<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
Commission file number 1-6450
GREAT LAKES CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-1765035
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
ONE GREAT LAKES BOULEVARD
P. O. BOX 2200
WEST LAFAYETTE, INDIANA 47906
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 765-497-6100
-----------------------
Not Applicable
---------------------------------------------------------------
Former name, former address and former fiscal year, if changed 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X
---
No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
One Class - 59,837,363 Shares as of September 30, 1997
<PAGE> 2
Part I - Financial Statements
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- -----------
(thousands of dollars)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 251,680 $ 147,367
Accounts receivable, less allowance
of $7,627 (1996 - $8,125) 280,586 309,643
Inventories
Finished products 252,792 264,662
Raw materials 50,897 47,853
Supplies 30,809 30,118
---------- ----------
Total inventories 334,498 342,633
Prepaid Expenses 35,712 37,819
---------- ----------
Total current assets 902,476 837,462
Plant and Equipment 1,360,858 1,287,656
Less allowance for depreciation (589,870) (544,622)
---------- ----------
Net plant and equipment 770,988 743,034
Goodwill 111,807 117,299
Investments in and Advances to
Unconsolidated Affiliates 91,215 71,317
Other Assets 25,667 36,365
Net Assets of Discontinued Operations 499,337 588,416
---------- ----------
$2,401,490 $2,393,893
========== ==========
</TABLE>
1
<PAGE> 3
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
(thousands of dollars)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 987 $ 288
Accounts payable 115,497 154,056
Accrued expenses 138,990 98,169
Income taxes payable 59,261 39,145
Dividends payable 9,574 9,242
Current portion of long-term debt 5,023 7,717
---------- ----------
Total current liabilities 329,332 308,617
Long-Term Debt, less Current Portion 501,647 503,795
Other Noncurrent Liabilities 17,278 18,688
Deferred Income Taxes 69,088 67,328
Minority Interest 6,158 8,566
Stockholders' Equity
Common stock, $1 par value, authorized
200,000,000 shares, issued 72,525,363
shares (1996 - 72,455,051 shares) 72,525 72,455
Additional paid-in capital 122,084 121,224
Retained earnings 2,039,031 1,893,104
Cumulative translation adjustment (52,300) 17,064
Treasury stock at cost 12,688,000
shares (1996 - 10,842,200 shares) (703,353) (616,948)
---------- ----------
Total Stockholders' Equity 1,477,987 1,486,899
---------- ----------
$2,401,490 $2,393,893
========== ==========
</TABLE>
2
<PAGE> 4
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ --------------------
1997 1996 1997 1996
------ ------- -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net Sales $368,376 $412,262 $1,169,301 $1,281,753
Operating Expenses
Cost of products sold 272,326 305,082 869,306 938,929
Selling, administrative
and research expenses 47,602 57,772 149,297 172,661
-------- -------- ---------- ----------
319,928 362,854 1,018,603 1,111,590
-------- -------- ---------- ----------
Operating Income 48,448 49,408 150,698 170,163
Equity in Earnings of
Affiliates and
Other Income 8,392 5,737 22,078 38,769
Interest and Other Expenses 11,680 8,787 35,891 41,475
-------- -------- ---------- ----------
Income from Continuing
Operations Before
Income Taxes 45,160 46,358 136,885 167,457
Income Taxes 16,000 16,100 48,400 58,100
-------- -------- ---------- ----------
Net Income from Continuing
Operations 29,160 30,258 88,485 109,357
Net Income from
Discontinued Operations 29,658 38,087 85,592 103,168
-------- -------- ---------- ----------
Total Net Income $ 58,818 $ 68,345 $ 174,077 $ 212,525
======== ======== ========== ==========
Net Income per Share from
Continuing Operations $ 0.49 $ 0.49 $ 1.47 $ 1.71
Net Income per Share from
Discontinued Operations $ 0.49 $ 0.60 $ 1.42 $ 1.61
-------- -------- ---------- ----------
Total Net Income per Share $ 0.98 $ 1.09 $ 2.89 $ 3.32
======== ======== ========== ==========
Dividends Declared
per Share $ 0.16 $ 0.15 $ 0.47 $ 0.42
======== ======== ========== ==========
Average Shares
Outstanding 59,849 63,410 60,181 63,966
</TABLE>
3
<PAGE> 5
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------
1997 1996
------------ -----------
(thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITES
Net Income from Continuing Operations $ 88,485 $109,357
Adjustments to reconcile income
from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 64,809 61,337
Changes in deferred items and other 147 6,118
------------ -----------
Cash provided by continuing operations
excluding changes in working capital 153,441 176,812
Changes in working capital other than
debt, net of effects from business
combinations 41,187 (20,217)
Other noncurrent liabilities (835) (3,072)
------------ -----------
Net Cash Provided by Operating Activities
from Continuing Operations 193,793 153,523
