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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the transition period from ________ to _________
Commission file name 1-8142
ENGELHARD CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1586002
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
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(Address of principal executive offices) (Zip Code)
(732) 205-5000
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(Registrant's telephone number including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 30, 1999
- --------------------- -----------------------------
$1 par value 143,644,464
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
Net sales ......................................... $1,073,234 $970,553
Cost of sales ..................................... 928,080 821,598
----------- ---------
Gross profit ................................. 145,154 148,955
Selling, administrative and other expenses ........ 77,595 78,741
----------- ---------
Operating earnings ........................... 67,559 70,214
Equity in earnings of affiliates .................. 3,675 4,405
Gain on sale of investment ........................ 1,020 -
Net interest expense .............................. (13,919) (12,326)
----------- ---------
Earnings before income taxes ................. 58,335 62,293
Income tax expense ................................ 17,792 19,124
----------- ---------
Net earnings ................................. $ 40,543 $ 43,169
=========== =========
Basic earnings per share .......................... $ 0.28 $ 0.30
=========== =========
Diluted earnings per share ........................ $ 0.28 $ 0.30
=========== =========
Cash dividends paid per share ..................... $ 0.10 $ 0.10
=========== =========
Average number of shares outstanding - Basic ...... 143,481 144,494
=========== =========
Average number of shares outstanding - Diluted .... 145,441 145,307
=========== =========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
March 31, December 31,
1999 1998
---------- ------------
Cash ............................................. $ 29,422 $ 22,339
Receivables ...................................... 357,823 376,826
Committed metal positions ........................ 721,004 541,224
Inventories ...................................... 352,260 349,752
Other current assets ............................. 81,768 69,826
---------- ----------
Total current assets ...................... 1,542,277 1,359,967
Investments ...................................... 165,738 156,727
Property, plant and equipment, net ............... 860,224 876,461
Intangible assets, net ........................... 324,158 326,253
Other noncurrent assets .......................... 152,383 146,911
---------- ----------
Total assets .............................. $3,044,780 $2,866,319
========== ==========
Short-term borrowings ............................ $ 268,462 $ 255,002
Accounts payable ................................. 282,529 227,535
Hedged metal obligations ......................... 646,201 552,690
Other current liabilities ........................ 224,501 235,218
---------- ----------
Total current liabilities ................. 1,421,693 1,270,445
Long-term debt ................................... 497,526 497,393
Other noncurrent liabilities ..................... 197,304 196,924
Shareholders' equity ............................. 928,257 901,557
---------- ----------
Total liabilities and
shareholders' equity .................... $3,044,780 $2,866,319
========== ==========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
--------- --------
Cash flows from operating activities
Net earnings .................................... $ 40,543 $ 43,169
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation, depletion and amortization ... 27,172 22,384
Gain on sale of investment ................. (1,020) -
Equity results, net of dividends ........... (3,675) (4,405)
Net change in assets and liabilities
Metal related ......................... (88,168) 156,746
All other ............................. (34,151) (27,366)
--------- ---------
Net cash provided by (used in) operating
activities ............................... (59,299) 190,528
--------- ---------
Cash flows from investing activities
Capital expenditures, net ....................... (13,117) (31,824)
Acquisitions and investments, net ............... (578) (35,808)
Other ........................................... (1,540) 305
--------- ---------
Net cash used in investing activities ...... (15,235) (67,327)
--------- ---------
Cash flows from financing activities
Increase in short-term borrowings ............... 13,460 35,684
Increase (decrease) in hedged metal obligations . 78,834 (124,968)
Proceeds from issuance of long-term debt ........ 183 -
Repayment of long-term debt ..................... (50) (99)
Purchase of treasury stock ...................... - (3,444)
Stock bonus and option plan transactions ........ 2,222 2,210
Dividends paid .................................. (14,495) (14,461)
--------- ---------
Net cash provided by (used in) financing
activities ............................... 80,154 (105,078)
Effect of exchange rate changes on cash .............. 1,463 (1,318)
--------- ---------
Net change in cash ......................... 7,083 16,805
Cash at beginning of year .................. 22,339 28,765
--------- ---------
Cash at end of period ...................... $ 29,422 $ 45,570
========= =========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
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ENGELHARD CORPORATION
BUSINESS SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------
