<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, 1999
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.)
500 East 96th Street,
Suite 500
Indianapolis, IN 46240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 317-715-3000
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 - 57,510,745 Shares as of September 30, 1999
<PAGE> 2
Part 1 - Financial Statements
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
1999 1998
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 400.1 $ 411.6
Accounts and notes receivable, less allowance of $3.1 and $4.1, respectively 348.1 258.0
Inventories
Finished products 225.1 211.3
Raw materials 62.9 50.0
Supplies 31.9 31.9
------------ ------------
Total inventories 319.9 293.2
Prepaid expenses 30.3 32.8
------------ ------------
Total current assets 1,098.4 995.6
------------ ------------
Plant and Equipment 1,368.8 1,241.5
Less allowance for depreciation (605.5) (552.0)
------------ ------------
Net plant and equipment 763.3 689.5
Goodwill 255.3 115.6
Investments in and Advances to Unconsolidated Affiliates 54.1 80.3
Other Assets 41.0 21.1
Net Assets of Discontinued Operations 42.3 102.5
------------ ------------
$ 2,254.4 $ 2,004.6
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 149.2 $ 129.3
Accrued expenses 152.4 163.8
Income taxes payable 31.7 44.2
Dividends payable 4.6 4.7
Notes payable and current portion of long-term debt 5.4 4.6
------------ ------------
Total current liabilities 343.3 346.6
------------ ------------
Long-Term Debt, less Current Portion 731.8 515.3
Other Noncurrent Liabilities 34.3 37.1
Deferred Income Taxes 59.4 51.3
Stockholders' Equity
Common stock, $1 par value, authorized 200 shares, issued 72.9 (1998 - 72.7 shares) 72.9 72.7
Additional paid-in capital 131.4 128.6
Retained earnings 1,751.2 1,657.1
Accumulated other comprehensive income (loss) (53.1) (32.9)
Less treasury stock, at cost, 15.4 shares (1998 - 14.3 shares) (816.8) (771.2)
------------ ------------
Total stockholders' equity 1,085.6 1,054.3
------------ ------------
$ 2,254.4 $ 2,004.6
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE> 3
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(millions, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 374.4 $ 340.5 $ 1,083.4 $ 1,077.1
Operating Expenses
Cost of products sold 266.1 249.8 764.5 777.7
Selling, administrative and research expenses 62.7 48.2 169.9 149.1
Special charges -- 48.3 -- 63.8
---------- ---------- ---------- ----------
328.8 346.3 934.4 990.6
---------- ---------- ---------- ----------
Operating Income (Loss) 45.6 (5.8) 149.0 86.5
Interest and Other Income 12.7 12.3 30.6 28.5
Interest and Other Expense 8.7 4.8 22.9 28.2
---------- ---------- ---------- ----------
Income from Continuing Operations before Income
Taxes 49.6 1.7 156.7 86.8
Income Taxes 15.4 0.5 48.6 30.4
---------- ---------- ---------- ----------
Net Income from Continuing Operations 34.2 1.2 108.1 56.4
Net Income from Discontinued Operations -- -- -- 32.6
---------- ---------- ---------- ----------
Net Income $ 34.2 $ 1.2 $ 108.1 $ 89.0
========== ========== ========== ==========
Earnings per Share:
Basic
Continuing Operations $ 0.59 $ 0.02 $ 1.85 $ 0.96
Discontinued Operations -- -- -- 0.55
---------- ---------- ---------- ----------
$ 0.59 $ 0.02 $ 1.85 $ 1.51
========== ========== ========== ==========
Diluted
Continuing Operations $ 0.59 $ 0.02 $ 1.85 $ 0.95
Discontinued Operations -- -- -- 0.55
---------- ---------- ---------- ----------
$ 0.59 $ 0.02 $ 1.85 $ 1.50
========== ========== ========== ==========
Cash Dividends Declared per Share $ 0.08 $ 0.08 $ 0.24 $ 0.32
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 4
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30
-------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income from continuing operations $ 108.1 $ 56.4
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 67.3 61.9
Changes in deferred items and other 7.4 46.7
-------- --------
Cash provided by continuing operations excluding changes in working capital 182.8 165.0
Changes in working capital other than debt, net of effect from
business combinations (51.8) 0.5
