policies," on pages 28-30 for a
complete description). ICM works to ensure that the Company and its customers
have an uninterrupted source of industrial commodities utilizing supply
contracts and commodities markets around the world. Hedging is accomplished
primarily through forward, future and option contracts. Hedged metal obligations
(metal sold not yet purchased but fully hedged) are considered financing
activities and reflect the fair value of the derivative instruments. These
transactions generally cover the sourcing requirements of ICM.
The cash provided from operations other than ICM exceeded $100 million in each
of the last three years despite generally higher levels of working capital.
Management believes that the Company will continue to have adequate access to
credit and capital markets to meet its needs for the foreseeable future.
MARKET RISK SENSITIVE TRANSACTIONS
See Item 7A, Market Risk Disclosures on pages 21-23.
CAPITAL EXPENDITURES COMMITMENTS AND CONTINGENCIES
Capital projects are designed to maintain capacity, expand operations, improve
efficiency or protect the environment. These amounted to $136.9 million in 1997,
compared with $128.2 million in 1996 and $147.7 million in 1995. Capital
20
<PAGE>
expenditures in 1995 included the Company's $57.0 million purchase of land and a
building that serve as the principal executive and administrative offices of the
Company and its operating businesses. See also Note 17, "Environmental Costs,"
and Note 19, "Litigation and Contingencies," on pages 46-47 and 48-49 for
further information about commitments and contingencies. Capital expenditures in
1998 are expected to approximate 1997 spending.
DIVIDENDS AND CAPITAL STOCK
In the third quarter of 1997, the Board of Directors approved an 11.1%
increase in the common stock dividend, raising the level to $0.10 per share
effective September 30, 1997. The annualized common stock dividend rate at the
end of 1997 was $0.40 per share compared with $0.36 per share in 1996.
In the first quarter of 1996, the Board approved the purchase of five million
shares of the Company's common stock. At December 31, 1997, no shares had been
purchased under this plan.
OTHER MATTERS
The Financial Accounting Standards Board (FASB) has issued Statements No. 130,
"Reporting Comprehensive Income," No. 131, "Disclosures About Segments of an
Enterprise and Related Information," and No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." These standards address
reporting and disclosure requirements only. Engelhard will comply with these
standards in 1998.
Many of Engelhard's computer systems must be modified due to certain
programming limitations in recognizing dates beyond 1999. Programs that have
time-sensitive software with this limitation may experience miscalculations or
system failures. The Company has completed its Year 2000 evaluation process
and is utilizing both internal and external resources to reprogram or replace
and test its software. The Company will spend and expense approximately $7.5
million in 1998 to ensure that all of these systems are Year 2000 compliant.
However, if such modifications are not made or are not completed on a timely
basis, the Year 2000 issue could have a material adverse impact on the
operations of the Company. In addition, the Company is in the process of
understanding the extent to which it is vulnerable to the Year 2000 issues of
its customers and suppliers. However, there can be no assurance that the Year
2000 issues of these customers and suppliers would not have a material adverse
effect on the Company. The date on which the Company plans to complete any
necessary Year 2000 modifications is based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification
plans and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes and similar uncertainties.
SUBSEQUENT EVENT
In 1998, management learned that Engelhard and several other companies
operating in Japan had been victims of a sophisticated, fraudulent scheme
involving base-metal inventory held in third-party warehouses in Japan. Based
on preliminary information, management estimates the inventory loss to be
approximately $39.0 million in 1997 and $16.0 million in 1998. The Company has
21
<PAGE>
not yet recorded any insurance or third-party recovery due to the ongoing
nature of the investigation and the complexity of the fraud uncovered.
However, the Company has placed its insurance carriers on notice and is
vigorously pursuing recovery from them and responsible third parties. This
event is not expected to have a material adverse impact on the business and
operation of the ICM group.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. Investors should be aware
of factors that could cause Engelhard's actual results to vary materially from
those projected in the forward-looking statements. These factors include, but
are not limited to, global economic trends; competitive pricing or product
development activities; markets, alliances, and geographic expansions
developing differently than anticipated; government legislation and/or
regulation (particularly on environmental issues); and technology,
manufacturing and legal issues.
Item 7A.: Market Risk Disclosures
- ----------- -----------------------
The Company is exposed to market risks arising from adverse changes in
interest rates, foreign currency exchange rates, and commodity prices. In the
normal course of business, the Company uses a variety of techniques and
instruments, including derivatives as part of its overall risk management
strategy. Engelhard enters into derivative agreements with a diverse group of
major financial and other institutions with individually determined credit
limits to reduce the risk of nonperformance by counterparties.
INTEREST RATE RISK
Engelhard uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk here is defined
as the potential change in the fair value resulting from an adverse movement in
interest rates. As of December 31, 1997, the fair value of the Company's total
debt was $633.5 million based on average market quotations of price and yields
provided by investment banks. A 100 basis point increase in interest rates could
result in a $13.9 million reduction in the fair value of total debt.
Also, the Company uses interest rate swaps to help achieve its fixed and
floating rate debt objectives. As of December 31, 1997, the Company had
forward starting swaps with a total notional value of $120 million, each
with a start date of April 30, 1998 and termination date of April 30, 2008.
These contracts hedge an anticipated 1998 debt issuance.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company uses a variety of strategies, including foreign currency forward
contracts, to minimize or eliminate foreign currency exchange rate risk
associated with substantially all of its foreign currency transactions,
including metal-related transactions denominated in other than U.S. dollars. In
selected circumstances, the Company may enter into foreign currency forward
contracts to hedge the U.S. dollar value of its foreign investments.
Engelhard uses sensitivity analysis to assess the market risk associated with
its foreign currency transactions. Market risk here is defined as the
potential change in fair value resulting from an adverse movement in foreign
22
<PAGE>
currency exchange rates. A 10% adverse movement in foreign currency rates
could result in a net loss of $4.7 million on the Company's foreign currency
forward contracts; however, since the Company limits the use of foreign
currency derivatives to the hedging of contractual foreign currency payables
and receivables, this loss in fair value for those instruments would generally
be offset by a gain in the value of the underlying payable or receivable.
A 10% adverse movement in foreign currency rates could result in an unrealized
loss of $61.3 million on its net investment in foreign subsidiaries and
affiliates; however, since Engelhard views these investments as long term, the
Company would not expect such a loss to be realized in the near term.
COMMODITY PRICE RISK
Generally, all industrial commodity transactions are hedged on a daily basis
using forward, future or option contracts to substantially eliminate the
exposure to price risk. In addition, all industrial commodity transactions are
marked-to-market daily. In limited and closely monitored situations, for which
exposure levels have been set by senior management, the Company holds
significant unhedged industrial commodity positions that are subject to future
market fluctuations. Such positions may include varying levels of derivative
commodity instruments.
The Company has performed a "value-at-risk" analysis on all of its commodity
assets and liabilities. The "value-at-risk" calculation is a statistical model
that uses historical price and volatility data to predict market risk on a
one-day interval with a 95% confidence level. While the "value-at-risk" models
are relatively sophisticated, the quantitative information generated is
limited by the historical information used in the calculation. For example,
the volatility in the platinum and palladium markets in 1997 was greater than
historical norms. Therefore, the Company uses this model only as a supplement
to other risk management tools and not as a substitute for the experience and
judgment of senior management and dealers who have extensive knowledge of the
markets and adjust positions and revise strategies as the markets change.
Based on the "value-at-risk" analysis, the maximum potential one-day loss in
fair value was approximately $1.1 million as of December 31, 1997.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
<TABLE>
<CAPTION>
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31 (in thousands, except per share amounts)
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Net sales $3,630,653 $3,184,431 $2,840,077
Cost of sales 3,030,717 2,671,377 2,379,474
-----------------------------------------
Gross profit 599,936 513,054 460,603
Selling, administrative and other expenses 327,820 255,460 244,660
Special charge 86,000 -- --
-----------------------------------------
Earnings from operations 186,116 257,594 215,943
Equity in earnings (losses) of affiliates (47,833) (5,008) 695
Gain on sale of investment 305 2,378 --
Interest expense, net of capitalized amounts (54,862) (45,860) (35,066)
Less contango on futures and forward contracts 2,086 851 3,740
-----------------------------------------
Net interest expense (52,776) (45,009) (31,326)
-----------------------------------------
Earnings before income taxes 85,812 209,955 185,312
Income tax expense 38,034 59,508 47,791
-----------------------------------------
Net earnings $ 47,778 $ 150,447 $ 137,521
=========================================
Basic earnings per share $ 0.33 $ 1.05 $ 0.96
Diluted earnings per share $ 0.33 $ 1.03 $ 0.94
=========================================
Average number of shares outstanding -- basic 144,270 143,810 143,619
=========================================
Average number of shares outstanding -- diluted 145,937 145,724 146,275
=========================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ENGELHARD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (in thousands) 1997 1996
-------------------------
<S> <C> <C>
ASSETS
Cash $ 28,765 $ 39,683
Receivables 323,330 385,904
Committed metal positions 502,494 357,087
Inventories 356,403 337,098
Other current assets 44,180 68,557
-------------------------
Total current assets 1,255,172 1,188,329
Investments 160,082 221,364
Property, plant and equipment, net 788,178 744,655
Intangible assets, net 214,929 195,353
Other noncurrent assets 167,962 140,803
-------------------------
Total assets $2,586,323 $2,490,504
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term bank borrowings $ 164,159 $ 108,652
Commercial paper 85,000 196,000
Current maturities of long-term debt 209 243
Accounts payable 180,499 166,202
Hedged metal obligations 572,266 414,097
Other current liabilities 238,003 187,803
-------------------------
Total current liabilities 1,240,136 1,072,997
Long-term debt 373,574 375,075
Other noncurrent liabilities 187,353 209,276
-------------------------
Total liabilities 1,801,063 1,657,348
Commitments and contingent liabilities
Preferred stock, no par value, 5,000 shares
authorized and unissued -- --
Common stock, $1 par value, 200,000 shares
authorized and 147,295 shares issued 147,295 147,295
Retained earnings 726,082 730,313
Treasury stock, at cost, 2,803 and 3,440
shares, respectively (45,992) (56,479)
Cumulative translation adjustment (42,125) 12,027
-------------------------
Total shareholders' equity 785,260 833,156
-------------------------
Total liabilities and shareholders' equity $2,586,323 $2,490,504
=========================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in thousands) 1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 47,778 $ 150,447 $ 137,521
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization 88,066 74,871 65,450
Gain on sale of investment (305) (2,378) --
Special charge 86,000 -- --
Equity results, net of dividends 51,636 7,523 2,716
Net change in assets and liabilities
Metal related (29,763) (121,270) (32,256)
All other (46,864) (84,434) (39,620)
----------------------------------------
Net cash provided by operating activities 196,548 24,759 133,811
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of disposals (136,945) (128,195) (147,704)
Proceeds from sale of investment 2,458 1,391 --
Acquisition of businesses and investments (37,409) (287,675) (42,502)
Other 8,691 4,931 2,035
----------------------------------------
Net cash used in investing activities (163,205) (409,548) (188,171)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings (55,493) 121,419 (10,237)
Increase in hedged metal obligations 55,403 159,286 4,708
Proceeds from issuance of long-term debt 555 250,164 100,125
Repayment of long-term debt (2,051) (100,786) (994)
Purchase of treasury stock -- (7,357) (7,235)
Stock bonus and option plan transactions 13,329 13,903 29,273
Dividends paid (54,851) (51,773) (50,313)
----------------------------------------
Net cash (used in) provided by
financing activities (43,108) 384,856 65,327
Effect of exchange rate changes on cash (1,153) (407) 2,652
----------------------------------------
Net increase (decrease) in cash (10,918) (340) 13,619
Cash at beginning of year 39,683 40,023 26,404
----------------------------------------
Cash at end of year $ 28,765 $ 39,683 $ 40,023
========================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative Total
Common Retained Treasury translation shareholders'
(in thousands, except per share amounts) stock earnings stock adjustment equity
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 98,197 $582,520 $(74,054) $ 8,072 $614,735
Net earnings -- 137,521 -- -- 137,521
Dividends ($0.35 per share) -- (50,313) -- -- (50,313)
Three-for-two stock split 49,098 (49,098) -- -- --
Foreign currency translation adjustment -- -- -- 13,761 13,761
Treasury stock acquired -- -- (7,235) -- (7,235)
Stock bonus and option plan transactions -- 5,157 24,116 -- 29,273
--------------------------------------------------------------------
Balance at December 31, 1995 147,295 625,787 (57,173) 21,833 737,742
Net earnings -- 150,447 -- -- 150,447
Dividends ($0.36 per share) -- (51,773) -- -- (51,773)
Foreign currency translation adjustment -- -- -- (9,806) (9,806)
Treasury stock acquired -- -- (7,357) -- (7,357)
Stock bonus and option plan transactions -- 5,852 8,051 -- 13,903
--------------------------------------------------------------------
Balance at December 31, 1996 147,295 730,313 (56,479) 12,027 833,156
Net earnings -- 47,778 -- -- 47,778
Dividends ($0.38 per share) -- (54,851) -- -- (54,851)
Foreign currency translation adjustment -- -- -- (54,152) (54,152)
Stock bonus and option plan transactions -- 2,842 10,487 -- 13,329
--------------------------------------------------------------------
Balance at December 31, 1997 $147,295 $726,082 $(45,992) $ (42,125) $785,260
====================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Engelhard Corporation and its wholly-owned subsidiaries (collectively referred
to as Engelhard or the Company). 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost or market. The elements of cost
include direct labor and materials, variable overhead and the full absorption of
fixed manufacturing overhead. The cost of precious-metals inventories is
determined using the last-in, first-out (LIFO) method of inventory valuation.