1999 1998
----------- ---------
Net Sales
Environmental Technologies .................. $ 149,223 $136,193
Process Technologies ........................ 118,095 109,123
Paper Pigments and Additives ................ 55,928 57,512
Specialty Pigments and Additives ............ 88,032 84,745
Industrial Commodities Management ........... 635,400 553,777
----------- ---------
Reportable segments .................... 1,046,678 941,350
All Other ................................... 26,556 29,203
----------- ---------
$1,073,234 $970,553
=========== =========
Operating Earnings
Environmental Technologies .................. $ 24,179 $ 20,952
Process Technologies ........................ 14,390 12,826
Paper Pigments and Additives ................ 6,723 6,076
Specialty Pigments and Additives ............ 13,897 13,680
Industrial Commodities Management ........... 6,890 14,376
----------- ---------
Reportable segments .................... 66,079 67,910
All Other ................................... 1,480 2,304
----------- ---------
67,559 70,214
Equity in earnings of affiliates ................. 3,675 4,405
Gain on sale of investment ....................... 1,020 -
Net interest expense ............................. (13,919) (12,326)
----------- ---------
Earnings before income taxes ........... $ 58,335 $ 62,293
Income tax expense ............................... 17,792 19,124
----------- ---------
Net earnings ........................... $ 40,543 $ 43,169
=========== =========
Within the "All other" category, sales to external customers and operating
earnings are derived primarily from the Engineered Materials business, as well
as royalty income and other miscellaneous income and expense items that are not
related to the reportable segments.
See the Accompanying Notes to the Condensed Consolidated Financial Statements
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Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------
Note 1 - Basis of Presentation
- ------------------------------
The unaudited condensed consolidated financial statements of Engelhard
Corporation and subsidiaries (the "Company") contain all adjustments, which, in
the opinion of management, are necessary for a fair statement of the results for
the interim periods presented. The financial statement results for interim
periods are not necessarily indicative of financial results for the full year.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report to Shareholders.
Note 2 - Acquisition
- --------------------
On May 1, 1998, the Company acquired the chemical catalysts businesses of
Mallinckrodt Inc. ("Mallinckrodt businesses") for approximately $210 million in
cash. The Company financed the acquisition with a combination of commercial
paper and bank borrowings. The purchase price exceeded the preliminary
assessment of the fair value of net assets acquired by approximately $90
million, which is being amortized on a straight-line basis over 40 years. The
results of the Mallinckrodt businesses are included in the accompanying
financial statements from the date of acquisition: For the first quarter of
1999, the acquisition increased net sales by $17.8 million; operating earnings
by $2.8 million; and had no impact on earnings per share, after considering the
impact of higher interest expense related to the acquisition.
Note 3 - Inventories
- --------------------
Inventories consist of the following (in thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials ........................... $ 76,071 $ 76,304
Work in process ......................... 89,004 54,933
Finished goods .......................... 158,197 189,653
Precious metals ......................... 28,988 28,862
-------- --------
Total inventories ....................... $352,260 $349,752
======== ========
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Note 4 - Other Matters
- ----------------------
In 1998, management learned that Engelhard and several other companies
operating in Japan had been victims of a fraudulent scheme involving base-metal
inventory held in third-party warehouses in Japan. The inventory loss was
approximately $40 million in 1997 and $20 million in 1998. The Company is
vigorously pursuing various recovery actions. These actions include negotiations
with the various third parties involved and in several instances the
commencement of litigation. In the first quarter of 1998, Engelhard recorded a
receivable from the insurance carriers and third parties involved for
approximately $20 million. This amount represents management's and counsel's
best estimate of the minimum probable recovery from the various insurance
policies and other parties involved in the fraudulent scheme.
In February 1999, the Peruvian taxing authority made public an
investigation of the country's gold industry stemming from suspected evasion of
value-added tax payments. Engelhard Peru, S.A., a purchaser and exporter of
gold, has paid the tax to its vendors for each purchase and then claimed a
refund from the Peruvian taxing authority after export. Engelhard typically
would post a one-month letter of credit to obtain a prompt refund. Engelhard's
refund claims for November and December of 1998 and January of 1999 were
approximately $10 million per month. Engelhard has received the refunds for
November and December, but, at the request of the government, the letters of
credit, in the amount of $20 million, have been extended until July 1999 while
the industry investigation is conducted. The refund for January 1999 is going
through the claim procedure and remains unpaid, and the related January letter
of credit in the amount of $10 million, has also been extended until July 1999.