Other noncurrent liabilities (1.6) (2.8)
-------- --------
Net Cash Provided by Operating Activities from Continuing Operations 129.4 162.7
Discontinued Operations:
Net income -- 32.6
Change in net assets 75.2 431.8
-------- --------
Net Cash Provided by Operating Activities 204.6 627.1
INVESTING ACTIVITIES
Plant and equipment additions (79.4) (114.3)
Business combinations, net of cash acquired (286.8) 3.2
Other 15.0 (8.7)
-------- --------
Net Cash Used in Investing Activities (351.2) (119.8)
FINANCING ACTIVITIES
Net repayments under short-term credit lines (0.5) (3.4)
Net increase (decrease) in commercial paper and other long-term obligations 210.2 (88.7)
Proceeds from stock options exercised 3.0 4.0
Cash dividends paid (14.0) (19.0)
Repurchase of common stock (50.6) (1.4)
Other (7.7) 0.7
-------- --------
Net Cash Provided by (Used in) Financing Activities 140.4 (107.8)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (5.3) 1.8
-------- --------
Increase (Decrease) in Cash and Cash Equivalents (11.5) 401.3
Cash and Cash Equivalents at Beginning of Year 411.6 73.7
-------- --------
Cash and Cash Equivalents at End of Period $ 400.1 $ 475.0
======== ========
</TABLE>
Parentheses indicate decrease in cash and cash equivalents.
See notes to consolidated financial statements.
3
<PAGE> 5
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(millions, except as indicated)
- --------------------------------------------------------------------------------
NOTE 1: 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, 1998.
NOTE 2: INCOME TAXES
A reconciliation of the U.S. Federal income tax rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------
1999 1998
-------- --------
% %
<S> <C> <C>
Statutory U.S. Federal tax rate 35.0 35.0
State income taxes 2.8 2.1
Special charges rate differential -- 1.5
International operations (1.8) 3.5
Other (5.0) (7.1)
-------- --------
31.0 35.0
======== ========
</TABLE>
NOTE 3: COMPREHENSIVE INCOME
Comprehensive income for the quarter and year to date was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income 34.2 1.2 108.1 89.0
Other comprehensive income (loss) 4.4 13.4 (20.2) 2.0
-------- -------- -------- --------
Comprehensive income 38.6 14.6 87.9 91.0
======== ======== ======== ========
</TABLE>
4
<PAGE> 6
NOTE 4: EARNINGS PER SHARE
The computation of basic and diluted earnings per share is determined by
dividing net income as reported as the numerator by the number of shares
included in the denominator as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Denominator for basic earnings per share
(weighted-average shares) 58.0 59.1 58.3 59.1
Effect of dilutive securities 0.3 0.1 0.2 0.2
-------- -------- -------- --------
Denominator for diluted earnings per share 58.3 59.2 58.5 59.3
======== ======== ======== ========
</TABLE>
NOTE 5: SPECIAL CHARGES
During 1998, the Company recorded special charges of $116.5 million or $74.7
million after income taxes. Of this amount, $15.5 million was recorded in the
first quarter for costs associated with the transition of the chief executive
officer. In the third and fourth quarter charges of $48.3 million and $52.7
million, respectively, were recorded in connection with a repositioning plan
undertaken to streamline operations, improve profitability and increase the
focus on customer needs.
A summary of spending against the liability for the special charges since
December 31, 1998 is shown in the following table:
<TABLE>
<CAPTION>
Dec. 31 Sept. 30
1998 Spending 1999
-------- -------- --------
<S> <C> <C> <C>
Severance costs $ 15.5 $ 2.8 $ 12.7
Plant Closures 10.1 0.4 9.7
Senior Management Transition 9.3 2.0 7.3
Lease Costs and Other 7.6 6.0 1.6
-------- -------- --------
$ 42.5 $ 11.2 $ 31.3
======== ======== ========
</TABLE>
NOTE 6: SEGMENT INFORMATION
The Company is organized into four global segments: Polymer Additives,
Performance Chemicals, Water Treatment, and Energy Services and Products. These
segments are strategic business units that offer products and services that are
intended to satisfy specific customer requirements. The units are organized and
managed to deliver a distinct group of products, technology and services.