The cost of other inventories is principally determined using either the average
cost or the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and amortization
of plant and equipment are provided primarily on a straight-line basis over the
estimated useful lives of the assets. Depletion of mineral deposits and mine
development are provided under the unit of production method.
When assets are sold or retired, the cost and related accumulated depreciation
or amortization are removed from the accounts and any gain or loss is included
in earnings.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated at cost and amortization is
provided on a straight-line basis over the estimated useful lives of the assets,
but not in excess of 40 years.
COMMITTED METAL POSITIONS AND HEDGED METAL OBLIGATIONS
The Company routinely enters into a variety of arrangements for the sourcing of
industrial commodities. These arrangements are spread among a number of
counterparties, which are generally major industrial companies or highly rated
financial or other institutions. The conduct of this business is closely
monitored.
Generally, all industrial commodity transactions are hedged on a daily basis,
using forward, future, option or swap contracts, to substantially eliminate
the exposure to price risk. In limited and closely monitored situations, for
which exposure levels have been set by senior management, the Company holds
significant unhedged (open) industrial commodity positions.
28
<PAGE>
Committed metal positions (non-inventory metal purchases) and hedged metal
obligations (metal sold not yet purchased but fully hedged) are carried at
fair value. Fair value is generally based on listed market prices. If listed
market prices are not available or if liquidating the Company's positions
would reasonably be expected to impact market prices, fair value is determined
based on other relevant factors, including dealer price quotations and price
quotations in different markets, including markets located in different
geographic areas. Any change in value, realized or unrealized, is recognized
in gross profit in the period of the change.
ENVIRONMENTAL COSTS
In the ordinary course of business, like most other industrial companies, the
Company is subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, and has made provisions for the estimated
financial impact of environmental cleanup related costs. The Company's policy is
to accrue environmental cleanup related costs of a noncapital nature when those
costs are believed to be probable and can be reasonably estimated. The
quantification of environmental exposures requires an assessment of many
factors, including changing laws and regulations, advancements in environmental
technologies, the quality of information available related to specific sites,
the assessment stage of each site investigation, preliminary findings and the
length of time involved in remediation or settlement. For certain matters, the
Company expects to share costs with other parties. The Company does not include
anticipated recoveries from insurance carriers or other third parties in its
accruals for environmental liabilities.
SALES AND COST OF SALES
Some of the Company's businesses use precious metals in their manufacturing
processes. Precious metals are included in sales and cost of sales if the metal
has been supplied by the Company. Often, customers supply the precious metals
for the manufactured product. In those cases, precious-metals values are not
included in sales or cost of sales. The mix of such arrangements and the extent
of market price fluctuations can significantly affect the level of reported
sales but do not usually have a material effect on earnings.
In addition, sales and purchases of precious metals to/from industrial and
refining customers are transacted through the Company's dealing operations and
are recorded in sales and cost of sales. Secondarily, and usually as a
consequence of the above transactions, the Company also engages in precious-
metals dealing with other counterparties. In these cases, the precious-metals
values are generally included in sales and cost of sales only to the extent
that the Company has added value by changing the physical form of the metal.
DERIVATIVE INSTRUMENTS AND CONTANGO
Derivative financial instruments are used by the Company primarily for hedging
purposes to mitigate a variety of working capital, investment and borrowing
risks. The use and mix of hedging instruments can vary depending on business and
economic conditions and management's risk assessments. The Company uses a
variety of strategies, including foreign currency forward contracts and internal
transaction hedging, to minimize or eliminate foreign currency exchange rate
risk associated with substantially all of its foreign currency transactions.
Gains and losses on these hedging transactions are generally recorded in
earnings in the same period as they are realized, which is usually the same
29
<PAGE>
period as the settlement of the underlying transactions. The Company uses
interest rate instruments only as hedges or as integral parts of borrowings. As
such, the differential to be paid or received in connection with these
instruments is accrued and recognized in income as an adjustment to interest
expense.
Derivative commodity instruments are used by the Company primarily for hedging
purposes to mitigate commodity price risk and include futures, forwards,
options and swaps. Gains and losses on these hedging instruments are recorded
in earnings daily, which matches the recording of gains and losses on the
underlying transactions. Usually the contract price of forward and futures
instruments exceeds the current (spot) price of the metal by a premium
referred to as "contango." This premium constitutes an offset to the financing
costs associated with carrying the precious metal that underlies the
transaction. As such, contango is reflected in the consolidated statements of
earnings as an adjustment to interest expense because it is an integral
component of the Company's financing costs. Risk is reduced on any mismatches
on maturities through the use of Eurodollar futures.
STOCK OPTION PLANS
The Company applies the provisions of Accounting Principles Board Opinion No. 25
and related interpretations in accounting for stock option plans. In general, no
compensation cost related to these plans is recognized in the consolidated
statements of earnings.
2. ACQUISITION
On May 31, 1996, the Company acquired the Mearl Corporation (Mearl). Mearl
manufactured and supplied the automotive, cosmetics and industrial markets
with pearlescent pigments, and also manufactured and supplied iridescent film
and other products to a variety of markets. The transaction was accounted for
as a purchase. The purchase price was $272.7 million in cash, financed
primarily with long-term debt. The purchase price exceeded the fair value of
net assets acquired by $153.5 million, which is being amortized on a straight-
line basis over 35 years. The results of operations of Mearl, integrated into
the Pigments and Additives segment, are included in the accompanying financial
statements from the date of acquisition.
3. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and were
$61.4 million in 1997, $56.5 million in 1996 and $53.0 million in 1995.
4. BENEFITS
The Company has domestic and foreign pension plans covering substantially all
employees. Plans covering most salaried employees generally provide benefits
based on years of service and the employee's final average compensation. Plans
covering most hourly bargaining unit members generally provide benefits of
stated amounts for each year of service. The Company makes contributions to the
plans as required and to such extent contributions are currently deductible for
tax purposes. Plan assets primarily consist of listed stocks and fixed income
securities.
30
<PAGE>
The components of the net pension credit for all plans are shown in the
following table:
NET PERIODIC PENSION CREDIT
(in millions) 1997 1996 1995
---------------------------------------
Service cost $10.1 $8.9 $8.3
Interest cost 22.7 20.3 20.4
Actual return on plan assets (62.6) (40.7) (40.9)
Net amortization and deferral 29.4 9.7 8.6
---------------------------------------
Net periodic pension credit $(0.4) $(1.8) $(3.6)
=======================================
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected
benefit obligations for the pension plans are 6.5% to 7.5% and 3.0% to 6.0%,
respectively. The expected long-term rate of return on assets is 7.5% to
10.5%.
The following table sets forth the plans' funded status:
FUNDED STATUS
(in millions) 1997 1996
----------------------
Actuarial present value of benefit obligations
Vested benefit obligation $254.9 $243.2
-------------------
Accumulated benefit obligation $277.8 $251.9
-------------------
Projected benefit obligation $328.7 $297.3
-------------------
Plan assets at fair value $374.7 $329.4
-------------------
Plan assets in excess of projected benefit obligation $46.0 $32.1
Unrecognized net loss 27.2 34.5
Unrecognized prior service cost 5.9 6.4
Unrecognized transition asset, net of amortization (2.7) (5.8)
Fourth quarter contribution 0.2 0.4
-------------------
Prepaid pension expense $76.6 $67.6
===================
In May 1996, in connection with the acquisition of Mearl (see Note 2,
"Acquisition," on page 30), the Company assumed certain assets and liabilities
of the Mearl pension plans that reduced the pension asset by $2.8 million.
The Company also sponsors two savings plans covering certain salaried and
hourly paid employees. The Company's contributions, which may equal up to 50%
of certain employee contributions, were $2.9 million in 1997, $2.4 million in
1996 and $2.2 million in 1995.
The Company also currently provides postretirement medical and life insurance
benefits to certain retirees (and their spouses), certain disabled employees
(and their families) and spouses of certain deceased employees. Substantially
all U.S. salaried employees and certain hourly paid employees are eligible for
these benefits, which are paid through the Company's general health care and
31
<PAGE>
life insurance programs, except for certain medicare-eligible salaried and
hourly retirees who are provided a defined contribution towards the cost of a
partially insured health plan. In addition, the Company provides postemployment
benefits to former or inactive employees after employment but before retirement.
These benefits are substantially similar to the postretirement benefits but
cover a much smaller group of employees.
The components of the net expense for these postretirement and postemployment
benefits are shown in the following table:
POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT EXPENSE
(in millions)
1997 1996 1995
--------------------------------------
Service cost $2.3 $2.4 $2.3
Interest cost 8.5 8.1 9.0
Net amortization (6.0) (5.5) (4.9)
--------------------------------------
Net benefit expense $4.8 $5.0 $6.4
======================================
The weighted-average discount rate used in determining the actuarial present
value of the accumulated postretirement and postemployment benefit obligation
is 7.5%. The average assumed health care cost trend rate used for 1997 is 8%,
gradually decreasing to 5% by 2004. A 1% increase in the assumed health care
cost trend rate would have increased aggregate service and interest cost in
1997 by $0.6 million and the accumulated postretirement and postemployment
benefit obligation as of December 31, 1997 by $5.8 million.
The following table sets forth the components of the accrued postretirement
and postemployment benefit obligation, all of which are unfunded:
POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT OBLIGATION
(in millions)
1997 1996
----------------------
Accumulated benefit obligation
Retirees $78.2 $79.7
Fully eligible active participants 14.2 14.6
Other active participants 19.1 19.5
----------------------
111.5 113.8
Unrecognized prior service cost 39.0 44.8
Unrecognized net gain 5.9 3.9
Fourth quarter contribution (3.1) (2.3)
----------------------
Accrued benefit obligation $153.3 $160.2
======================
In May 1996, in connection with the acquisition of Mearl (see Note 2,
"Acquisition," on page 30), the Company assumed certain postretirement
liabilities that increased the Company's accrued benefit obligation by $6.5
million.
32
<PAGE>
5. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has raw material supply
arrangements with entities in which Anglo American Corporation of South Africa
Limited (Anglo) has material interests and with Engelhard-CLAL and its
subsidiaries. Anglo indirectly holds a significant minority interest in the
common stock of the Company. Engelhard-CLAL is a 50% owned joint venture. The
Company's transactions with such entities amounted to purchases-from of $101.2
million in 1997, $203.2 million in 1996 and $367.3 million in 1995; sales-to
of $42.2 million in 1997, $513.5 million in 1996 and $442.4 million in 1995;
and metal leasing-to of $16.3 million in 1997, $37.7 million in 1996 and $31.7
million in 1995. Management believes these transactions were under terms no
less favorable to the Company than those arranged with other parties. At
December 31, 1997 and 1996 amounts due to such entities totaled $5.3 million
and $4.3 million, respectively.