Discontinued Operations:
Net Income 85,592 103,168
Change in net assets 59,410 17,560
------------ -----------
Total Net Cash Provided by Operating
Activities 338,795 274,251
INVESTING ACTIVITIES
Plant & equipment additions (108,295) (165,486)
Business combinations, net of
cash acquired (999) (6,246)
Other (5,860) (5,755)
------------ -----------
Net Cash Used in Investing Activities (115,154) (177,487)
FINANCING ACTIVITIES
Net borrowing (repayment) under
short-term credit lines 394 (5,553)
Net (decrease) increase in commercial
paper and other long-term obligations (456) 7,730
Proceeds from stock options exercised 1,941 1,502
Minority interest (1,767) (73)
Repurchase of common stock (86,405) (106,810)
Cash dividends (28,150) (26,782)
------------ -----------
Net Cash Used in Financing Activities (114,443) (129,986)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (4,885) (1,634)
------------ -----------
Increase(Decrease) in Cash and
Cash Equivalents 104,313 (34,856)
Cash and Cash Equivalents at
Beginning of Year 147,367 126,535
------------ -----------
Cash and Cash Equivalents at End of Period $251,680 $ 91,679
============ ===========
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
RESULTS OF CONTINUING OPERATIONS
Sales for the 1997 third quarter were $368 million compared to the $412 million
reported in the prior-year period. Net income from continuing operations
amounted to $29 million, or $.49 per share, down $1 million from 1996.
Total net income for the quarter was $59 million, or $.98 per share, down $10
million from 1996.
For the nine months, sales were $1.2 billion compared to $1.3 billion in 1996.
Net income from continuing operations of $88 million, or $1.47 per share, was
down $21 million from the year-ago period. Total net income of $174 million,
or $2.89 per share, was down $38 million.
Sales by business unit are set forth in the following table ($-millions):
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------------ ----------------------------------
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Flame Retardants $68 $74 (8)% $217 $219 (1)%
Intermediates and
Fine Chemicals 78 75 4 % 245 235 4 %
Polymer Stabilizers 59 59 - 181 182 (1)%
Specialized Services 76 89 (15)% 233 268 (13)%
Water Treatment 87 115 (24)% 293 378 (22)%
---- ---- ----- ------ ------ -----
$368 $412 (11)% $1,169 $1,282 (9)%
==== ==== ===== ====== ====== =====
</TABLE>
On an overall basis, the decline in sales reflects the following:
<TABLE>
<CAPTION>
Third Year
Quarter to Date
------- -------
<S> <C> <C>
Selling Prices $(9) $ (31)
Volumes 26 97
Foreign Exchange (13) (28)
Dispositions (48) (151)
---- -----
$(44) $(113)
==== =====
</TABLE>
Flame Retardant sales in the quarter declined about $6 million due equally to
lower prices, volumes and unfavorable foreign exchange. Price increases
announced at mid-year had some positive impact although some volume was
sacrificed. Foreign exchange, particularly against the German mark and the
Japanese yen, continues to be negative.
5
<PAGE> 7
Intermediates and Fine Chemicals showed improvement over the prior-year quarter
due to volume gains for most key products; however, pricing, especially for
furfural and derivatives, continues to be weak.
Polymer Stabilizers volume expanded at double-digit rates; however, adverse
currency impacts, primarily the German mark, offset almost all of the
improvement. Price decreases in the quarter were less severe than earlier in
the year.
The Enviro-Energy Performance Group (EEP), the Fluorine Business and WIL Lab
toxicological testing businesses all achieved significant sales gains; however,
Specialized Services, as a whole, declined due to the disposal in late 1996 of
the engineered surface materials business and the continuing contraction of
Chemol, the company's Eastern European chemical trading business. EEP's
results reflect the strong growth of the domestic offshore activities coupled
with new service offerings. Also, the environmental business has come back
from last year's low and is expanding in the private sector market.
Water Treatment sales for the quarter, excluding the $40 million effect of
selling the wholesale equipment distribution business at the end of 1996,
enjoyed substantial volume growth that was partially offset by weak prices and
adverse currency effects. A hot, dry, late summer in much of the U.S.
mitigated the cool, wet start to the pool season. European sales measured in
the local currency were ahead of 1996; however, unfavorable exchange eroded
most of the improvement.
Gross profits in the quarter of $96 million were approximately $11 million less
than the prior-year period. Volume gains of $9 million were totally offset by
price declines. Dispositions reduced gross profits by another $8 million, and
the effect of cost increases and negative currency effects were $2 million and
$1 million, respectively. As a percentage of sales, gross profits were 26.1
percent for the quarter, up slightly from the prior-year period.