The Company evaluates business unit performance and allocates resources based on
operating income which represents net sales less costs of products sold,
selling, administrative and research expenses. Each of the Company's segments
uses bromine as a raw material in their production processes. Bromine is
transferred at cost based on the percentage of production consumed.
5
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales by Segment to External Customers:
Polymer Additives $ 160.0 $ 139.1 $ 442.0 $ 437.0
Performance Chemicals 90.8 83.6 246.9 232.4
Water Treatment 101.0 92.9 323.6 316.3
Energy Services and Products 23.1 24.3 71.7 90.6
-------- -------- -------- --------
Total Sales of Reportable Segments 374.9 339.9 1,084.2 1,076.3
Corporate and Other (0.5) 0.6 (0.8) 0.8
-------- -------- -------- --------
$ 374.4 $ 340.5 $1,083.4 $1,077.1
======== ======== ======== ========
Segment Profit:
Polymer Additives $ 17.4 $ 16.6 $ 58.9 $ 60.2
Performance Chemicals 21.1 19.5 55.9 53.1
Water Treatment 17.7 12.2 63.6 49.6
Energy Services and Products (1.8) (0.4) (3.0) 9.4
-------- -------- -------- --------
Total Profits of Reportable Segments 54.4 47.9 175.4 172.3
Corporate and Other (8.8) (5.4) (26.4) (22.0)
Special Charges -- (48.3) -- (63.8)
-------- -------- -------- --------
Operating Income (Loss) 45.6 (5.8) 149.0 86.5
Interest and Other Income 12.7 12.3 30.6 28.5
Interest and Other Expense 8.7 4.8 22.9 28.2
-------- -------- -------- --------
Income from Continuing Operations before
Income Taxes $ 49.6 $ 1.7 $ 156.7 $ 86.8
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Sept. 30 Dec. 31
Segment Assets: 1999 1998
-------- --------
<S> <C> <C>
Polymer Additives $ 811.8 $ 695.3
Performance Chemicals 433.9 309.3
Water Treatment 292.1 226.8
Energy Services and Products 136.1 152.2
Corporate and Other 538.2 518.5
Discontinued Operations 42.3 102.5
-------- --------
$2,254.4 $2,004.6
======== ========
</TABLE>
The NSC Technologies acquisition is included in the Performance Chemicals
business unit. The acquisition of FMC Corporation's Process Additives Division
(PAD) is included in the Polymer Additives and Water Treatment business units.
At September 30, 1999, the net assets of the discontinued operations include
deferred tax assets, notes receivable from the sale of assets and certain
accounts receivable that the Company is in the process of collecting.
6
<PAGE> 8
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company has been cooperating with the U.S. Department of Justice and the
European Commission since the spring of 1998 in their respective investigations
of the bromine and brominated products industry. Both investigations were
initiated after the Company self-reported to those agencies certain business
practices that raised questions under the antitrust laws. As a result of the
Company's cooperation, Great Lakes and its current directors and employees have
been accepted into the Department of Justice's amnesty program. As a result, the
Company will be exempt from United States federal criminal prosecution and fines
relating to the practices in question if the Company complies with certain
conditions, including its continued full cooperation with the DOJ's
investigation and policy regarding reasonable remedial efforts. The Company
believes it has fully complied with all applicable conditions to date and
intends to continue full compliance. Concurrently, the Company is seeking
favorable treatment under a program in the European Community that also rewards
self reporting and cooperation. Participation in the above programs does not,
however, provide the Company with immunity from civil liability, including
restitution claims. To date, eight federal purported class action lawsuits and
two California purported class actions have been filed against the Company, each
claiming treble damages. These suits claim, among other things, that Great Lakes
conspired with others in violation of the antitrust laws regarding the pricing
of bromine and brominated products.
In April 1999, the Company reached agreement with the National Labor Relations
Board to settle a 1986 lawsuit alleging unfair labor practices at the Company's
Newport, Tennessee, facility following its acquisition of the site from Syntex
Corporation. The $9 million settlement covers backpay and interest for certain
former Syntex employees. The settlement amount is consistent with previously
established reserves.
There have been no other significant subsequent developments relating to the
commitments and contingencies reported in the Company's most recent Form 10-K.
