<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 June 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 - 59,848,352 Shares as of June 30, 1997
<PAGE> 2
Part 1 - Financial Statements
- - -----------------------------
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------- -----------
(thousands of dollars)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 228,269 $ 202,255
Accounts receivable, less allowance
of $8,626 (1996 - $10,219) 505,550 506,203
Inventories
Finished products 295,603 298,682
Raw materials 77,415 87,687
Supplies 39,013 40,289
---------- ----------
Total inventories 412,031 426,658
Prepaid Expenses 40,720 42,080
---------- ----------
Total Current Assets 1,186,570 1,177,196
Plant and Equipment 1,463,040 1,424,596
Less allowance for depreciation (592,096) (566,113)
---------- ----------
Net plant and equipment 870,944 858,483
Goodwill 424,372 435,195
Investments in and Advances to
Unconsolidated Affiliates 74,578 72,767
Other Assets 113,494 117,698
---------- ----------
$2,669,958 $2,661,339
========== ==========
</TABLE>
1
<PAGE> 3
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------------------
(thousands of dollars)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ 728 $ 288
Accounts payable 137,479 190,853
Accrued expenses 137,787 127,333
Income taxes payable 158,216 98,687
Dividends payable 9,576 9,242
Current portion of long-term debt 5,712 7,717
---------- ----------
Total current liabilities 449,498 434,120
Long-Term Debt, less Current Portion 569,854 503,795
Other Noncurrent Liabilities 82,166 109,012
Deferred Income Taxes 86,153 83,912
Minority Interest 39,696 43,601
Stockholders' Equity
Common stock, $1 par value, authorized
200,000,000 shares, issued
72,490,552 shares
(1996 - 72,455,051 shares) 72,491 72,455
Additional paid-in capital 121,610 121,224
Retained earnings 1,989,787 1,893,104
Cumulative translation adjustment (40,114) 17,064
Treasury stock at cost 12,642,200
shares (1996 - 10,842,200 shares) (701,183) (616,948)
---------- ----------
Total stockholders' equity 1,442,591 1,486,899
---------- ----------
$2,669,958 $2,661,339
========== ==========
</TABLE>
2
<PAGE> 4
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
(in thousands except per share data)
<S> <C> <C> <C> <C>
Net Sales $549,897 $594,949 $1,043,363 $1,131,909
Operating Expenses
Cost of products sold 372,117 396,101 710,402 747,324
Selling, administrative
and research expenses 63,016 72,381 125,675 141,366
-------- -------- ---------- ----------
435,133 468,482 836,077 888,690
-------- -------- ---------- ----------
Income from Operations 114,764 126,467 207,286 243,219
Equity in earnings of
Affiliate and Other Income 8,158 27,021 15,727 34,599
Interest and Other Expenses 20,579 28,067 33,340 44,460
Minority Interest in Income
of Subsidiaries 7,152 7,263 13,714 14,878
-------- -------- ---------- ----------
Income Before Income Taxes 95,191 118,158 175,959 218,480
Income Taxes 32,800 40,200 60,700 74,300
-------- -------- ---------- ----------
Net Income $ 62,391 $ 77,958 $ 115,259 $ 144,180
======== ======== ========== ==========
Net Income per Share $ 1.04 $ 1.20 $ 1.91 $ 2.23
======== ======== ========== ==========
Dividends Declared per Share $ 0.16 $ 0.15 $ 0.31 $ 0.27
======== ======== ========== ==========
Average Shares Outstanding 59,837 63,971 60,350 64,627
</TABLE>
3
<PAGE> 5
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
1997 1996
---- ----
(thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $115,259 $144,180
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 65,175 61,198
Changes in deferred items and other 560 6,743
-------- --------
Cash provided by operations
excluding changes in working capital 180,994 212,121
Changes in working capital other than
debt, net of effects from business
combinations 14,241 (72,412)
Other noncurrent liabilities (23,271) (7,757)
-------- --------
Net Cash Provided by Operating Activities 171,964 131,952
INVESTING ACTIVITIES
Plant and equipment additions (79,553) (108,773)
Business combinations, net of cash
acquired (7,822) (23,172)
Other (8,868) (10,910)
-------- --------
Net Cash Used in Investing Activities (96,243) (142,855)
FINANCING ACTIVITIES
Net borrowings (repayment) under
short-term credit lines 475 (3,177)
Net increase in commercial paper
and other long-term obligations 67,572 47,914
Proceeds from stock options exercised 421 1,067
Minority interest (3,390) 1,446
Repurchase of common stock (84,235) (82,733)
Cash dividends (18,576) (17,294)
-------- --------
Net Cash Used in Financing Activities (37,733) (52,777)
Effect of Exchange Rate Changes on Cash
and Cash Equivalents (11,974) (1,239)
-------- --------
Increase (Decrease) in Cash and Cash
Equivalents 26,014 (64,919)
Cash and Cash Equivalents at
Beginning of Year 202,255 180,970
-------- --------
Cash and Cash Equivalents at End of
Period $228,269 $116,051
======== ========
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------
RESULTS OF OPERATIONS
Second quarter sales of $550 million declined $45 million from the $595 million
reported in the 1996 quarter. Net income of $62 million, or $1.04 per share,
was down $16 million from the prior-year period.