The January letter of credit becomes effective upon receipt of the January
refund by Engelhard. Management believes, based upon consultation with counsel,
that all appropriate tax payments have been made and that the Company is
entitled to all refunds claimed. However, if the resolution of this matter
differs from management's belief, the maximum financial exposure is
approximately $30 million.
Note 5 - Comprehensive Income
- -----------------------------
Comprehensive income is summarized as follows (in thousands):
Three Months Ended
March 31,
---------------------
1999 1998
---- ----
Net earnings ......................................... $40,543 $43,169
Other comprehensive loss:
Foreign currency translation adjustment ........... (1,759) (20,963)
-------- --------
Comprehensive income ................................. $38,784 $22,206
======== ========
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.
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Note 6 - Earnings Per Share
- ---------------------------
The following table represents the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
(in thousands, except per share data) 1999 1998
- ------------------------------------- -------- --------
Basic EPS Computation
- ---------------------
Net earnings applicable to common shares $ 40,543 $ 43,169
-------- --------
Average number of shares outstanding 143,481 144,494
-------- --------
Basic earnings per share $ 0.28 $ 0.30
======== ========
Diluted EPS Computation
- -----------------------
Net earnings applicable to common shares $ 40,543 $ 43,169
-------- --------
Average number of shares outstanding 143,481 144,494
Effect of dilutive stock options 625 813
Effect of Rabbi Trust 1,335 -
-------- --------
Total number of shares outstanding 145,441 145,307
-------- --------
Diluted earnings per share $ 0.28 $ 0.30
======== ========
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
- ------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the First Quarter of 1999
With the First Quarter of 1998
- ---------------------------------------
Net earnings decreased 6% to $40.5 million in the first quarter of 1999
from $43.2 million in the same period of 1998. Operating earnings for the first
quarter of 1999 decreased 4% to $67.6 million, compared with $70.2 million in
the same period of 1998. The Industrial Commodities Management segment reported
lower operating earnings, which offset higher operating earnings for all of the
Company's other reportable segments.
The Company's share of earnings from affiliates was $3.7 million for the
first quarter of 1999 compared with $4.4 million for the same quarter of 1998.
The decrease was attributable to lower equity earnings from Engelhard-CLAL, a
precious metal fabrication joint venture.
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Higher net interest expense was primarily due to increased borrowings due
to the acquisition of the Mallinckrodt businesses, partially offset by a
decrease in interest rates.
Net sales for the first quarter of 1999 increased 11% to $1.1 billion from
$1.0 billion for the same quarter of 1998. The Environmental Technologies,
Process Technologies, Specialty Pigments and Additives, and Industrial
Commodities Management segments reported higher sales, which more than offset
the lower sales of the Paper Pigments and Additives segment and sales reported
in the "All Other" category.
Environmental Technologies
- --------------------------
Operating earnings increased 15% to $24.2 million in the first quarter of
1999 from $21.0 million in the same period of 1998. Net sales for the first
quarter of 1999 increased 10% to $149.2 million from $136.2 million in the same
period of 1998.
The segment had higher earnings largely due to increased volumes for
emission-control systems in both North America and Europe and reduced material
costs resulting from supply-chain management initiatives.
More than 80% of the segment's sales and more than 90% of its operating
earnings came from technologies to control emissions from mobile sources,
including gasoline- and diesel-powered passenger cars, sport utility vehicles,
trucks, buses and off-road vehicles. Sales and operating earnings from these
technologies increased 12% and 17%, respectively. Continuing demand for the more
sophisticated emission-control technologies drove sales increases in both North
America and Europe. In North America, higher sales were primarily from increased
volumes at General Motors. In Europe, the volume increase was primarily from
Ford Motor Company and Nissan.
Process Technologies
- --------------------
Operating earnings increased 12% to $14.4 million in the first quarter of
1999 from $12.8 million in the same period of 1998. Net sales for the first
quarter of 1999 increased 8% to $118.1 million from $109.1 million in the same
period of 1998.