NOTE 8: ACQUISITIONS
On May 3, 1999, the Company completed the acquisition of NSC Technologies from
Monsanto Company for approximately $125 million. NSC Technologies develops,
manufactures and sells chiral pharmaceutical intermediates and select bulk
actives to pharmaceutical companies. Current annual sales are approximately $70
million. The business's core chiral expertise in unnatural amino acids provides
a broad platform from which it develops novel, high value-added intermediates
and bulk actives for anti-viral, cardiovascular and oncology therapeutic drugs.
The acquisition was accounted for using the purchase method of accounting with
results of NSC Technologies included since the date of acquisition. Goodwill
resulting from the acquisition amounted to approximately $86 million which is
being amortized over 30 years. The allocation of purchase price to the acquired
assets and assumed liabilities, including goodwill, is preliminary since
discussions are ongoing with the seller regarding the acquired assets and
assumed liabilities.
On August 2, 1999, the Company completed the acquisition of FMC Corporation's
Process Additives Division (PAD) for $162 million in cash. The transaction
broadens the Polymer Additives business unit and more than doubles the
industrial segment of the Water Treatment business unit. PAD posted 1998 sales
of $160 million, employs 500 and includes manufacturing operations in Nitro,
West Virginia, and Trafford Park (Manchester, England).
7
<PAGE> 9
The acquisition was accounted for using the purchase method of accounting with
results of PAD included since the date of acquisition. Goodwill resulting from
the acquisition amounted to approximately $60 million which is being amortized
over 35 years. The allocation of purchase price to the acquired assets and
assumed liabilities, including goodwill, is preliminary since discussions are
ongoing with the seller regarding the acquired assets and assumed liabilities.
NOTE 9: DEBT
On July 15, 1999, the Company sold $400 million of 7% notes due July 15, 2009.
Proceeds from the sale of the notes were used to replace a portion of the
commercial paper borrowings and fund the PAD acquisition. The notes were sold
under a shelf registration process. Under the process, the Company filed a
Registration Statement on Form S-3 with the Securities and Exchange Commission
and may sell various unsecured debt securities, common stock or rights or
warrants to purchase common stock individually or in combination up to $750
million. The amount remaining on the registration statement is $350 million. The
registration provides the Company with increased flexibility to finance its
growth.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
This Management's Discussion and Analysis of Results of Operations and Financial
Condition should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
1998 Annual Report on Form 10-K and the unaudited interim consolidated financial
statements included elsewhere in this report. All references to earnings per
share contained in this report are diluted earnings per share unless otherwise
noted.
RESULTS OF CONTINUING OPERATIONS
Sales for the third quarter increased 10% to $374 million. Strong volume growth
in Fluorine, Agricultural Products and Polymer Additives and the acquisitions of
NSC Technologies and the Process Additives Division of FMC Corporation (PAD)
more than offset the effects of competitive pricing pressure in Flame Retardants
and Energy Services and Products and volume declines in Fine Chemicals.
Gross profit margin improved from 26.6% to 28.9% for the quarter. Productivity
initiatives, a better mix of products in Polymer Additives, higher volumes in
Fluorine and Agriculture Products, and lower raw material costs all contributed
to the improvement in gross profit margin. Selling, administrative and research
expenses increased $15 million primarily as a result of increased spending for
the Company's new ERP system and related information technology infrastructure
as well as the NSC Technologies and PAD acquisitions. Operating income for the
quarter increased 7% to $46 million from $43 million in 1998, excluding special
charges.
Interest and other income was $13 million for the 1999 third quarter which
represents an increase of approximately $0.4 million over third quarter last
year due primarily to a gain resulting from the partial disposition of an equity
investment partially offset by lower interest income.
Interest and other expense increased by $4 million to $9 million for the period
as a result of higher average borrowings and goodwill amortization resulting
from the NSC Technologies and PAD acquisitions.
Income taxes for the quarter were $15 million or 31% of income before taxes. The
Company anticipates its 1999 effective tax rate will be approximately 31%, a
reduction of 3 percentage points from the 1998 effective tax rate of 34%,
excluding the effects of special charges. The lower effective tax rate is
primarily due to structural changes made in the Company's foreign operations
that result in generating a substantially higher percentage of income in lower
tax rate jurisdictions.