Six month sales of $1.0 billion declined 8 percent from the $1.1 billion
reported in 1996. Net income for the period was $115 million, or $1.91 per
share, down $29 million from 1996.
Comparative sales by business unit are set forth in the following table
($-million):
<TABLE>
<CAPTION>
Second Quarter Year to Date
--------------------- ----------------------
1997 1996 Change 1997 1996 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Flame Retardants $ 73 $ 75 (3)% $ 149 $ 145 3 %
Intermediates &
Fine Chemicals* 95 80 19 % 169 162 4 %
Petroleum Additives* 133 133 -- 254 269 (6)%
Polymer Stabilizers 61 63 (3)% 122 123 (1)%
Specialized Services* 71 83 (14)% 143 170 (16)%
Water Treatment 117 161 (27)% 206 263 (22)%
---- ---- ----- ------ ------ -----
$550 $595 8 % $1,043 $1,132 (8)%
==== ==== ===== ====== ====== =====
</TABLE>
*1996 restated to be consistent with current year.
On an overall basis, the sales decline reflects the following:
<TABLE>
<CAPTION>
Second Year
Quarter to Date
------- -------
<S> <C>
Selling Prices $(12) $(17)
Volumes 39 42
Foreign Exchange (7) (12)
Dispositions (65) (102)
---- ----
$(45) $(89)
==== ====
</TABLE>
Flame Retardants sales declined slightly from the prior year as volume
improvements were more than offset by lower prices and
5
<PAGE> 7
unfavorable foreign exchange. Recently announced price increases have not
yielded any positive results as yet; and in some instances, customers are
delaying purchases and working down inventory.
Intermediates and Fine Chemicals sales improved over the prior-year periods.
Furfural and derivatives sales volume increased to fill the market gap created
by a fire at a competitor's plant. Pricing remains soft. Fine chemicals sales
expanded as customers ramped up requirements for certain pharmaceutical and
agrochemical intermediates.
Petroleum Additives sales were comparable to the prior-year period. Retail
alkyl lead compound tonnage and prices improved slightly over the prior-year
quarter. For the year, retail volumes are expected to decline about 11 percent
while prices are expected to show an improvement in the low, single-digit
range. Wholesale volumes were down compared to 1996 reflecting lower tonnage
sales to DuPont while prices improved. The relationship of retail to wholesale
business was 70/30 for the quarter compared to 63/37 last year. Non-lead
petroleum additives volumes were off in the quarter while sales of performance
chemicals doubled as the Octaquest product is running near capacity.
Polymer Stabilizers double-digit gains in volume were more than offset by price
decreases and adverse currency effects. Antioxidants for plastics,
particularly no dust and binary blends, is the main growth area.
Specialized Services sales declined despite 20 percent-plus gains registered by
the Enviro-Energy Performance group (EEP), the Fluorine group and Wil labs
toxicological testing business. The disposal of the engineered surface
applications business (E/M) in late 1996 and the contraction of the Eastern
European trading business are the detractors from sales. EEP business
continues to expand due to the level of offshore drilling activity, increasing
service capabilities and a rebound in the environmental services business from
last year's low. The fluorine business continues to expand the geographic
coverage and range of applications for FM-200(R).
Water Treatment sales showed significant volume improvements excluding the
negative effect of selling the wholesale distribution business (BLN) in late
1996. Recreational water treatment sales in
6
<PAGE> 8
the U.S. market expanded due to gains in the distributor market even though
weather conditions in the Midwest and Northeast markets were suboptimal.
European sales were off due to comparatively poor weather conditions.
Gross Profits of $178 million were $21 million less than the prior
year. The decline reflects selling price decreases of $12 million, volume
improvements of $10 million, increased cost of $3 million, negative currency
impacts due to the relative strength of the dollar versus most European
currencies and the Japanese yen of $3 million and a gain related to business
dispositions of $13 million recorded in the prior year. As a percentage of
sales, gross profits of 32.3 percent overall declined 1.1 percentage points
from the 1996 quarter.
Selling, Administrative and Research expenses were $63 million, a decline of $9
million from the prior-year quarter, due primarily to dispositions. As a
percentage of sales, SAR's declined 0.7 percentage points to 11.5 percent of
sales.
FINANCIAL CONDITION
Cash provided from operations amounted to $172 million, an increase of $40
million over the prior year, reflecting significantly lower investments in
inventories and accounts receivable, and reduced tax payments.
Trade account receivables are $33 million lower than June 30, 1996, due to
lower sales. Days sales outstanding is 80 days compared to 79 days a year ago.
The divestiture of the water treatment distribution business caused the
one-day increase, and masks improvement in all key units.
Inventory levels are down $26 million from a year ago; however, turnover has
decreased to 3.4 times per year from 3.8 times. Higher inventories of furfural
and derivatives and petroleum additives account for the majority of the
decrease in turnover.