Sales and earnings growth were driven by the May 1998 acquisition of the
catalyst businesses of Mallinckrodt Inc., which accounted for $17.8 million in
sales and $2.8 million in operating earnings in the first quarter of 1999.
Excluding the results of the acquisition, operating earnings and net sales for
the segment would have decreased 10% and 8%, respectively, partially due to the
continuing lower demand for petrochemical catalysts. Overall weakness in the
chemical industry reduced demand for petrochemical catalysts.
Operating earnings from petroleum cracking catalysts were flat, as
significantly lower operating costs offset the impact from a drop in demand from
petroleum refiners. The lower operating costs resulted from the mid-1998
shutdown of a manufacturing facility in The Netherlands, manufacturing
efficiencies and reduced administrative expenses. The plant shutdown reduced
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fixed costs by $2.0 million in the first quarter of 1999. The manufacturing
efficiencies accounted for $1.1 million, while the reduced administrative
expenses totaled $1.3 million.
Paper Pigments and Additives
- ----------------------------
Operating earnings increased 11% to $6.7 million in the first quarter of
1999 from $6.1 million in the same period of 1998. Net sales for the first
quarter of 1999 decreased 3% to $55.9 million from $57.5 million in the same
period of 1998.
Operating earnings were up despite a modest decline in sales as a result of
lower manufacturing and commercial costs, which accounted for substantially all
of the increase. The sales decrease primarily reflected an overall slowdown in
the paper industry. Sales in Europe and North America decreased 13% and 4%,
respectively, from the prior year first quarter while sales in the Asia-Pacific
region increased 12%.
Specialty Pigments and Additives
- --------------------------------
Operating earnings increased 2% to $13.9 million in the first quarter of
1999 from $13.7 million in the same period of 1998. Net sales for the first
quarter of 1999 increased 4% to $88.0 million from $84.7 million in the same
period of 1998.
The increase in operating earnings was driven by increased performance
additives earnings of $2.3 million, due largely to higher attapulgite-based
product earnings resulting from a 9% increase in sales. In addition, increased
sales in the Asia-Pacific region increased earnings by $1.0 million, while
specialty films increased earnings by $0.8 million due to a 35% increase in
sales. These improved results were offset by higher period costs for specialty
pigments resulting from the start up of a new manufacturing process.
Industrial Commodities Management
- ---------------------------------
Operating earnings decreased 52% to $6.9 million in the first quarter of
1999 from $14.4 million in the same period of 1998. Net sales for the first
quarter of 1999 increased 15% to $635.4 million from $553.8 million in the same
period of 1998.
Sales increased, as palladium and rhodium prices were significantly higher
than in the year-ago quarter. The earnings decrease was the result of
significantly lower volatility in platinum group metals markets during the
quarter as compared with the prior year.
Financial Condition and Liquidity
---------------------------------
In July 1998, the Company filed a shelf registration for $300 million. The
net proceeds from offerings under the shelf registration are expected to be used
to retire short-term debt and for general corporate purposes. The Company
anticipates issuing $100 million of bonds under the shelf registration by
mid-1999.
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At March 31, 1999, the Company's current ratio was 1.1, the same as at
December 31, 1998. The Company's total debt to total capital ratio was 45%, the
same as at December 31, 1998.
The nature of the Industrial Commodities Management business can result in
significant fluctuations in cash flow. To that end, committed metal positions
increased due to a significant purchase of precious metals close to quarter end.
Payment terms reduced the immediate outflow of cash and this is reflected in the
increase in accounts payable. Hedged metal obligations also increased as a
consequence of this transaction. Under contracts already in place, this metal
will be sold during the second quarter causing an offsetting reduction in all
balances. Management believes that the Company will continue to have adequate
access to credit and other capital markets to meet its needs for the foreseeable
future.
Cash flows from investing activities were impacted by the acquisition of
Semo Chemical Company and the restructuring of Engelhard/ICC in the first
quarter of 1998, as well as the timing of capital expenditures in the first
quarter of 1999. Capital expenditures in 1999 are anticipated to approximate
1998 spending.