Net income for the third quarter was $34 million, or $0.59 per share. This
compares to net income of $33 million, or $0.56 per share, excluding special
charges, for the corresponding period in 1998. Net income including the special
charges was $1 million, or $0.02 per share, for the third quarter of 1998.
9
<PAGE> 11
The following table sets forth the percentage relationship to net sales of
certain income statement items for the Company's continuing operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
% % % %
<S> <C> <C> <C> <C>
Net Sales 100.0 100.0 100.0 100.0
Cost of Products Sold 71.1 73.4 70.6 72.2
-------- -------- -------- --------
Gross Profit 28.9 26.6 29.4 27.8
Selling, Administrative and Research Expenses 16.7 14.1 15.6 13.8
-------- -------- -------- --------
Operating Contribution 12.2 12.5 13.8 14.0
Special Charges -- 14.2 -- 5.9
-------- -------- -------- --------
Operating Income (Loss) 12.2 (1.7) 13.8 8.1
Interest and Other Income 3.4 3.6 2.8 2.6
Interest and Other Expense 2.3 1.4 2.1 2.6
-------- -------- -------- --------
Income from Continuing Operations before
Income Taxes 13.3 0.5 14.5 8.1
Income Taxes 4.2 0.1 4.5 2.9
-------- -------- -------- --------
Net Income from Continuing Operations 9.1 0.4 10.0 5.2
======== ======== ======== ========
</TABLE>
SEGMENT INFORMATION
Set forth below is a discussion of the operations of the Company's business
segments: Polymer Additives, Performance Chemicals, Water Treatment, and Energy
Services and Products. Operating income, which is the income measure the Company
uses to evaluate business segment performance, represents net sales less costs
of products sold, selling, administrative and research expenses. The operating
income data presented below is before the special charges recorded in 1998.
Bromine used by each of the Company's segments as a raw material in their
production processes is reflected at cost.
POLYMER ADDITIVES
The Polymer Additives business unit is a leading worldwide developer, producer
and marketer of brominated, non-halogen, intumescent and antimony-based flame
retardants and antioxidants, UV absorbers and light stabilizers. Results for the
quarter and year-to-date follow:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 160.0 $ 139.1 $ 442.0 $ 437.0
Operating Income 17.4 16.6 58.9 60.2
</TABLE>
Polymer Additives sales increased 15% for the third quarter as compared to last
year. Excluding the PAD acquisition, volumes in Polymer Additives were up 8%;
prices were down 4% and foreign currency exchange effects were a negative 1%;
the acquisition of the PAD business contributed 12% to this segment's sales in
the quarter. The 5% increase in operating income for the Polymer Additives
business reflects favorable sales mix led by the continued growth in No Dust
Blends, coupled with productivity gains, lower raw material costs and the
acquisition of PAD. These improvements more than offset price pressure in Flame
Retardants, higher spending for systems implementation, and start-up costs
incurred in connection with the installation of new bromine technology in South
Arkansas.
10
<PAGE> 12
PERFORMANCE CHEMICALS
The Performance Chemicals business unit is a collection of individual businesses
providing products and services that meet highly specific requirements for
pharmaceutical, agrochemical and industrial chemical applications. Results for
the quarter and year-to-date follow:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 90.8 $ 83.6 $ 246.9 $ 232.4
Operating Income 21.1 19.5 55.9 53.1
</TABLE>
Sales in the Performance Chemicals segment increased 9% over last year. The
acquisition of NSC Technologies and the continued strong performances of
Fluorine and Agricultural Products were offset in part by lower volumes in the
Fine Chemicals group. Led by strong volumes in Fluorine and Agricultural
Products, operating income for Performance Chemicals increased 8% to a record
level of $21 million for the quarter versus a very strong quarterly performance
one year ago. The operating margin for the group was 23% for the quarter.