Tax payments during the first half of 1997 are significantly lower than the
prior-year period which included a $38 million settlement with the IRS for
years 1989 through 1991. The increase in income taxes payable since December
31, 1996 is a function of the due dates for payments in the United Kingdom.
7
<PAGE> 9
The decrease in accounts payable since December 31, 1996 reflects reduced
capital spending, the timing of activities and the reclassification of certain
items to accrued liabilities.
Capital spending of $80 million is $29 million less than a year ago. Cost
improvement projects and new products are the primary areas of plant and
equipment additions. It is anticipated that spending for the year will be
about $160 million.
During the first six months of 1997, the company has repurchased 1.8 million
shares of common stock at a cost of $84 million, or $46.80 per share. The
company is authorized to purchase up to an additional 4.5 million shares. It
is management's intention to do so as conditions warrant.
A cash dividend of $0.16 per share was paid during the quarter, an increase of
6.6% over the $0.15 paid in the prior-year quarter.
OTHER MATTERS
The company's Board of Directors approved a plan to spin off its petroleum
additives business creating a new independently traded public company (Octel)
effective July 16, 1997. 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
acquire the 10.65 percent interest in Octel held by Chevron. This transaction
is expected to be completed by the end of September, 1997.
Prior to the spin-off, Octel will raise approximately $450 million through
borrowings in the public and private sector and use a portion of the proceeds
to finance the acquisition of the Chevron interest. The remainder of the
proceeds, plus available cash from Octel, less taxes and transaction costs,
will be distributed to Great Lakes in the form of a special distribution of
roughly $300 million. It is anticipated that the debt will mature over eight
years and have an average interest cost of 9.5 percent. This level of debt
will result in debt to total capitalization of about 60 percent.
8
<PAGE> 10
The transaction will be carried out in the form of a tax-free distribution to
Great Lakes shareholders of shares in the new petroleum additives company, and
it is expected to be completed in approximately nine months. The
transaction is subject to receipt of a favorable ruling from the Internal
Revenue Service, the acquisition of all existing minority interests in Octel,
and final approval by Great Lakes' Board of Directors of the structure and
financing of the new company.
Set forth below are certain summary, unaudited proforma information that the
company believes is important to enable the reader to have a meaningful
understanding of the two companies' historical results. The proforma data are
for information purposes and are provided solely to illustrate how the
companies would look on a stand-alone basis and may not necessarily reflect the
future results nor the results those companies would have achieved if they had
been operated as separate, independent companies during the period presented.
($-millions)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
GLCC
Sales $419 $465 $791 $867
EBITDA 80 95 146 169
EBIT 59 74 103 127
Capital Spending 35 56 74 106
Octel
Sales $133 $133 $254 $269
EBITDA 60 64 118 130
EBIT 48 54 95 111
Capital Spending 2 -- 5 3
</TABLE>
NOTES:
(1) EBIT - Earnings before net interest, income taxes and minority interest
(2) EBITDA - Earnings before net interest, income taxes, depreciation,
amortization and minority interest
9
<PAGE> 11
(3) Effective Income Tax Rate - On a proforma basis, the effective income tax
rate for GLCC is approximately 33 percent and Octel is approximately 35
percent.
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.
10
<PAGE> 12
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>
Six Months Ended
June 30
----------------
1997 1996
---- ----
<S> <C> <C>
Statutory U.S. Federal tax rate 35.0% 35.0%
Decrease in taxes relating to
various minor items (.5) (1.0)
---- ----
34.5% 34.0%
==== ====
</TABLE>
NOTE C - Subsequent Event
The company's Board of Directors approved a plan to spin off its petroleum
additives business effective July 16, 1997. The transaction will be carried
out in the form of a tax-free distribution to shareholders.
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 August 4, 1997 By /s/ Robert T. Jeffares
------------------------ -------------------------
Robert T. Jeffares
Executive Vice President and
Chief Financial Officer
Date August 4, 1997 By /s/ Robert J. Smith
------------------------ -------------------------
Robert J. Smith, Controller
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 228,269
<SECURITIES> 0
<RECEIVABLES> 514,176
<ALLOWANCES> 8,626
<INVENTORY> 412,031
<CURRENT-ASSETS> 1,186,570
<PP&E> 1,463,040
<DEPRECIATION> 592,096
<TOTAL-ASSETS> 2,669,958
<CURRENT-LIABILITIES> 449,498
<BONDS> 569,854
0
0
<COMMON> 72,491
<OTHER-SE> 1,370,100
<TOTAL-LIABILITY-AND-EQUITY> 2,669,958
<SALES> 1,043,363
<TOTAL-REVENUES> 1,059,090
<CGS> 710,402
<TOTAL-COSTS> 836,569
<OTHER-EXPENSES> 18,700
<LOSS-PROVISION> (492)
<INTEREST-EXPENSE> 14,640
<INCOME-PRETAX> 175,959
<INCOME-TAX> 60,700
<INCOME-CONTINUING> 115,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,259
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
</TABLE>