6. INCOME TAXES
The components of income tax expense are shown in the following table:
INCOME TAX EXPENSE
(in millions) 1997 1996 1995
---------------------------
Current income tax expense
Federal $27.9 $21.7 $15.9
State 4.5 2.1 2.0
Foreign 22.7 11.0 12.0
---------------------------
55.1 34.8 29.9
---------------------------
Deferred income tax expense
Federal 2.9 16.6 19.2
Changes in tax rates (1.1) -- --
State 0.1 3.0 2.7
Foreign (17.4) 4.7 (2.6)
Loss carryforwards/tax credits (1.6) 0.4 (1.4)
---------------------------
(17.1) 24.7 17.9
---------------------------
Income tax expense $38.0 $59.5 $47.8
===========================
The foreign portion of earnings before income tax expense was $13.8 million in
1997, $50.6 million in 1996 and $40.8 million in 1995. Taxes on income of
foreign consolidated subsidiaries and affiliates are provided at the tax rates
applicable to their respective foreign tax jurisdictions. Tax credits of $1.0
million in 1997, $1.7 million in 1996 and $8.0 million in 1995, are in
connection with equity transactions, and are included in adjustments for those
years. These amounts are not reflected in the previous table.
33
<PAGE>
The following table sets forth the components of the net deferred tax asset
which results from temporary differences between the amounts of assets and
liabilities recognized for financial reporting and tax purposes:
NET DEFERRED INCOME TAX ASSET
(in millions) 1997 1996
---------------------
Deferred tax assets
Accrued liabilities $51.3 $33.0
Noncurrent liabilities 82.4 80.4
Tax credits/carryforwards 29.6 39.8
---------------------
Total deferred tax assets 163.3 153.2
---------------------
Deferred tax liabilities
Prepaid pension expense (38.0) (36.4)
Property, plant and equipment (4.1) (11.0)
Other assets (16.1) (38.4)
---------------------
Total deferred tax liabilities (58.2) (85.8)
---------------------
Valuation allowance (17.0) --
---------------------
Net deferred tax asset $88.1 $67.4
=====================
In 1997, the Company recorded special and other charges in the amount of
$149.6 million for a variety of events (including restructuring actions and a
loss from the base-metal fraud in Japan). A net deferred tax asset, after
valuation allowance, of $31.9 million was provided with respect to this
charge. The tax benefit reflects the recording of a valuation allowance
primarily against the capital loss carryforwards expected to be generated by
some of these charges. The allowance recognizes management's view that it is
more likely than not that these tax benefits may expire unused.
As of December 31, 1997, the Company had approximately $11.6 million of
nonexpiring alternative minimum tax credit carryforwards available to offset
future U.S. federal income taxes. Also, as of December 31, 1997, the Company
had approximately $9.8 million of foreign nonexpiring net operating loss
carryforwards and approximately $6.0 million of foreign investment tax credits
expiring in 2000 available to offset certain future foreign income taxes.
Management believes that the Company will generate sufficient taxable income
and employ tax planning strategies to ensure realization of these tax
benefits.
34
<PAGE>
A reconciliation of the difference between the Company's consolidated income
tax expense and the expense computed at the federal statutory rate is shown in
the following table:
CONSOLIDATED INCOME TAX EXPENSE RECONCILIATION
(in millions)
1997 1996 1995
------------------------------
Income tax expense at federal
statutory rate $30.0 $73.5 $64.9
State income taxes, net of
federal effect 2.3 3.3 3.0
Percentage depletion (14.0) (13.4) (14.0)
Equity earnings 10.0 (1.0) (0.9)
Effect of different tax rates
on foreign earnings, net 1.4 0.2 (3.6)
Tax credits/carryforwards (4.8) (0.8) (0.7)
Foreign sales corporation (6.8) (5.0) (4.1)
Valuation allowance 17.0 -- --
Other items, net 2.9 2.7 3.2
------------------------------
Income tax expense $38.0 $59.5 $47.8
==============================
At December 31, 1997, the Company's share of the cumulative undistributed
earnings of foreign subsidiaries was approximately $248.2 million. 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. It is
not practical to estimate the amount of additional tax that might be payable
on these foreign earnings in the event of distribution or sale; however, under
existing law, foreign tax credits would be available to substantially reduce,
or in some cases eliminate, U.S. taxes payable.
7. METAL POSITIONS AND OBLIGATIONS
The following table sets forth the Company's open metal positions included in
Committed Metal Positions on the consolidated balance sheets:
METAL POSITIONS INFORMATION
(in millions) 1997 1996
-------------------------------------------
Gross Gross
position Value position Value
Platinum group metals Long $16.0 Long $49.2
Gold Short (0.6) Short (4.0)
Silver Short (1.7) Short (0.5)
Base metals Short (0.2) --
-------------------------------------------
Total open metal positions $13.5 $44.7
===========================================
The net mark-to-market adjustments related to the above open positions were
not material in 1997, in 1996 or in 1995. As a result of its metals
transactions, the Company earned net contango income of $2.1 million in 1997,
$0.9 million in 1996 and $3.7 million in 1995.
35
<PAGE>
Derivative commodity and foreign currency instruments used to hedge metal
positions and obligations consist of the following:
METAL HEDGING INSTRUMENTS
(in millions) 1997 1996
-----------------------------------------
Buy Sell Buy Sell
Forward/futures contracts $927.9 $742.5 $733.1 $520.3
Eurodollar futures 385.0 639.0 270.0 1,016.0
Swaps 246.9 298.4 6.9 99.0
Options 42.9 14.6 143.7 150.4
Yen forwards/futures -- 31.1 -- 171.5
8. INVENTORIES
Inventories consist of the following:
INVENTORIES
(in millions) 1997 1996
----------------
Raw materials $99.2 $72.5
Work in process 31.9 50.0
Finished goods 191.8 180.0
Precious metals 33.5 34.6
----------------
Total inventories $356.4 $337.1
================
All precious-metals inventories are stated at LIFO cost. The market value of
the precious-metals inventories exceeded cost by $49.7 million and $25.9
million at December 31, 1997 and 1996, respectively. Net earnings in 1997 and
1996 include after-tax gains of $2.0 million and $3.3 million, respectively,
from the sale of certain LIFO inventories.
In the normal course of business, certain customers and suppliers deposit
significant quantities of precious metals with the Company under a variety of
arrangements. Equivalent quantities of precious metals are returnable as
product or in other forms.
9. INVESTMENTS
The Company has investments in affiliates that are accounted for on the equity
method. The more significant of these investments are Engelhard-CLAL and N.E.
Chemcat Corporation (N.E. Chemcat). Engelhard-CLAL, a 50/50 joint venture,
manufactures and markets certain precious-metal containing products. N.E.
Chemcat is a 38.8% owned, publicly-traded Japanese corporation and a leading
producer of automotive and chemical catalysts, electronic chemicals and other
precious-metals based products.
At December 31, 1997 and 1996, the quoted market value of the Company's
investment in N.E. Chemcat was in excess of $55 million and $104 million,
respectively. The valuation represents a mathematical calculation based on the
closing quotation published by the Tokyo over-the-counter market and is not
necessarily indicative of the amount that could be realized upon sale. Due to
36
<PAGE>
the recent weakness of the Japanese equity markets, the Company's investment
in N.E. Chemcat exceeded the quoted market value as of December 31, 1997.
Management believes this situation to be temporary.
In the fourth quarter of 1996, the Company sold its investment in Heraeus
Engelhard Electrochemistry Corp. to its partner for cash, with the buyer
assuming all assets and liabilities. The Company realized an after-tax gain of
$1.5 million on the sale.
The summarized unaudited financial information below represents an aggregation
of the Company's nonsubsidiary affiliates:
FINANCIAL INFORMATION
(unaudited) (in millions) 1997 1996 1995
----------------------------------
Earnings data
Revenue $1,788.6 $1,739.7 $1,207.9
Gross profit 165.0 327.9 130.8
Net earnings/(losses) (69.6) (5.3) 6.2
Company's equity in net earnings/(losses) (47.8) (5.0) 0.7
Balance sheet data
Current assets $ 420.1 $ 555.1
Noncurrent assets 216.5 199.6
Current liabilities 117.4 212.7
Noncurrent liabilities 185.8 104.1
Net assets 333.4 437.9
Company's equity in net assets 156.1 217.4
The decrease in the Company's equity in net assets was primarily a result of
the 1997 special and other charges (see pages 39 and 40 for detail).
The Company's share of undistributed earnings/losses of affiliated companies
included in consolidated retained earnings was a loss of $14.2 million at
December 31, 1997 and gains of $36.0 million and $39.2 million at December 31,
1996 and 1995, respectively. Dividends from affiliated companies were $3.8
million in 1997, $2.5 million in 1996 and $3.4 million in 1995.
10. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
PROPERTY, PLANT AND EQUIPMENT
(in millions) 1997 1996
------------------
Land $38.3 $38.5
Buildings and building improvements 232.9 224.5
Machinery and equipment 1,196.9 1,140.3
Construction in progress 111.5 82.1
Mineral deposits and mine development 76.9 74.4
------------------
1,656.5 1,559.8
Accumulated depreciation, depletion and amortization 868.3 815.1
------------------
Property, plant and equipment, net $788.2 $744.7
==================
37
<PAGE>
11. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
At December 31, 1997, the Company had an unsecured committed revolving credit
agreement for $600 million with a group of North American money center banks
and major foreign banks which expires in the year 2002. Facility fees are paid
to the bank group for this line. In connection with its credit facility, the
Company has agreed to certain covenants, none of which is considered
restrictive to the operations of the Company.
At December 31, 1997 and 1996, short-term bank borrowings were $164.2 million
and $108.7 million, respectively. Weighted-average interest rates were 5.9%,
5.7% and 6.0% during 1997, 1996 and 1995, respectively. At December 31, 1997
and 1996, commercial paper borrowings were $85.0 million and $196.0 million,
respectively. Weighted-average interest rates were 5.8%, 5.5% and 5.8% during
1997, 1996 and 1995, respectively.
Additional unused, uncommitted lines of credit available exceeded $700 million
at December 31, 1997. The Company's lines of credit with its banks are
available in accordance with normal terms for prime commercial borrowers and
are not subject to commitment fees or other restrictions.
The following table sets forth the components of long-term debt:
DEBT INFORMATION
(in millions) 1997 1996
-----------------
Notes,with a weighted-average interest rate of 6.53%,
due 2000 $ 99.7 $100.0
7% Notes, due 2001, net of discount 149.2 149.8
7.375% Notes, due 2006, net of discount 99.4 99.9
Notes acquired, with a weighted-average interest
rate of 12.0%, due 2003-2006 14.1 14.1
Industrial revenue bonds, 5.375%, due 2006 6.5 6.5
Industrial revenue bonds, 64.5% of prime rate, due 1999 4.5 4.5
Foreign bank loans with a weighted-average interest
rate of 7.0%, due 1998-2000 0.1 0.5
Other, with weighted-average rate of 5.8%, due 1998 0.3 --
-----------------
373.8 375.3
Amounts due within one year 0.2 0.2
-----------------
Total long-term debt $373.6 $375.1
=================
As of December 31, 1997, the aggregate maturities of long-term debt for the
succeeding five years are as follows: $0.3 million in 1998, $4.5 million in
1999, $99.7 million in 2000, $149.2 million in 2001 and zero in 2002. See Note
14, "Financial Instruments," on pages 40 and 41 for a discussion about
interest rate swap agreements.