Other Matters
-------------
Significant Shareholder Announcement
- ------------------------------------
In the fourth quarter of 1998, Minorco announced that it was merging with
Anglo American Corporation of South Africa Limited and that it would sell all
the shares of common stock of Engelhard owned by Minorco and its affiliates,
approximately 46 million shares.
On March 2, 1999, Engelhard announced that Minorco would sell 26 million
shares in a secondary public offering and it also agreed to purchase
approximately 18 million of its shares owned by Minorco. Engelhard will purchase
those shares for the price, net of the underwriting commission, received by
Minorco in this offering. However, if that net price is more than $18.90 per
share, Engelhard will purchase those 18 million shares for $18.90 per share. If
the underwriters do not exercise all of their overallotment option granted to
them by Minorco for up to 2 million shares, Engelhard will purchase those
remaining shares at the same price that it will purchase the 18 million shares.
The 20 million shares, which includes the additional 2 million shares related to
the overallotment option, represent approximately 14% of Engelhard's total
shares outstanding. Minorco has agreed to compensate Engelhard for its costs and
other expenses relating to this offering and its purchase of the shares.
Engelhard plans to initially finance the purchase with short-term debt and
intends to take steps to reduce its total debt going forward. Engelhard does not
believe the financing of the purchase will have any material impact on its
liquidity. Engelhard is reviewing its portfolio to identify non-core assets and
businesses for potential sale and exploring ways to further reduce operating
expenses. Engelhard expects the buy-back to increase its earnings per share. If
Engelhard purchased the 20 million shares from Minorco on January 1, 1999 at a
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price of $18.90 per share, it is estimated that Engelhard's first quarter 1999
earnings per share would have increased by approximately $.02 on both a basic
and diluted basis.
Engelhard's purchase of shares and the secondary offering are expected to
be completed during the second quarter of 1999.
Year 2000 Update
- ----------------
The ability of computers, software or any equipment utilizing microprocessors to
properly recognize and process data at the turn of the century is commonly
referred to as a Y2K compliance issue. To address this issue, Engelhard has
developed a worldwide Y2K readiness plan that is divided into phases. The phases
are as follows:
o Inventory - understanding what applications are in the portfolio.
o Assessment - determining what, if any, Y2K shortcomings each application
has.
o Remediation - fixing or replacing each application to make it Y2K
compliant.
o Testing - conducting thorough Y2K scenarios to ensure that the fixing of
each application is complete.
The entire company has completed the inventory and assessment stages. Our major
corporate-wide applications, such as order processing, financials, metals
trading, human resources and payroll are all complete, including testing.
Engelhard has approached its Y2K compliance issue by categorizing its
dependencies into two sections: Internal systems and External systems of
suppliers and customers. Generally, internal systems identified as non-Y2K
compliant will be replaced or modified by reprogramming, upgrading or other
means. Many of the internal non-compliant systems were targeted for replacement
for reasons other than Y2K issues as the benefits of newer technology had
already created an economic business case for action. The cost of these
replacement solutions will be capitalized as permitted by applicable accounting
standards, whereas the cost of modification solutions will generally be expensed
as repairs. External systems will be monitored with the cooperation of our
suppliers and customers.
Internal IT systems - includes internal applications software such as finance,
manufacturing and logistics. All internal IT systems have been inventoried and
assessed for Y2K compliance.
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An estimate of completion for individual business unit systems is as follows:
Approximate % Completion of Key Applications
Actual Plan
------ -----------------
3/99 6/99 9/99
---- ---- ----
Environmental Technologies 70 95 100
Process Technologies 90 100 100
Paper Pigments and Additives 80 100 100
Specialty Pigments and Additives 70 90 100
Industrial Commodities Management 90 100 100
All Other 90 100 100
The projects which are either complete or still underway have been primarily
internally planned and staffed. The only major project which used external help
in assessment, remediation, and testing was our corporate order processing
system (CSS), for which we engaged MCI Systemhouse. This is now complete.
A core team in corporate headquarters, including a representative from internal
audit, has been given the responsibility to assess Y2K project progress during
remediation. They also conduct reviews at the end of each major project to
validate Y2K concurrence, according to a pre-determined checklist.