Selling, Administrative and Research expenses of $48 million for the quarter
were about $10 million lower than the prior-year period. About $5 million of
the reduction is the effect of dispositions. Cost reductions and currency
contributed equally to the balance of the improvement. At 12.9 percent of
sales, SAR are 1.1 percentage points lower than the year-ago quarter.
RESULTS FROM DISCONTINUED OPERATIONS
A summary of the results of operations for the company's Petroleum Additives
business is provided in Note C to the Consolidated Financial Statements.
6
<PAGE> 8
Sales for the quarter of $136 million declined $19 million due to a 15.6% drop
in retail alkyl led compound volume. This above trend line decline reflects
the timing of deliveries to Western European and Southeast Asian customers.
For the full year, the decline in retail tonnage is anticipated to be in the
9-10 percent range which is in line with trend line expectations. Average
retail prices declined slightly reflecting the changing mix of regional sales.
Wholesale sales declined about 5 percent from the prior year as volume declines
were partially offset by higher selling prices.
Gross profits in the quarter declined about $14 million from the prior year as
the effect of lower volume, slightly negative pricing and adverse currency
effects more than offset lower production costs.
SAR declined about $2 million due primarily to cost reduction programs.
Included in the results of the discontinued operations are about $2 million
(before income taxes) of spin-off related costs.
FINANCIAL CONDITION
Cash provided by operating activities of the continuing operations amounted to
$194 million for the nine months ended September 30, 1997, a $40 million
increase over the prior-year period. The improvement results from a $61
million reduction in working capital, primarily lower accounts receivable and
reduced tax payments.
Trade accounts receivable are down $37 million from September 30, 1996, and $12
million from December 31, 1996, while total receivables declined $70 million
and $29 million for the respective periods. The lower investment in trade
receivables is due in part to reduced sales and, in part, to a reduction in
days sales outstanding. The reduction in total receivables results from the
collection of amounts associated with dispositions.
The investment in inventories, while up $10 million from September 30, 1996,
declined about $8 million from 1996 year end. The small increase from a year
ago reflects buildup to meet customer demand while the decline from year end
results from the seasonality of the Water Treatment business.
Tax payments are lower this year reflecting a payment in 1996 of $38 million to
settle years 1989-1991 with the IRS.
Capital spending of $108 million is about $57 million less than a year ago.
Capital additions are primarily focused on cost improvements and new products.
Capital spending for the year is expected to be in the $140 million range.
7
<PAGE> 9
Through the first nine months of 1997, the company has repurchased 1,845,800
shares of common stock at a cost of $86 million, or $46.81 per share. The
company is authorized to repurchase up to 4,478,100 additional shares. It is
management's intention to do so as conditions warrant.
A cash dividend of $0.16 was paid during the quarter, an increase of $.01 over
the $0.15 paid in 1996.
OTHER MATTERS
On July 16, 1997, the company's Board of Directors approved a plan to spin off
its petroleum additives business, establishing a new independently traded
public company (Octel). The company created by the spin-off will consist of
the company's tetraethyl lead antiknock compounds business and its non-lead
petroleum additives businesses.
In anticipation of the spin-off, Great Lakes has signed a memorandum of
understanding with Chevron Chemical Company pursuant to which Octel would
redeem Chevron's 10.65 percent interest in Octel. This transaction is expected
to be completed by the end of November 1997.
Current plans call for Octel to raise approximately $450 million through
borrowings in the public and private sector prior to the spin-off. A portion
of the proceeds will be used to finance the acquisition of the Chevron interest
with the remainder of the proceeds, plus available cash from Octel, less taxes
and transaction costs, distributed to Great Lakes in the form of a special
distribution of roughly $300 million. It is anticipated that the debt will
mature over eight years and have an average interest cost of 9.5 percent. This
level of debt will result in Octel having debt to total capitalization of about
60 percent.
The transaction will be carried out in the form of a tax-free distribution to
Great Lakes shareholders of shares in the new petroleum additives company, and
it is expected to be completed during the first half of 1998. The transaction
is subject to receipt of a favorable ruling from the Internal Revenue Service,
the acquisition of all existing minority interests in Octel, and final approval
by Great Lakes' Board of Directors of the structure and financing of the new
company.
On November 3, 1997, the company completed the acquisition of Cookson Group
plc's global antimony products business, Anzon, for $90 million. Anzon is a
global producer of antimony-based components for use as flame retardants.
Anzon's annual sales amounted to about $90 million in 1996.
8
<PAGE> 10
FORWARD LOOKING STATEMENT
This report contains forward looking statements involving risk and
uncertainties that effect the company's operations as discussed in the 1996
annual report on Form 10-K filed with the Securities and Exchange Commission.
Accordingly, there is no assurance that the company's expectations will be
realized.
9
<PAGE> 11
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position and
results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring accruals) have been made which are necessary for a fair
financial statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and
footnotes included in the company's Annual Report on Form 10-K for the year
ended December 31, 1996.