38
<PAGE>
12. SPECIAL AND OTHER CHARGES
In the fourth quarter of 1997, the Company recorded Special and Other Charges
of $149.6 million ($117.7 million after tax). The following table sets forth
the impact of the special and other charges in the 1997 Consolidated Statement
of Earnings:
CAPTION IMPACTED Special and
(in millions, except per share amounts) Other Charges
------------
Cost of sales $ 6.1
Selling, administrative and other expenses 12.7
Special charge 86.0
------------
Earnings from operations 104.8
Equity in earnings (losses) of affiliates 44.8
------------
Earnings before income taxes 149.6
Income tax expense 31.9
------------
Net earnings $117.7
============
Basic earnings per share $ 0.82
============
Diluted earnings per share $ 0.81
============
Generally, these charges cover asset impairments and employee severance costs
related to Engelhard-CLAL; a loss related to the base-metal fraud in Japan
(see Note 21, "Subsequent Event," on page 50); the mothballing of a petroleum
catalysts facility in The Netherlands used for the manufacture of FCC
catalysts; the sale of the stationary-source, emission-control capital
equipment business; the restructuring of Engelhard/ICC; and other asset
impairments.
Excluding the $44.8 million in charges related to equity investments, the
balance of the pretax charge comprises $6.4 million for employee separation
liabilities; $7.9 million for restructuring and exit costs; $89.1 million of
asset impairments/write-offs; and $1.4 million of other charges for warranty
and environmental costs. The $6.4 million charge for employee separation
liabilities, included in special charge on the Consolidated Statement of
Earnings, covers approximately 90 employees, most of whom work at the FCC
catalysts manufacturing facility in The Netherlands.
The $44.8 million charge related to equity investments comprises $7.8 million
for employee separation liabilities and $37.0 million of asset impairments
(predominately fixed assets, deferred tax assets and goodwill).
39
<PAGE>
The following table sets forth the components of the Company's reserves for
restructuring and exit costs:
RESTRUCTURING RESERVES Employee
(in millions) Separations Other Total
------------------------------------
Balance at December 31, 1994 $27.1 $18.4 $45.5
Cash spending (9.5) (8.6) (18.1)
Engelhard-CLAL formation (3.9) 9.0 5.1
------------------------------------
Balance at December 31, 1995 13.7 18.8 32.5
Cash spending (7.4) (10.6) (18.0)
Other -- (1.0) (1.0)
------------------------------------
Balance at December 31, 1996 6.3 7.2 13.5
Provision 6.4 7.9 14.3
Cash spending (1.5) (4.3) (5.8)
------------------------------------
Balance at December 31, 1997 $11.2 $10.8 $22.0
====================================
In 1995, the Company completed the formation of Engelhard-CLAL which increased
the reserve as a result of previously anticipated precious metal and other
asset gains, partially offset by a decrease in the reserve for restructuring
activities planned to be performed in the joint venture.
The balance remaining from prior years primarily relates to the Floridin
acquisition which had been significantly delayed due to lengthy court
proceedings. The acquisition was completed in June 1997 and the related exit
activities from a Paper Pigments and Additives facility have begun and are
expected to be completed in 1998. Substantially all actions covered by the
1997 Special and Other Charges are expected to be completed in 1998.
13. LEASE COMMITMENTS
The Company rents real property and equipment under long-term operating
leases. Future minimum rental payments required under noncancellable operating
leases, having initial or remaining lease terms in excess of one year, are
$3.6 million in 1998, $2.7 million in 1999, $2.1 million in 2000, $1.7 million
in 2001, $1.5 million in 2002 and $4.3 million thereafter. Rental/lease
expense, including all leases, amounted to $14.0 million in 1997, $11.8
million in 1996 and $14.2 million in 1995.
14. FINANCIAL INSTRUMENTS
The Company's nonderivative financial instruments consist primarily of cash in
banks, temporary investments, accounts receivable and debt. The fair value of
financial instruments in working capital approximates book value. The fair
value of long-term debt was $384.1 million in 1997 and $380.1 million in 1996
based on current interest rates, compared with a book value of $373.8 million
in 1997 and $375.3 million in 1996.
The Company's financial instruments do not represent a concentration of credit
risk because the Company deals with a variety of major banks worldwide, and
its accounts receivable are spread among a number of major industries,
40
<PAGE>
customers and geographic areas. In addition, a centralized credit committee
reviews significant credit transactions and risk management issues before the
granting of credit and an appropriate level of reserves is maintained. For the
past three-year period, provisions to these reserves were not significant.
Management believes that should a counterparty fail to perform according to
the terms of an agreement, it is unlikely that any of the Company's off-
balance sheet financial instruments would result in a significant loss to the
Company.
FOREIGN CURRENCY INSTRUMENTS
There were no speculative positions in foreign currencies as of December 31,
1997 and 1996, and there were no material gains or losses from such positions
for any year presented. The following table sets forth, in U.S. dollars, the
Company's open foreign currency forward contracts used for hedging other than
metal-related transactions (see Note 7, "Metal Positions and Obligations," on
pages 35 and 36 for foreign currency instruments used to hedge metal-related
transactions):
FOREIGN CURRENCY FORWARD CONTRACTS INFORMATION
1997 1996
(in millions) Buy Sell Buy Sell
-----------------------------------
Deutsche Mark $ -- $ -- $-- $5.0
Korean Won 14.3 -- -- --
Japanese Yen -- 1.2 -- --
French Franc 2.4 -- -- --
Finnish Markka -- 1.4 -- --
Italian Lira -- 1.4 -- --
-----------------------------------
Total open foreign currency
forward contracts $16.7 $4.0 $-- $5.0
===================================
The Company also had a cross-currency forward contract to buy Dutch Guilders
and sell British Pounds to hedge an intercompany loan transaction. The U.S.
dollar value of this contract was $10.6 million at December 31, 1997. None of
these contracts exceeds a year in duration and the net amount of deferred
income and expense on foreign currency forward contracts had no impact in
1997, 1996 and 1995.
Interest Rate Instruments
The Company entered into an interest rate swap agreement in 1993 to change
certain fixed rate debt into floating rate debt. The impact of this swap
contract, which terminated in 1996, was to increase interest expense by $0.6
million in 1996 and $1.9 million in 1995.
In 1996, in connection with the $150 million 7% Notes due 2001 and the $100
million 7.375% Notes due 2006, the Company entered into ten forward starting
swaps. These swap agreements were based on amounts and maturities which
coincided with the debt agreements. These agreements were closed concurrent
with the debt issuance. The resulting impact on the weighted-average interest
rate for 1997 and 1996 was not material. Also, in 1997 the Company entered
into five forward starting swaps commencing in 1998 in connection with an
anticipated debt issuance.
41
<PAGE>
15. BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The Company operates in three business segments: Catalysts and Chemicals,
Pigments and Additives, and Engineered Materials and Industrial Commodities
Management.
The Catalysts and Chemicals segment, located principally in the United States,
Europe, the Asia-Pacific region and South Africa, provides a wide range of
catalyst-based technologies and related performance products and processes to
help customers comply with environmental regulations and improve their
processes and productivity across many different industries. The Company's
technologies are used by customers in the automotive, manufacturing and
petroleum refining industries, to solve problems related to quality and/or
cost efficiency, manufacturing yields and emissions.
The Pigments and Additives segment, located principally in the United States,
Finland and Japan, helps customers improve the look and performance of their
products through pigment technologies and performance additives designed to
enhance or add new properties to our customers' products in a wide variety of
industries, including paper, paint, plastics and rubber.
The Engineered Materials and Industrial Commodities Management segment,
located principally in the United States, Europe and Japan, delivers precious-
metal based technologies, products, services and management expertise to a
variety of industrial customers. This segment also buys and sells precious
metals, base metals, energy and related products.
42
<PAGE>
The following table presents certain data by business segment:
<TABLE>
<CAPTION>
Engineered
Materials &
Industrial
BUSINESS SEGMENT INFORMATION Catalysts & Pigments & Commodities Corporate
(in millions) Chemicals Additives Management and Other Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $ 920.9 $ 592.2 $ 2,117.5 $ -- $3,630.6
Operating earnings,
before special and other charges 143.5 115.2 65.2(1) -- 323.9
Special and other charges (65.0) (0.8) (39.0) -- (104.8)
Depreciation, depletion and amortization 34.2 43.6 2.5 7.8 88.1
Identifiable assets(2) 666.0 873.3 650.8 396.2 2,586.3
Capital expenditures, net 61.5 59.3 5.1 11.0 136.9
1996
Net sales $866.2 $500.8 $1,817.4 $ -- $3,184.4
Operating earnings 132.5 98.9 50.4(1) -- 281.8
Depreciation, depletion and amortization 32.3 34.3 2.4 5.9 74.9
Identifiable assets 652.6 793.7 572.2 472.0 2,490.5
Capital expenditures, net 71.9 42.9 6.0 7.4 128.2
1995
Net sales $725.0 $403.8 $1,711.3 $ -- $2,840.1
Operating earnings 106.5 90.6 48.3 -- 245.4
Depreciation, depletion and amortization 28.1 29.4 4.3 3.7 65.5
Identifiable assets 534.4 468.8 420.9 519.2 1,943.3
Capital expenditures, net 32.8 49.0 5.3 60.6 147.7
(1) Includes a gain on the sale of certain LIFO inventories of $2.8 million in 1997 and $5.4 million in 1996.
(2) The special and other charges reduced identifiable assets by $49.0 million in Catalysts and Chemicals,
$0.8 million in Pigments and Additives, $39.0 million in Engineered Materials and Industrial Commodities Management
and $44.8 million in Corporate and Other (see Note 12, "Special and Other Charges," on pages 39 and 40). In 1996,
the Pigments and Additives identifiable assets reflect the acquisition of Mearl. (See Note 2, "Acquisition," on page 30.)
The following table presents certain data by geographic area:
Special
GEOGRAPHIC AREA DATA Inter-area Operating and other Identifiable
(in millions) Net sales sales earnings* charges assets
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
United States $2,455.0 $96.5 $245.8 $(37.4) $1,714.4
International 1,175.6 39.8 78.1 (67.4) 475.7
-------------------------------------------------------------------------
1996
United States $1,910.9 $32.5 $232.9 $ -- $1,567.6
International 1,273.5 55.8 48.9 -- 450.9
-------------------------------------------------------------------------
1995
United States $1,680.9 $31.6 $203.4 $ -- $1,031.0
International 1,159.2 52.3 42.0 -- 393.1
-------------------------------------------------------------------------
*Before special and other charges
</TABLE>
43
<PAGE>
The special and other charges reduced identifiable assets by $32.6 million in
the United States and $101.0 million in Europe. Inter-area sales are generally
based on market prices. The Company's foreign operations are predominately
based in Europe. Export sales from the United States to customers throughout
the world were $366.3 million in 1997, $285.9 million in 1996 and $265.8
million in 1995 and are included in U.S. sales.
The following table reconciles segment operating earnings with earnings before
income taxes as shown in the Consolidated Statements of Earnings:
RECONCILIATION TO CONSOLIDATED STATEMENTS OF EARNINGS
(in millions)
1997 1996 1995
--------------------------------
Operating earnings $219.1 $281.8 $245.4
Gain on sale of investment 0.3 2.4 --
Equity in earnings (losses) of affiliates (47.8) (5.0) 0.7
Interest and other expenses, net (85.8) (69.2) (60.8)
--------------------------------
Earnings before income taxes $85.8 $210.0 $185.3
================================
For the year ended December 31, 1996, Engelhard-CLAL, a related party and a
customer of the Engineered Materials and Industrial Commodities Management
segment, accounted for 16% of the Company's net sales. For the year ended
December 31, 1995, an unaffiliated customer of both the Catalysts and
Chemicals and the Engineered Materials and Industrial Commodities Management
segments accounted for 11% of the Company's net sales.
16. STOCK OPTION AND BONUS PLANS
The Company's Stock Option Plans of 1991 and 1981, as amended (the Key Option
Plans) generally provide for the granting to key employees of options to
purchase an aggregate of 16,875,000 and 6,834,375 common shares, respectively,
at fair market value on the date of grant. No options under the Key Option
Plans may be granted after June 30, 2001.