There has been little in the way of deferral of projects due to Y2K efforts. In
fact, the two major system implementations at corporate (PeopleSoft for Human
Resources and Oracle for Accounts Receivable) were Y2K compliance driven. Both
are now complete.
There have been no Y2K problems to date. In particular, orders which have been
placed with Y2K delivery have experienced no problem.
Internal Non-IT systems - includes embedded chip technology such as programmable
logic controllers and related hardware/software; and personal computers and
related software. Engelhard's programmable logic controllers and related
hardware/software have been inventoried and assessed for Y2K compliance.
Engelhard anticipates that all non-compliant equipment software will be replaced
or upgraded by mid-1999. Engelhard believes that all of its "critical" personal
computers and related software are Y2K compliant. All of Engelhard's other
personal computers and related software are in the process of being remediated
and tested. Engelhard believes that any non-compliant hardware/software will be
replaced or upgraded by mid-1999.
External systems - includes systems of customers and suppliers. Engelhard is in
the process of understanding the extent to which it is vulnerable to the Y2K
issues of its customers and suppliers. Engelhard has identified and contacted
third parties who would have a significant negative impact on operations if not
Y2K compliant. Engelhard has assessed the status of these third parties and has
developed requisite action plans where necessary. There can be no assurance that
the Y2K compliance issues of these customers and suppliers will not have a
material adverse affect on operating results or cash flows of the Company.
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Engelhard's assessment of its suppliers regarding their Y2K readiness, including
both domestic and international, includes comprehensive surveys of all vendors
and individual assessments of key ones. The surveys are complete and revealed no
major problems. The individual assessments are ongoing through 1999, and will
include face-to-face reviews if appropriate. In Engelhard's communication with
its customers regarding their inquiries to us, we have replied, with a standard
written response which gives our assurance that we are taking the appropriate
steps to be Y2K compliant before January 1, 2000.
The estimated total cost of implementing Y2K solutions is approximately $13.1
million. The total amount expended through December 31, 1998 was $10.6 million,
with an additional $0.3 million expended in the first quarter of 1999. With
regard to the $10.9 million expended to date, approximately $6.4 million has
been expensed and $4.5 million capitalized in accordance with applicable
accounting standards. The remaining Y2K expenditures are estimated to be
incurred by the end of 1999, of which approximately $1.3 million will be
expensed.
The dates on which the Company plans to complete any necessary Y2K modifications
are 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 of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
The failure to correct a material Y2K compliance problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have a material adverse impact on the operations
of Engelhard. Engelhard believes that, with the implementation of new business
systems and completion of the Y2K project as scheduled, the possibility of
significant interruptions of normal operations is reduced.
While we feel that we do not have significant exposure with respect to our major
systems in dealing with Y2K, we have begun to assess areas in which a
contingency plan is prudent in the event of an unforeseen problem.
To that end, each business has identified the key systems that require a
contingency plan to be developed. Going forward, the milestones through 1999
are:
Establish business/site teams to develop plans and
procedures to address identified critical components 6/30
Develop contingency plans 6/30
Publish recommendations relative to year-end 1999 activities 7/31
Test contingency plans where possible 8/31
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Forward-looking Statements
--------------------------
This document contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
the future prospects, developments and business strategies of Engelhard. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These forward-looking statements involve risks and
uncertainties that may cause Engelhard's actual future activities and results of
operations to be materially different from those suggested or described in this
document. These risks include: competitive pricing or product development
activities; Engelhard's ability to achieve and execute internal business plans;
global economic trends; worldwide political instability and economic growth;
markets, alliances and geographic expansions developing differently than
anticipated; fluctuations in the supply and prices of precious and base metals;
government legislation and/or regulation (particularly on environmental issues);
technology, manufacturing and legal issues; the impact of "Year 2000"; and the
impact of any economic downturns and inflation, including the recent weaknesses
in the currency, banking and equity markets of countries in the Asia/Pacific
region. Investors are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of their dates. Engelhard
disclaims any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Part II - OTHER INFORMATION
---------------------------
Item 4. Results of Matters to a Vote of Security Holders
- ------- ------------------------------------------------
(a) The Company's Annual Meeting of the Shareholders was held on
May 6, 1999.
(b) Results of votes of security holders.