NOTE B - Income Taxes
The provision for income taxes at the effective tax rates reconciles with the
statutory U.S. Federal tax rate as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
1997 1996
---- ----
<S> <C> <C>
Statutory U.S. Federal tax rate 35.0% 35.0 %
Change in taxes relating
various minor items 0.4% (0.3)%
----- ------
35.4% 34.7 %
===== ======
</TABLE>
NOTE C - Discontinued Operations
In July 1997 the Board of Directors approved a plan to spin off the company's
petroleum additives business as an independent, publicly owned company. The
transaction will be effected through the distribution of shares in the newly
formed company to the Great Lakes Chemical Corporation's shareholders and is
expected to be tax free to shareholders. The transaction is subject to the
receipt of a favorable tax ruling from the Internal Revenue Service, the
acquisition of all existing minority interests in Octel and the final approval
by the Great Lakes Board of Directors of the structure and financing of the new
company. Prior to the spin-off, it is anticipated that Octel will borrow
approximately $450 million and use part of the proceeds to finance the
acquisition of the minority interests. The proceeds from the borrowing, plus
available cash from Octel less taxes and
10
<PAGE> 12
transaction costs, will be distributed to Great Lakes in the form of a special
dividend of approximately $300 million. Great Lakes will contribute Octel's
remaining net assets to Octel reducing Great Lakes shareholders' equity. As a
result of the plan to spin off Octel, the company's consolidated financial
statements and the notes thereto for the period ended September 30, 1997,
report this business as a discontinued operation. Prior-period financial
statements have been restated accordingly. A summary statement of income and
summary statement of position of the discontinued operation is shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
Summary Statement 1997 1996 1997 1996
---- ---- ---- ----
of Income:
- - -----------------
($-Millions)
<S> <C> <C> <C> <C>
Net Sales $135.5 $154.9 $389.7 $423.5
Operating Expenses
Cost of products sold 63.7 69.3 188.9 188.9
Selling, administrative
research expenses 11.3 3.2 35.3 39.7
------ ------ ------ ------
75.0 82.5 224.2 228.6
------ ------ ------ ------
Operating Income 60.5 72.4 165.5 194.9
Other Expenses 9.1 6.7 16.2 17.2
Minority Interest 6.8 8.5 20.4 23.1
------ ------ ------ ------
Income before Income
Taxes 44.6 57.2 128.9 154.6
Income Taxes 15.0 19.1 43.3 51.4
------ ------ ------ ------
Net Income $29.6 $38.1 $85.6 $103.2
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Summary Statement
of Position Sept. 30 1997 Dec. 31 1996
- - ------------------------- ------------- ------------
<S> <C> <C>
Current Assets $278.0 $339.7
Net Property, Plant
and Equipment 103.3 115.4
Goodwill and Other Assets 378.9 400.7
------ ------
760.2 855.8
Current Liabilities 146.5 125.5
Other Liabilities 114.4 141.9
------ ------
Great Lakes Investment $499.3 $588.4
====== ======
</TABLE>
11
<PAGE> 13
Part II. Other Financial Information
Item 6. Exhibits and reports on Form 8-K
The company did not file, nor was it required to file, a Form 8-K because of a
change in independent auditors or because of any material unusual charges or
credits to income occurring during the quarter for which this report was filed.
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.
Date November 6, 1997 By /s/ Robert T. Jeffares
--------------------- -----------------------------
Robert T. Jeffares
Executive Vice President and
Chief Financial Officer
Date November 6, 1997 By /s/ Robert J. Smith
--------------------- -----------------------------
Robert J. Smith, Controller
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, AND STATEMENT OF CASHFLOW AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 251,680
<SECURITIES> 0
<RECEIVABLES> 288,213
<ALLOWANCES> 7,627
<INVENTORY> 334,498
<CURRENT-ASSETS> 902,476
<PP&E> 1,360,858
<DEPRECIATION> 589,870
<TOTAL-ASSETS> 2,401,490
<CURRENT-LIABILITIES> 329,332
<BONDS> 501,647
0
0
<COMMON> 72,525
<OTHER-SE> 1,370,066
<TOTAL-LIABILITY-AND-EQUITY> 2,401,490
<SALES> 1,169,301
<TOTAL-REVENUES> 1,191,379
<CGS> 869,306
<TOTAL-COSTS> 1,018,110
<OTHER-EXPENSES> 14,673
<LOSS-PROVISION> 493
<INTEREST-EXPENSE> 21,218
<INCOME-PRETAX> 136,885
<INCOME-TAX> 48,400
<INCOME-CONTINUING> 88,485
<DISCONTINUED> 88,592
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174,077
<EPS-PRIMARY> 2.89
<EPS-DILUTED> 2.89
</TABLE>