In 1993, the Company established the Employee Stock Option Plan of 1993, as
amended, which generally provided for the granting to all employees (excluding
U.S. bargaining unit employees and key employees eligible under the Key Option
Plans) of options to purchase an aggregate of 2,812,500 common shares at fair
market value on the date of grant. No additional options may be granted under
this plan. In 1995, the Company established the Directors Stock Options Plan,
which generally provides for the granting to each nonemployee director the
option to purchase up to 3,000 common shares at the fair market value on the
date of grant. Options under all plans become exercisable in four installments
beginning after one year, and no options may be exercised after 10 years from
the date of grant. Outstanding options may be canceled and reissued under
terms specified in the plan documents.
44
<PAGE>
Had compensation cost for the Company's two stock option plans been determined
based on the fair value at grant date for awards in 1997, 1996 and 1995
consistent with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation," the Company's net earnings
and earnings per share would have been as follows:
PRO FORMA INFORMATION
(in millions, except per share data) 1997 1996 1995
------------------------------
Net earnings -- as reported $47.8 $150.4 $137.5
Net earnings -- pro forma 41.4 145.0 135.3
Basic earnings per share -- as reported 0.33 1.05 0.96
Basic earnings per share -- pro forma 0.29 1.01 0.94
Diluted earnings per share -- as reported 0.33 1.03 0.94
Diluted earnings per share -- pro forma 0.28 1.00 0.92
The pro forma amounts shown above are not representative of the effects on net
income or earnings per share in future years because only options granted
after January 1, 1995 have been included in the above numbers, and the full
net income effect is recognized over the vesting period, typically four years.
The weighted-average fair value at date of grant for options granted during
1997, 1996 and 1995 was $5.74, $7.37 and $6.17, respectively. Fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for option grants in
1997, 1996 and 1995: dividend yield of 1.3% to 2.1%, expected volatility of
31% to 32%; risk free interest rate of 5.0% to 6.5%; and expected life of 4 to
5 years.
Stock option transactions under all plans are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Number Option price Number Option price Number Option price
of shares per share of shares per share of shares per share
--------------------------- ------------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 9,187,945 $5.26-23.88 7,901,801 $5.26-19.05 7,289,925 $4.54-19.05
Granted 2,935,789 18.56-20.91 2,006,572 19.00-23.88 2,143,845 16.83-22.38
Forfeited (62,643) 14.20-23.88 (351,168) 8.17-23.88 (121,165) 5.54-19.14
Exercised (330,846) 5.43-19.05 (369,260) 5.54-17.92 (1,410,804) 4.54-19.14
--------------------------- ------------------------- ----------- ------------
Outstanding at end of year 11,730,245 $5.26-23.88 9,187,945 $5.26-23.88 7,901,801 $5.26-22.38
Exercisable at end of year 5,850,724 $5.26-23.88 4,652,411 $5.26-22.38 2,860,532 $5.26-19.05
Available for future grants 6,447,093 9,320,239 10,975,643
</TABLE>
45
<PAGE>
The following table summarizes information about fixed-price options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------ --------------------------
Weighted-
average Weighted- Weighted-
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices at 12/31/97 life (years) price at 12/31/97 price
- ------------------------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C>
$ 5.26 to 9.46 582,811 2 $ 7.72 582,811 $ 7.72
11.45 to 19.06 2,178,315 4 16.92 2,178,315 16.92
14.21 to 19.06 2,165,594 7 16.20 1,615,842 16.19
16.83 to 22.38 1,943,313 8 18.93 971,441 18.93
19.00 to 23.88 1,953,502 9 21.55 501,715 21.61
18.56 to 20.91 2,906,710 10 18.95 600 20.25
---------- ------ --------- ------
11,730,245 $17.94 5,850,724 $16.53
</TABLE>
The Company's Key Employee Stock Bonus Plan, as amended (the Bonus Plan)
provides for the award of up to 15,187,500 common shares to key employees as
compensation for future services, not exceeding 1,518,750 shares in any year
(plus any canceled awards or shares available for award, but not previously
awarded). The Bonus Plan terminates on June 30, 2006. Shares awarded vest in
five annual installments, provided the recipient is still employed by the
Company on the vesting date. Compensation value is measured on the date the
award is granted.
In 1997 and 1996, the Company granted 193,000 and 174,000 shares to key
employees at a fair value of $20.25 and $23.88, respectively, per share.
Compensation expense relating to stock awards was $5.2 million in 1997, $7.0
million in 1996 and $7.7 million in 1995. Shares awarded, net of
cancellations, are included in average shares outstanding.
17. ENVIRONMENTAL COSTS
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing, environmental investigations
and cleanup plans at several currently or formerly owned and/or operated
sites, including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The
Company is continuing to investigate contamination at Plainville under a 1993
agreement with the United States Environmental Protection Agency (EPA) and is
awaiting approval of a decommissioning plan by the State of Massachusetts
under authority delegated by the Nuclear Regulatory Commission. Investigation
of the environmental status at Salt Lake City continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at Attapulgus, under a 1994 consent order with the Georgia Department
of Natural Resources, Environmental Protection Division, is expected to be
completed in 1998.
46
<PAGE>
In addition, 17 sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many
cases, the dollar amount of the claim is unspecified and claims have been
asserted against a number of other entities for the same relief sought from
the Company. Based on existing information, the Company believes that it is a
de minimis contributor of hazardous substances at many of the sites referenced
above. Subject to the reopening of existing settlement agreements for
extraordinary circumstances or natural resource damages, the Company has
settled a number of other cleanup proceedings. The Company has also responded
to information requests from EPA and state regulatory authorities in
connection with other Superfund sites.
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1997 and 1996 were $43.6 million
and $49.6 million, respectively, including $3.8 million and $4.6 million,
respectively, for Superfund sites. These amounts represent those costs which
the Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 60% of what it believes are the reasonably possible
environmental cleanup related costs of a noncapital nature. The estimate of
reasonably possible costs is less certain than the probable estimate upon
which the accrual is based.
During the past three-year period, cash payments for environmental cleanup
related matters were $6.0 million, $7.0 million and $7.6 million for 1997,
1996 and 1995, respectively. The amounts accrued in connection with
environmental cleanup related matters were not significant over this time
period.
For the past three-year period, environmental related capital projects have
averaged less than 10 percent of the Company's total capital expenditure
programs, and the expense of environmental compliance (environmental testing,
permits, consultants and in-house staff) was not significant.
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations.
Based on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup related matters are
projected to be $10.0 million for 1998, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, management
believes that environmental cleanup related reserves at December 31, 1997 are
reasonable and adequate and that environmental matters are not expected to
have a material adverse effect on financial condition. These matters, if
resolved in a manner different from the estimates, could have a material
adverse effect on operating results or cash flows when resolved in a future
reporting period.
47
<PAGE>
18. EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" (SFAS 128), during the fourth quarter
of 1997 as required. The new standard specifies the computation, presentation,
and disclosure requirements for basic and diluted earnings per share (EPS).
The following table represents the computation of basic and diluted EPS as
required by SFAS 128.
EARNINGS PER SHARE COMPUTATIONS
Year ended December 31 (in thousands, except per share data)
1997 1996 1995
----------------------------------
Basic EPS Computation
Net income applicable to common shares $47,778 $150,447 $137,521
----------------------------------
Average number of shares outstanding 144,270 143,810 143,619
----------------------------------
Basic earnings per share $0.33 $1.05 $0.96
==================================
Diluted EPS Computation
Net income applicable to common shares $47,778 $150,447 $137,521
----------------------------------
Average number of shares outstanding 144,270 143,810 143,619
Effect of dilutive stock options 1,667 1,914 2,656
----------------------------------
Total number of shares outstanding 145,937 145,724 146,275
----------------------------------
Diluted earnings per share $0.33 $1.03 $0.94
==================================
Options to purchase additional shares of common stock were outstanding at the
end of 1997 and 1996 (1997-1,775,827 and 1996-1,757,223), but were not
included in the computation of diluted EPS because the options' exercise
prices were greater than the average annual market price of the common shares.
19. LITIGATION AND CONTINGENCIES
The Company and certain of its officers and directors are defendants in a
consolidated class action complaint pending in the U.S. District Court for the
District of New Jersey on behalf of persons who bought Engelhard stock between
April 1995 and November 1995. The complaint claims that defendants made false
statements and omissions and traded on nonpublic information. The Company
believes the class action to be without merit and is vigorously defending
against it.
The Company is one of a number of defendants in numerous proceedings which
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to talc, asbestos or other "toxic" substances purportedly supplied by
the Company and other defendants. The Company is also subject to a number of
environmental contingencies (see Note 17, "Environmental Costs," on pages 46 and
47) and is a defendant in a number of lawsuits covering a wide range of other
matters. In some of these matters, the remedies sought or damages
48
<PAGE>
claimed are substantial. During 1997, 1996 and 1995, the Company provided $2.8
million, $4.3 million and $7.0 million, respectively, for existing legal
proceedings. While it is not possible to predict with certainty the ultimate
outcome of these lawsuits or the resolution of the environmental contingencies,
management believes, after consultation with counsel, that resolution of these
matters is not expected to have a material adverse effect on financial
condition. These matters, if resolved in a manner different from the estimates,
could have a material adverse effect on the operating results or cash flows when
resolved in a future reporting period.
In July 1996, the Securities and Exchange Commission (SEC) issued a formal
order of investigation concerning the sales of Engelhard stock by certain of
the Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company has
provided documents to the SEC and witnesses have been examined by the SEC
staff.
20. SUPPLEMENTAL INFORMATION
The following table presents certain supplementary information to the
Consolidated Statements of Cash Flows:
SUPPLEMENTARY CASH FLOW INFORMATION
(in millions) 1997 1996 1995
--------------------------
Cash paid during the year for
Interest, net of capitalized amounts and contango $43.9 $34.2 $29.1
Income taxes 29.5 41.3 21.9
Change in assets and liabilities -- source (use)
Receivables $43.2 $(82.1) $22.5
Committed metal positions (81.6) (64.8) (33.1)
Inventories (36.0) (33.2) (29.9)
Other current assets 24.4 (7.5) 8.2
Other noncurrent assets (68.8) 0.2 (17.2)
Accounts payable 17.1 2.7 (3.4)
Accrued liabilities 48.2 (23.5) (6.7)
Noncurrent liabilities (23.1) 2.5 (12.3)
--------------------------
Net change in assets and liabilities $(76.6) $(205.7) $(71.9)
==========================
The following table presents certain supplementary information to the
Consolidated Balance Sheets:
SUPPLEMENTARY BALANCE SHEET INFORMATION
(in millions) 1997 1996
---------------
Taxes payable $50.4 $30.2
Payroll-related accruals 45.3 37.7
Restructuring reserves 22.0 13.5
Interest payable 12.4 14.5
Environmental reserve 10.6 11.1
Deferred income 7.1 11.2
Other 90.2 69.6
----------------
Other current liabilities $238.0 $187.8
================
49
<PAGE>
21. SUBSEQUENT EVENT
In 1998, management learned that Engelhard and several other companies
operating in Japan had been victims of a sophisticated, fraudulent scheme
involving base-metal inventory held in third-party warehouses in Japan. Based
on preliminary information, management estimates the inventory loss to be
approximately $39.0 million in 1997 and $16.0 million in 1998. The Company has
not yet recorded any insurance or third-party recovery due to the ongoing
nature of the investigation and the complexity of the fraud uncovered.
However, the Company has placed its insurance carriers on notice and is
vigorously pursuing recovery from them and responsible third parties. This
event is not expected to have a material adverse impact on the business and
operation of the ICM group.
50
<PAGE>
Report of Independent Accountants
_________________________________
To the Shareholders and Board of Directors of Engelhard Corporation:
We have audited the accompanying consolidated balance sheets of Engelhard
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Engelhard
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 5, 1998
51
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) quarter quarter quarter quarter
--------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales $884.2 $896.7 $836.1 $1,013.6
Gross profit 141.7 154.5 140.1 163.6
Earnings/(loss) before income taxes 53.8 63.1 54.7 (85.7)
Net earnings/(loss) 37.6 44.2 38.8 (72.8)
Basic earnings/(loss) per share 0.26 0.31 0.27 (0.50)
Diluted earnings/(loss) per share 0.26 0.30 0.27 (0.50)
1996
Net sales $ 774.7 $ 783.9 $ 800.9 $ 824.9
Gross profit 109.8 128.1 124.1 151.1
Earnings before income taxes 45.5 56.0 49.0 59.5
Net earnings 32.6 40.0 35.0 42.8
Basic earnings per share 0.23 0.28 0.24 0.30
Diluted earnings per share 0.22 0.27 0.24 0.30
<FN>
Unless otherwise indicated, all per-share amounts are presented as basic earnings per share, as calculated under
SFAS No. 128, "Earnings Per Share."