1. Election of Directors For Withheld
--------------------- --- --------
Barry W. Perry 132,707,698 1,527,213
Reuben F. Richards 132,684,026 1,550,885
Henry R. Slack 132,609,874 1,625,037
Orin R. Smith 132,576,265 1,658,646
2. Appointment of PricewaterhouseCoopers L.L.P. as Independent Public
Accountants.
For Against Abstain
--- ------- -------
133,139,766 647,282 447,863
3. Approval of the Engelhard Corporation Deferred Stock Plan for Nonemployee
Directors.
For Against Abstain
--- ------- -------
127,137,637 6,357,547 739,727
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K Pages
- ------- -------------------------------- -----
(a)(10) Material Contracts.
(a) Engelhard Corporation Deferred Stock Plan for *
Nonemployee Directors, effective May 6, 1999
(incorporated by reference to the 1998 definitive
Proxy Statement filed with the Securities and
Exchange Commission on March 31, 1999).
(b) Credit Agreement dated as of April 10, 1997 *
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on May 14,
1997).
(12) Computation of the Ratio of Earnings to Fixed Charges. 18-19
(b) In a report on Form 8-K filed with the SEC on March 2, *
1999, the Company reported the Stock Purchase And
Registration Rights Agreement between Engelhard
Corporation and Minorco.
* Incorporated by reference as indicated.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENGELHARD CORPORATION
-----------------------------
(Registrant)
Date May 11, 1999 /s/ Orin R. Smith
--------------------- -----------------------------
Orin R. Smith
Chairman and Chief
Executive Officer
Date May 11, 1999 /s/ Thomas P. Fitzpatrick
--------------------- -----------------------------
Thomas P. Fitzpatrick
Senior Vice President and
Chief Financial Officer
Date May 11, 1999 /s/ David C. Wajsgras
---------------------- -----------------------------
David C. Wajsgras
Controller
17
<PAGE>
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
18
<PAGE>
<TABLE>
<CAPTION>
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31, Years Ended December 31,
------------------ -----------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations
before provision for income taxes $58,335 $260,563 $ 85,812 $209,955 $185,312 $157,306
Add/(deduct)
Portion of rents representative
of the interest factor 875 3,500 3,000 3,900 4,700 4,800
Interest on indebtedness 13,919 58,887 52,776 45,009 31,326 21,954
Equity dividends - 2,022 3,803 2,515 3,411 3,800
Equity in (earnings) losses
of affiliates (3,675) (10,077) 47,833 5,008 (695) (632)
-------- --------- -------- -------- --------- ---------
Earnings, as adjusted $69,454 $314,895 $193,224 $266,387 $224,054 $187,228
======== ========= ======== ======== ========= =========
Fixed Charges
Portion of rents representative
of the interest factor $ 875 $ 3,500 $ 3,000 $ 3,900 $ 4,700 $ 4,800
Interest on indebtedness 13,919 58,887 52,776 45,009 31,326 21,954
Capitalized interest 292 1,897 651 875 784 528
-------- --------- -------- -------- -------- ---------
Fixed charges $15,086 $ 64,284 $ 56,427 $ 49,784 $ 36,810 $ 27,282
======== ========= ======== ======== ======== =========
Ratio of Earnings to Fixed Charges 4.60 4.90 3.42 (a) 5.35 6.09 6.86
======== ========= ======== ======== ======== =========
(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.
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,422
<SECURITIES> 0
<RECEIVABLES> 357,823
<ALLOWANCES> 0
<INVENTORY> 352,260
<CURRENT-ASSETS> 1,542,277
<PP&E> 1,647,587
<DEPRECIATION> 787,363
<TOTAL-ASSETS> 3,044,780
<CURRENT-LIABILITIES> 1,421,693
<BONDS> 497,526
0
0
<COMMON> 147,295
<OTHER-SE> 780,962
<TOTAL-LIABILITY-AND-EQUITY> 3,044,780
<SALES> 1,073,234
<TOTAL-REVENUES> 1,073,234
<CGS> 928,080
<TOTAL-COSTS> 928,080
<OTHER-EXPENSES> 77,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,919
<INCOME-PRETAX> 58,335
<INCOME-TAX> 17,792
<INCOME-CONTINUING> 40,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,543
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