Results in the fourth quarter of 1997 include special and other charges of $149.6 million ($117.7 million after tax or
$0.82 per share) for a variety of events (including restructuring actions and a loss from the base-metal fraud in Japan).
Results in the second quarter of 1996 include a gain of $9.2 million ($5.7 million after tax or $0.04 per share) from an
insurance recovery partially offset by a provision of $7.0 million ($4.3 million after tax or $0.03 per share) for costs
related to certain existing legal proceedings. Results in the fourth quarter of 1996 include a gain of $5.4 million
($3.3 million after tax or $0.02 per share) on the sale of certain LIFO inventories and a gain of $2.4 million ($1.5 million
after tax or $0.01 per share) on the sale of an investment. These fourth quarter gains were partially offset by a
restructuring reserve of $2.5 million after tax ($0.02 per share) related to the Company's investment in Engelhard-CLAL,
and a charge of $2.6 million ($1.6 million after tax or $0.01 per share) for a revaluation of petroleum catalyst inventories.
Basic and diluted earnings per share amounts are calculated independently for each of the quarters presented. The sum of the
quarters may not equal the full year earnings per share amounts.
</FN>
</TABLE>
Changes in and Disagreements with
Item 9. Accountants on Accounting and Financial Disclosure
- ------ --------------------------------------------------
Not applicable.
52
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
(a) Directors -
Information concerning directors of the Company is included under the
caption "Election of Directors" and "Information with Respect to Nominees and
Directors Whose Terms Continue" on pages 3 through 6 of the Proxy Statement for
the 1998 Annual Meeting of Shareholders and is incorporated herein by reference.
(b) Executive Officers -
ARTHUR A. DORNBUSCH, II Age 54. Vice President, General Counsel and
Secretary of the Company from prior to 1993.
THOMAS P. FITZPATRICK Age 59. Vice President and Chief Financial
Officer effective May 1, 1997. Partner with
Coopers & Lyband L.L.P. prior thereto.
JOSEPH E. GONNELLA Age 51. Senior Vice President, Strategy and
Corporate Development effective February 1, 1997.
Group Vice President and General Manager of the
Environmental Technologies Group from August 1994
to January 1997. Business Director of the Mobile
Source business prior thereto.
JOHN C. HESS Age 45. Vice President, Human Resources effective
August 1, 1997. Director of Human Resources for
the Chemical Catalyst Group from November 1995 to
July 1997. Director of Human Resources for
Policies, Plans and Services prior thereto.
PETER B. MARTIN Age 58. Vice President, Investor Relations
effective June 18, 1997. Vice President, Investor
Relations, W.R. Grace & Company prior thereto.
BARRY W. PERRY * Age 51. President and Chief Operating Officer
effective February 1, 1997. Group Vice President
and General Manager of the Pigments and Additives
Group from August 1993 to January 1997. Group
Vice President and General Manager of the Latex &
Specialty Polymers Division of Rhone-Poulenc prior
thereto.
ROBERT J. SCHAFFHAUSER Age 59. Vice President and Chief Technical Officer
effective February 1, 1997. Vice President,
Technology and Corporate Development from January
1995 to January 1997. Vice President, Corporate
Development prior thereto.
* Also a director of the Company
53
<PAGE>
ORIN R. SMITH * Age 62. Chairman and Chief Executive Officer of
the Company since January 1995. President and
Chief Executive Officer of the Company prior
thereto. Mr. Smith is also a director of
Ingersoll-Rand Company, Minorco, Perkin-Elmer
Corporation, Summit Bancorp and Vulcan Materials
Company.
MICHAEL A. SPERDUTO Age 40. Treasurer of the Company since January
1993. Vice President of Finance of the Industrial
Commodities Management Group prior thereto.
DAVID C. WAJSGRAS Age 37. Controller of the Company effective
September 1, 1997. Chief Financial Officer and
Director of Financial Services with AlliedSignal
Inc. from July 1994 to August 1997. Business Unit
Controller for AlliedSignal Inc. prior thereto.
* Also a director of the Company
Officers of the Company are elected at the meeting of the Board of
Directors held in May of each year after the annual meeting of shareholders and
serve until their successors shall be elected and qualified and shall serve as
such at the pleasure of the Board.
Item 11. Executive Compensation
- ------- ----------------------
Information concerning executive compensation is included under the caption
"Executive Compensation and Other Information" on pages 11 through 22 of the
Proxy Statement for the 1998 Annual Meeting of Shareholders and is incorporated
herein by reference.
Security Ownership of Certain
Item 12. Beneficial Owners and Management
- ------- --------------------------------
Information concerning security ownership of certain beneficial owners and
management is included under the captions "Information as to Certain
Shareholders" and "Share Ownership of Directors and Officers" on pages 2 and 3
and pages 7 and 8, respectively, of the Proxy Statement for the 1998 Annual
Meeting of Shareholders and is incorporated herein by reference.
Certain Relationships
Item 13. and Related Transactions
- ------- ------------------------
Information concerning certain business relationships of nominees for
director and directors and related transactions is included under the captions
"Information as to Certain Shareholders", "Information with Respect to Nominees
and Directors Whose Terms Continue", "Share Ownership of Directors and Officers"
and "Compensation Committee Interlocks, Insider Participation and Certain
Transactions" on pages 2 through 8 and page 10, respectively, of the Proxy
Statement for the 1998 Annual Meeting of Shareholders and is incorporated herein
by reference.
54
<PAGE>
PART IV
Exhibits, Financial Statement
Item 14. Schedules and Reports on Form 8-K
- ------- ---------------------------------
Pages
-----
(a) (1) Financial Statements and Schedules
Report of Independent Accountants 51
Consolidated Statements of Earnings for each of the 24
three years in the period ended December 31, 1997
Consolidated Balance Sheets at December 31, 1997 and 1996 25
Consolidated Statements of Cash Flows for each of the 26
three years in the period ended December 31, 1997
Consolidated Statements of Shareholders' Equity for each 27
of the three years in the period ended December 31, 1997
Notes to Consolidated Financial Statements 28-50
(2) Financial Statement Schedules
Consolidated financial statement schedules not filed *
herein have been omitted either because they are not
applicable or the required information is shown in the
Notes to Consolidated Financial Statement in this
Form 10-K.
(b) There were no reports on Form 8-K filed during the year
ended December 31, 1997.
Exhibits Page
- -------- ----
(3) (a) Certificate of Incorporation of the Company *
(incorporated by reference to Form 10, as
amended on Form 8-K filed with the Securities
and Exchange Commission on May 19, 1981).
(3) (b) By-laws of the Company as amended September 17, 1981 *
(incorporated by reference to Form 10-Q for the
quarter ended September 30, 1981).
(3) (c) Certificate of Amendment to the Restated Certificate *
of Incorporation of the Company (incorporated by
reference to Form 10-K for the year ended December 31,
1987).
* Incorporated by reference as indicated.
55
<PAGE>
Exhibits Page
- -------- ----
(3) (d) Article XVII of the Registrant's By-laws as amended *
on May 2, 1988 (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on
May 21, 1988).
(3) (e) Certificate of Amendment to the Restated Certificate of *
Incorporation of the Company (incorporated by reference
to Form 10-Q for the quarter ended March 31, 1993).
(3) (f) Amendment to the Restated Certificate of Incorporation *
of the Company, filed with the State of Delaware, Office
of the Secretary of State on May 2, 1996 (incorporated
by reference to Form 10-Q filed with the Securities and
Exchange Commission on May 14, 1996).
(3) (g) By-laws of the Company as amended June 12, 1997 *
(incorporated by reference to Form 10-Q filed with the
Securities and Exchange Commission on August 13, 1997).
(10)(a) Form of Agreement of Transfer entered into between *
Engelhard Minerals & Chemicals Corporation and the
Company, dated May 18, 1981 (incorporated by
reference to Form 10, as amended on Form 8 filed
with the Securities and Exchange Commission on
May 19, 1981).
(10)(b) Engelhard Corporation Stock Option Plan of 1981 *
Restated as of December 13, 1989 - conformed copy
includes amendments through February 1995
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(c) Retirement Plan for Directors of Engelhard *
Corporation Effective January 1, 1985 - conformed
copy includes amendments through June 1991
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(d) Deferred Compensation Plan for Key Employees of *
Engelhard Corporation Effective August 1, 1985 -
conformed copy includes amendments through December
1993 (incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996) (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
* Incorporated by reference as indicated.
56
<PAGE>
Exhibits Page
- -------- ----
(10)(e) Engelhard Corporation Directors and Executives *
Deferred Compensation Plan (1986-1989) - conformed
copy includes amendments through December 1993
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(f) Key Employees Stock Bonus Plan of Engelhard *
Corporation Effective July 1, 1986 - conformed
copy includes amendments through June 1992
(incorporated by reference to Form 10-K filed with
the Securities and Exchange Commission on
March 22, 1996).
(10)(g) Stock Bonus Plan for Non-Employee Directors of *
Engelhard Corporation Effective July 1, 1986 -
conformed copy includes amendments through
June 1992 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(h) Deferred Compensation Plan for Directors of *
Engelhard Corporation Restated as of May 7, 1987 -
conformed copy includes amendments through
December 1993 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(i) Supplemental Retirement Program of Engelhard *
Corporation as Amended and Restated Effective
January 1, 1989 - conformed copy includes
amendments through November 1994 (incorporated
by reference to Form 10-K filed with the Securities
and Exchange Commission on March 22, 1996).
(10)(j) Engelhard Corporation Directors and Executives *
Deferred Compensation Plan (1990-1993) -
conformed copy includes amendments through
November 1993 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(k) Engelhard Corporation Stock Option Plan of 1991 - *
conformed copy includes amendments through
February 1995 (incorporated by reference to the
1995 definitive Proxy Statement filed with the
Securities and Exchange Commission on March 31, 1995).
* Incorporated by reference as indicated.
57
<PAGE>
Exhibits Pages
- -------- -----
(10)(l) Engelhard Corporation Directors Stock Option *
Plan Effective May 4, 1995 (incorporated by
reference to the 1995 definitive Proxy Statement
filed with the Securities and Exchange Commission on
March 31, 1995).
(10)(m) Form of Agreement With Key Employees in the *
Event of an Acquisition of a Control Interest in
the Company, dated November 2, 1995 (incorporated by
reference to Form 10-K filed with the Securities and
Exchange Commission on March 22, 1996).
(10)(n) Amendments to the Key Employee Stock Bonus Plan of *
Engelhard Corporation adopted March 7, 1996
(incorporated by reference to the 1996 definitive
Proxy Statement filed with the Securities and
Exchange Commission on March 29, 1996).
(10)(o) Amendments to the Stock Bonus Plan for Non-Employee *
Directors of Engelhard Corporation adopted March 7,
1996 (incorporated by reference to the 1996 definitive
Proxy Statement filed with the Securities and Exchange
Commission on March 29, 1996).
(10)(p) Amendment to the Supplemental Retirement Program of *
Engelhard Corporation adopted December 19, 1996
(incorporated by reference to Form 10-K filed with the
Securities and Exchange Commission on March 27, 1997).
(10)(q) Form of Separation Agreement with L. Donald LaTorre, *
formerly a Director, President and Chief Operating
Officer of the Company, dated April 1, 1997
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on May 14,
1997).
(10)(r) Amendment to the Deferred Compensation Plan for Key *
Employees of Engelhard Corporation, adopted April 3,
1997 (incorporated by reference to Form 10-Q filed
with the Securities and Exchange Commission on
May 14, 1997).
(10)(s) Form of Employee Agreement with Orin R. Smith, Chairman 62-68
and Chief Executive Officer of the Company, dated
October 3, 1996 and amended on March 5, 1998.
* Incorporated by reference as indicated.
58
<PAGE>
Exhibits Pages
- -------- -----
(12) Computation of Ratio of Earnings to Fixed Charges 69-70
(21) Subsidiaries of the Registrant 71-73
(23) Consent of Independent Accountants 74-75
(24) Powers of Attorney 76-86
59
<PAGE>
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) 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, in Iselin, New
Jersey on the 31st day of March 1998.
Engelhard Corporation
---------------------
Registrant
/s/Orin R. Smith
---------------------
Orin R. Smith
(Chairman and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Orin R. Smith Chairman and Chief Executive March 31, 1998
- ------------------------- Officer & Director
Orin R. Smith (Principal Executive Officer)
/s/ Thomas P. Fitzpatrick Vice President and March 31, 1998
- ------------------------- Chief Financial Officer
Thomas P. Fitzpatrick (Principal Financial Officer)
/s/ David C. Wajsgras Controller March 31, 1998
- ------------------------- (Principal Accounting Officer)
David C. Wajsgras
60
<PAGE>
* Director March 31, 1998
- ---------------------------
Linda G. Alvarado
* Director March 31, 1998
- ---------------------------
Marion H. Antonini
* Director March 31, 1998
- ---------------------------
Anthony W. Lea
* Director March 31, 1998
- --------------------------
William R. Loomis, Jr.
* Director March 31, 1998
- --------------------------
James V. Napier
* Director March 31, 1998
- --------------------------
Norma T. Pace
* Director March 31, 1998
- -------------------------
Barry W. Perry
* Director March 31, 1998
- -------------------------
Reuben F. Richards
* Director March 31, 1998
- -------------------------
Henry R. Slack
* Director March 31, 1998
- -------------------------
Douglas G. Watson
* By this signature below, Arthur A. Dornbusch, II has signed this Form 10-K
as attorney-in-fact for each person indicated by an asterisk pursuant to
duly executed powers of attorney filed with the Securities and Exchange
Commission included herein as Exhibit 25.
/s/ Arthur A. Dornbusch, II March 31, 1998
- ---------------------------
Arthur A. Dornbusch, II
61
<PAGE>
EXHIBIT 10(s)
AMENDED EMPLOYMENT CONTRACT FOR ORIN R. SMITH
---------------------------------------------
62
<PAGE>
EMPLOYMENT AGREEMENT
It is mutually agreed between Engelhard Corporation, a Delaware
corporation with its principal offices at 101 Wood Avenue, Iselin, New Jersey
08830-0770 (hereinafter referred to as the "Company"), and Orin R. Smith, an
individual residing at Middlebrook P.O. Box 631 Oldwick, N.J. 08858 (hereinafter
referred to as the "Employee"), as follows:
1. Upon the terms and conditions of this Agreement, the Company
shall employ the Employee and the Employee shall continue in the employ of the
Company for the three-year period commencing May 21, 1996 and ending May 20,
1999 (hereinafter referred to as the "Employment Period"). Commencing on May 20,
1997, and on each May 20th thereafter, the Employment Period shall automatically
be extended for another calendar year unless notice of the Company's intention
not to so extend the Employment Period shall have been given to the Employee in
writing no later than December 31st of the preceding year; provided, however,
that the Employment Period shall not extend beyond December 31, 2000.
2. The employment shall be as Chairman and Chief Executive
Officer of the Company and for such other and further assignments and
responsibilities of comparable status as the Board of Directors of the Company
may direct. The Employee shall diligently and faithfully devote his full working
time exclusively and his best efforts to the performance of the work and
services under this Agreement and to the furtherance of the best interests of
the Company, subject to the authority and direction of the Board of Directors of
the Company; provided, however, that the Employee may, without prior approval of
the Board of Directors of the Company, (i) serve on corporate, civic or
charitable boards or committees, (ii) deliver lectures, fulfill speaking
engagements or teach at educational institutions, and (iii) manage his personal
investments, so long as such activities do not interfere materially with his
responsibilities under this Agreement.
3. (a) In addition to the Employee's obligations under Paragraph
2 above, the Employee, during the Employment Period, and for a period of two
years succeeding, will not (on his own behalf, either as an officer,
shareholder, partner, employee or otherwise, or on behalf of any significant
competitor of the Company), in any manner, directly or indirectly without the
express prior written consent of the Company, or except on behalf of the
Company, engage in any activity, accept employment with, render any service in
any capacity to or have any interest in (including investments in the equity
securities of) any business or enterprise or other activity (x) which will
conflict with the significant interests of the Company or its business or (y)
which is a significant competitor of or in significant competition with the
Company; provided, however, that the Employee may acquire or hold (beneficially
and of record) up to, but not more than, 1% of the equity securities of any such
significant competitor or entity without the consent of the Company if such
equity securities are listed on the New York Stock Exchange or the American
Stock Exchange or are quoted on NASDAQ.
(b) The Employee will not in bad faith in any manner, at any
time during the Employment Period, directly or indirectly, affect to the
Company's detriment any relationship of the Company or any affiliate with any
customer, supplier or employee of the Company or any affiliate, or cause any
customer or supplier to refrain from entrusting additional business to the
Company or any affiliate.
63
<PAGE>
(c) The Employee will not in any manner, at any time during
the Employment Period, directly or indirectly, without the express prior written
consent of the Company, disclose or use (x) any material confidential
information, it being understood that the term "confidential" shall mean all
information concerning the Company or any affiliate or customer or supplier or
other business associate of the Company or any affiliate (including but not
limited to any trade secrets or other private matters), which has been or is
received by the Employee from the Company or any affiliate or customer or
supplier or other business associate of the Company or any affiliate and which
is not known or generally available to the general public or of a type which the
Company has customarily made available to the general public and has not kept
confidential, and (y) any idea which the Employee may conceive during the
Employment Period, whether such idea is conceived individually or jointly, on or
off Company premises or during or after working time, and which relates to the
Company's services to its customers or suppliers or other business associates,
the Employee hereby acknowledging that any such idea shall be the exclusive
property of the Company.
(d) The Employee agrees that the remedy at law for any breach
of any of the foregoing provisions of this Paragraph 3 will be inadequate and
that the Company, in addition to any remedy at law, shall be entitled to
injunctive relief in the case of any such breach.
(e) Provided that the Company shall be in compliance in all
material respects with its obligations hereunder, the foregoing obligations of
the Employee under this Paragraph 3 shall survive a termination, for any reason,
of the Employee's employment prior to the end of the Employment Period, and
shall remain in full force and effect until the end of the Employment Period
(and two years following the end of the Employment Period in the case of the
obligations set forth in Paragraph 3(a)).
4. As consideration for the obligations incurred by the Employee
under this Agreement and for the services to be rendered by the Employee under
this Agreement, the Company shall pay to the Employee during the Employment
Period (except as otherwise provided in this Agreement) compensation as follows:
(a) The Company shall pay to the Employee a salary at an
annual rate of not less than $775,000 payable in periodic installments on the
Company's regular payroll dates.
(b) Additionally, in each year during the Employment Period
the Employee shall be entitled to participate in and receive cash bonus, equity
pool and stock option awards pursuant to the Company's Incentive Compensation
Plan, stock option plan and other equity-based compensation plans as determined
by the Compensation Committee of the Company's Board of Directors (the
"Compensation Committee"); provided, however, that for each calendar year
included in the Employment Period (beginning with calendar year 1996) the
Employee shall receive awards no less than the following: (i) if the Company's
performance for the year is less than a predictable level of performance, as
determined by the Compensation Committee, cash bonus of at least $216,645 and an
award of at least 22,500 shares of Common Stock of the Company; and (ii) if the
Company's performance for the year is greater than or equal to a predictable
level of performance, as determined by the Compensation Committee, (x) cash
bonus of at least $581,250, (y) equity pool share awards with a value of at
least $484,375 and (z) stock option awards with a value of at least $1,162,500.
64
<PAGE>
For this purpose, equity pool and stock option awards for a year will be valued
in the manner established by the Compensation Committee for valuing such awards
for other executives for such year. The minimum cash bonus and other awards set
forth in this Paragraph 4(b) shall be prorated on a daily basis for any calendar
year during which the Employee is not employed by the Company for the entire
year and the Company's performance for such partial year shall be deemed to be
the greater of: (i) the performance of the Company during the immediately
preceding calendar year; or (ii) the projected level of performance at the time
of termination, as set forth in the most recent Monthly Report to Directors.
Cash bonuses for a calendar year shall be disbursed (subject to any election by
the Employee to defer payment pursuant to an applicable deferred compensation
plan maintained by the Company) at the customary time for payment (generally
during the first quarter of the calendar year immediately subsequent to the year
in which earned). Equity pool, stock option and share awards for a calendar year
shall be made at the customary time for such awards (generally before the end of
the first quarter of the calendar year immediately subsequent to the year for
which earned), except that such awards may be made earlier if deemed necessary
or desirable by the Compensation Committee.
(c) The Employee shall be provided with the perquisites and
privileges commensurate with his position as Chairman and Chief Executive
Officer of the Company.
(d) The Employee shall be entitled to participate in the
benefit plans of the Company, including the pension plan, supplemental pension
plan, savings plan, deferred compensation plan and insurance and medical plans
as the Company may from time to time provide generally for its executive
officers.
(e) The foregoing enumeration of certain types and amounts of
compensation shall not be construed to affect the Company's right to pay
additional compensation as the Company in its discretion may determine. To the
extent that the Company's performance exceeds a predictable level, as determined
by the Compensation Committee, compensation paid to the Employee hereunder for a
year shall be no less than the compensation otherwise determined under the
applicable Company compensation plans as administered by the Compensation
Committee.
(f) If the Employee desires to defer payment of any portion
of his minimum cash bonus provided for in Paragraph 4(b) above, the Employee
shall be required to make such a deferral election in respect of such amount of
the cash bonus on or prior to the December 31 immediately preceding the year for
which the bonus is earned.
5. The employment of the Employee shall terminate prior to the
expiration of the Employment Period in the event that the Employee (i) dies,
(ii) becomes permanently and totally disabled, (iii) retires at any normal
retirement age or early retirement age pursuant to the Retirement Income Plan
for Salaried Employees of the Company, or (iv) breaches this Agreement and the
Company terminates his employment for such breach. In the event of any such
termination other than a termination described in (i) or (ii) above, the
Company's obligation to pay further salary as provided in Paragraph 4(a), or to
pay additional bonuses or make equity pool, stock option or share awards as
provided in Paragraph 4(b), shall cease. In the event of termination due to
death or permanent and total disability, the Employee (or in the case of his
65
<PAGE>
death, his estate or beneficiary) shall be entitled to receive an amount equal
to 70% of the total annual compensation that would otherwise be payable under
Paragraph 4 hereof during the remaining term of this Agreement at the time such
amounts would have been paid had the employment of the Employee continued for
the full term of the Agreement; provided, however, that in lieu of stock option,
restricted stock or other equity-based awards the Employee shall receive the
cash value of such awards at the time the awards would have been granted, which
stock option values shall be determined based on the Black-Scholes option
pricing model and restricted stock values shall be based on the undiscounted
closing trading price of Company shares on the New York Stock Exchange on the
date of grant. Notwithstanding any such termination of employment prior to the
expiration of the Employment Period, the terms and conditions of this Agreement,
including, without limitation, the Employee's obligations set forth in
Paragraphs 3 and 6 of this Agreement, shall continue in force and effect except
as otherwise provided herein.
6. In the event of termination of employment other than for
reason of the Employee's death or permanent and total disability, the Employee
shall when requested, and against payment of expenses, by the Company make
himself available as a consultant to consult with and supply information to and
generally cooperate with the Company during the remainder of the Employment
Period, all for reasonable periods of time and on reasonable notice not
inconsistent with the Employee's engaging in other full time employment not
itself inconsistent with the terms of this Agreement.
7. (a) This Agreement shall be deemed to be made under and
construed in accordance with the laws of the State of New Jersey.
(b) This Agreement shall be binding upon and inure to the
benefit of the Company and its successors and shall be binding upon the
Employee, his heirs, executors and administrators.
(c) As used in this Agreement, the term "affiliate" means any
entity controlled by, controlling or under common control with the Company.
Ownership, directly or indirectly, of more than 50% of the voting securities of
any corporation shall, in any event, constitute control for the purposes of this
Agreement.
(d) Except as provided in the following sentence, this
Agreement constitutes and expresses the whole agreement of the parties in
reference to any employment of the Employee by the Company and supersedes all
prior understandings, written or oral, between the Employee and the Company
relating to the subject matter hereof, including the employment agreement
between the Company and the Employee dated May 21, 1986. This Agreement does not
supersede the Change in Control Agreement between the Company and the Employee
dated as of October 3, 1996 (the "Change in Control Agreement"); provided,
however, that amounts receivable under Paragraph 4 hereof upon breach of this
Agreement by the Company will be reduced (but not below zero) by amounts
received by the Employee under Section 3 of the Change in Control Agreement.
Upon the occurrence of a "change in control" as defined in the Company's
Articles of Incorporation and/or the Change in Control Agreement, the Employee
shall have the right solely at his option to call for early termination of this
Agreement. Upon such demand, the Employee shall immediately be paid in cash the
undiscounted cash value of base salary, bonus and equity-based compensation that
66
<PAGE>
would have been paid if the Employee had performed hereunder through December
31, 2000 computed as if the Company had achieved results in each year remaining
in the term equal to its highest performance in any of the three immediately
preceding years; provided, however, that the cash value of stock options,
restricted stock awards and other equity-based awards shall be the undiscounted
value of such awards at the time the awards would have been granted determined,
in the case of stock options, based on the Black-Scholes option pricing model
and in the case of restricted stock on the undiscounted closing trading price of
Company shares on the New York Stock Exchange on the date of grant; provided
further, however, that amounts receivable under Paragraph 4 hereof upon breach
of this Agreement by the Company will be reduced (but not below zero) by amounts
received by the Employee under Section 3 of the Change in Control Agreement.
(e) This Agreement may not be amended, modified or
supplemented except by a writing signed by both of the parties hereto which
expressly states it is being made pursuant to this Paragraph 7(e).
(f) In case any one or more of the covenants, agreements,
provisions or terms contained in this Agreement shall be invalid, illegal or
unenforceable in any respect, the validity of the remaining covenants,
agreements, provisions or terms contained herein shall be in no way affected,
prejudiced or disturbed thereby.
IN WITNESS WHEREOF, the parties have signed this Agreement as of
the 3rd day of October, 1996.
ENGELHARD CORPORATION
By /s/ Marion H. Antonini
----------------------
Marion H. Antonini
/s/ Orin R. Smith
-----------------
Orin R. Smith
67
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
It is mutually agreed between Engelhard Corporation, a Delaware
corporation with its principal offices at 101 Wood Avenue, Iselin, New Jersey
08830-0770 (hereinafter referred to as the "Company"), and Orin R. Smith, an
individual residing at Middlebrook, P.O. Box 631, Oldwick, New Jersey 08858
(hereinafter referred to as the "Employee"), as follows:
1. The Company and the Employee desire to amend the Agreement between
them dated October 3, 1996 as provided in Paragraph 7(e) of said Agreement.
2. Paragraph 1 of the Agreement is amended to delete the date "August
31, 2000" and replace it with the date "December 31, 2000".
3. Paragraph 7(d) of the Agreement is amended to delete the date
"August 31, 2000" and replace it with the date "December 31, 2000".
4. The Agreement as amended is attached hereto as Exhibit A.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
5th day of March 1998.
ENGELHARD CORPORATION
By /s/ Marion H. Antonini
----------------------
Marion H. Antonini
/s/ Orin R. Smith
-----------------
Orin R. Smith
68
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
69
<PAGE>
EXHIBIT 12
ENGELHARD CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
Years Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings from continuing operations
before provision for income taxes $ 85,812 $209,955 $185,312 $157,306 ($4,709)
Add/(deduct)
Portion of rents representative
of the interest factor 4,600 3,900 4,700 4,800 4,500
Interest on indebtedness 52,776 45,009 31,326 21,954 13,696
Equity dividends 3,803 2,515 3,411 3,800 2,600
Equity in (earnings) losses of affiliates 47,833 5,008 (695) (632) (3,443)
-------- -------- --------- --------- --------
Earnings, as adjusted $194,824 $266,387 $224,054 $187,228 $12,644
======== ======== ========= ========= ========
Fixed Charges
Portion of rents representative
of the interest factor $4,600 $3,900 $4,700 $4,800 $4,500
Interest on indebtedness 52,776 45,009 31,326 21,954 13,696
Capitalized interest 651 875 784 528 -
------- ------- ------- -------- --------
Fixed charges $58,027 $49,784 $36,810 $27,282 $18,196
======= ======= ======= ======== ========
Ratio of Earnings to Fixed Charges 3.36 (A) 5.35 6.09 6.86 - (B)
======= ======= ======= ======== ========
(A) Earnings in 1997 were negatively impacted by special and other charges of $149.6 million for a variety of events.
Without such charges the ratio of earnings to fixed charges would have been 5.94.
(B) 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
would have been 8.83.
</TABLE>
70
<PAGE>
EXHIBIT 21:
SUBSIDIARIES OF THE REGISTRANT
------------------------------
71
<PAGE>
Subsidiaries of the Registrant
------------------------------
Jurisdiction Under Which
Name of Subsidiary Incorporated or Organized
- ------------------ -------------------------
Engelhard West, Inc. California
Engelhard Canada, Ltd. Canada
Engelhard Industries International, Ltd. Canada
Engelhard Technologies, Ltd. Canada
EC Delaware, Inc. Delaware
EI Corporation Delaware
Engelhard Asia Pacific, Inc. Delaware
Engelhard C Cubed Corporation Delaware
Engelhard DT, Inc. Delaware
Engelhard EM Holding Company Delaware
Engelhard Energy Corporation Delaware
Engelhard MC, Inc. Delaware
Engelhard Metal Plating, Inc. Delaware
Engelhard Pollution Control, Inc. Delaware
Engelhard Power Marketing, Inc. Delaware
Engelhard Sensor Technologies, Inc. Delaware
Engelhard Strategic Investments, Inc. Delaware
Engelhard Supply Corporation Delaware
International Dioxide, Inc. Delaware
Mustang Property Corporation Delaware
Engelhard Pigments OY Finland
Engelhard Pyrocontrole S.A. France
Engelhard S.A. France
Engelhard Holdings GmbH Germany
Engelhard Process Chemicals GmbH Germany
Engelhard Technologies GmbH Germany
Engelhard Technologies Verwaltsung GmbH Germany
Engelhard Italiana S.P.A. Italy
Engelhard Metals Japan, Ltd. Japan
Engelhard Pigments Japan Japan
Engelhard DeMeern, B.V. The Netherlands
Engelhard Netherlands, B.V. The Netherlands
Engelhard Terneuzen, B.V. The Netherlands
Harshaw Chemical Company New Jersey
Mearl Corporation New Jersey
Engelhard Peru S.A. Peru
Engelhard South Africa, Ltd. South Africa
Engelhard Metals A.G. Switzerland
Engelhard International, Ltd. United Kingdom
Engelhard Limited United Kingdom
Engelhard Metals, Ltd. United Kingdom
Engelhard Sales, Ltd. United Kingdom
Engelhard Technologies, Ltd. United Kingdom
Sheffield Smelting Co., Ltd. United Kingdom
Engelhard Export Corporation U.S. Virgin Islands
72
<PAGE>
Subsidiaries of the Registrant
------------------------------
Jurisdiction Under Which
Name of Subsidiary/Affiliate Incorporated or Organized
- ---------------------------- -------------------------
Engelhard-CLAL, Ltd. Partnership Delaware
Engelhard-CLAL SAS France
Engelhard HexCore L.P. Delaware
NE Chemcat Corporation Japan
Tickford Engelhard Michigan
Engelhard/Colortronics New Jersey
Fresh Air Solutions L.P. Pennsylvania
Heesung-Engelhard Corporation South Korea
Acreon Catalysts Texas
Dnipro Kaolin Ukraine
The names of other subsidiaries have been omitted since such subsidiaries, if
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as that term is defined in Rule 12b-2 (17 CFR 240.12b-2)
promulgated under the Securities Exchange Act of 1934.
73
<PAGE>
EXHIBIT 23:
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
74
<PAGE>
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the registration statements
of Engelhard Corporation on Form S-8 (File Nos. 2-72830, 2-81559, 2-84477, 2-
89747, 33-28540, 33-37724, 33-40365, 33-40338 and 33-43934) of our report dated
February 5, 1998 on our audits of the consolidated financial statements of
Engelhard Corporation and Subsidiaries, as of December 31, 1997 and 1996, and
for the years ended December 31, 1997, 1996 and 1995, which report is included
in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 31, 1998
75
<PAGE>
EXHIBIT 24:
POWERS OF ATTORNEY
------------------
76
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ Linda G. Alvarado
_____________________________
Linda G. Alvarado
77
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ Marion H. Antonini
________________________________
Marion H. Antonini
78
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1998.
/s/ Anthony W. Lea
________________________________
Anthony W. Lea
79
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ William R. Loomis, Jr.
______________________________
William R. Loomis, Jr.
80
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ James V. Napier
______________________________
James V. Napier
81
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ Norma T. Pace
________________________________
Norma T. Pace
82
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ Barry W. Perry
_________________________________
Barry W. Perry
83
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ Reuben F. Richards
________________________________
Reuben F. Richards
84
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 12, 1998.
/s/ Henry R. Slack
_______________________________
Henry R. Slack
85
<PAGE>
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 5, 1998.
/s/ Douglas G. Watson
_________________________________
Douglas G. Watson
86
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 28,765
<SECURITIES> 0
<RECEIVABLES> 825,824
<ALLOWANCES> 0
<INVENTORY> 356,403
<CURRENT-ASSETS> 1,255,172
<PP&E> 1,547,551
<DEPRECIATION> 759,373
<TOTAL-ASSETS> 2,586,323
<CURRENT-LIABILITIES> 1,240,136
<BONDS> 373,574
0
0
<COMMON> 147,295
<OTHER-SE> 637,965
<TOTAL-LIABILITY-AND-EQUITY> 2,586,323
<SALES> 3,630,653
<TOTAL-REVENUES> 3,630,653
<CGS> 3,030,717
<TOTAL-COSTS> 3,030,717
<OTHER-EXPENSES> 413,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,776
<INCOME-PRETAX> 85,812
<INCOME-TAX> 38,034
<INCOME-CONTINUING> 47,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,778
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 39683
<SECURITIES> 0
<RECEIVABLES> 742991
<ALLOWANCES> 0
<INVENTORY> 337098
<CURRENT-ASSETS> 1188329
<PP&E> 1445329
<DEPRECIATION> 700674
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<CURRENT-LIABILITIES> 1072997
<BONDS> 375075
0
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<COMMON> 147295
<OTHER-SE> 685861
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<OTHER-EXPENSES> 255460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45009
<INCOME-PRETAX> 209955
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<EPS-PRIMARY> 1.05
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> Dec-31-1995
<CASH> 40023
<SECURITIES> 0
<RECEIVABLES> 566312
<ALLOWANCES> 0
<INVENTORY> 245103
<CURRENT-ASSETS> 905878
<PP&E> 1262311
<DEPRECIATION> 652771
<TOTAL-ASSETS> 1943309
<CURRENT-LIABILITIES> 792243
<BONDS> 211533
0
0
<COMMON> 147295
<OTHER-SE> 590447
<TOTAL-LIABILITY-AND-EQUITY> 1943309
<SALES> 2840077
<TOTAL-REVENUES> 2840077
<CGS> 2379474
<TOTAL-COSTS> 2379474
<OTHER-EXPENSES> 244660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31326
<INCOME-PRETAX> 185312
<INCOME-TAX> 47791
<INCOME-CONTINUING> 137521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137521
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.94
</TABLE>