WATER TREATMENT
The Water Treatment business unit is the world's leading provider of
recreational water care products to the consumer. In addition, this business
unit is the world's leading provider of bromine based biocides for industrial
water treatment applications and a leading supplier of corrosion inhibitors,
scale control and desalination products using polymaleate chemistry. Results for
the quarter and year-to-date follow:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 101.0 $ 92.9 $ 323.6 $ 316.3
Operating Income 17.7 12.2 63.6 49.6
</TABLE>
The Water Treatment business experienced another outstanding quarter. Operating
earnings and margins were again at record quarterly levels for this business
unit. Sales of higher margin products, improved profitability in Europe and
lower raw material costs drove the 45% increase in operating earnings. The 9%
increase in sales was largely due to the PAD acquisition which significantly
expanded the depth and breadth of the company's industrial water treatment
business. Volume increases in the U.S. recreational water treatment market were
offset by the company's decision to exit certain low margin business in Europe.
11
<PAGE> 13
ENERGY SERVICES AND PRODUCTS
The Energy Services and Products business unit provides completion products
including bromine-based clear fluids and services to oil and gas well operators.
Results for the quarter and year-to-date follow:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 23.1 $ 24.3 $ 71.7 $ 90.6
Operating (Loss) Income (1.8) (0.4) (3.0) 9.4
</TABLE>
Reduced spending by energy industry customers resulting from weak crude oil and
natural gas prices in the first half of the year was the principal factor for
the decline in net sales and the increase in operating loss for the Energy
Services and Products (OSCA) business. Bid activity did gain momentum and rig
count increased in North America, OSCA's most important market, during the third
quarter.
FINANCIAL CONDITION AND LIQUIDITY
Inventories were $320 million at September 30, 1999, a decline of $25 million
from year end and $28 million from a year ago after excluding amounts related to
the NSC Technologies and PAD acquisitions. The improvement in inventory
management was led by the Water Treatment business unit; however, all business
units contributed to the decline in inventories.
Trade accounts receivable amounted to $316 at September 30, 1999, an increase of
$37 million as compared to December 31, 1998 after excluding amounts related to
the NSC Technologies and PAD acquisitions. This increase was primarily in the
Polymer Additives business unit as a higher portion of sales have shifted to
Europe and Asia. Days sales outstanding were 77 days.
Capital spending through September 30, 1999 amounted to $79 million. Spending
for the year is expected to be approximately $115 million.
Approximately 1.2 million shares were repurchased during the first three
quarters of 1999 at a cost of $51 million.
On July 15, 1999, the Company sold $400 million of 7% notes due July 15, 2009.
Proceeds from the sale of the notes were used to replace a portion of the
commercial paper borrowings and fund the PAD acquisition. The notes were sold
under a shelf registration process. Under the process, the Company filed a
Registration Statement on Form S-3 with the Securities and Exchange Commission
and may sell various unsecured debt securities, common stock or rights or
warrants to purchase common stock individually or in combination up to $750
million. The amount remaining on the registration statement is $350 million. The
registration provides the Company with increased flexibility to finance its
growth. Total debt at September 30, 1999 was $737 million, up $217 million over
year end.
12
<PAGE> 14
OTHER MATTERS
ACQUISITIONS
On May 3, 1999, the Company completed the acquisition of NSC Technologies from
Monsanto Company for approximately $125 million. NSC Technologies develops,
manufactures and sells chiral pharmaceutical intermediates and select bulk
actives to pharmaceutical companies. Current annual sales are approximately $70
million. The businesses core chiral expertise in unnatural amino acids provides
a broad platform from which it develops novel, high value-added intermediates
and bulk actives for anti-viral, cardiovascular and oncology therapeutic drugs.
NSC Technologies has been included as part of the Performance Chemicals business
unit.
On August 2, 1999, the Company completed the acquisition of FMC Corporation's
Process Additives Division (PAD) for $162 million in cash. PAD is a world leader
in the production of phosphate ester flame retardants, flame retardant fluids,
and lubricant additives, as well as a leading supplier of specialty water
treatment chemicals used in industrial applications and desalination. The
transaction broadens the Polymer Additives business unit and more than doubles
the industrial segment of the Water Treatment business unit. PAD posted 1998
sales of $160 million, employs 500 and includes manufacturing operations in
Nitro, West Virginia, and Trafford Park (Manchester, England). PAD has been
included in the Polymer Additives and Water Treatment business units.
The acquisitions were funded with available cash and borrowing capacity.
SPECIAL CHARGES
The Company is proceeding with the repositioning activities in accordance with
the plan approved by the Board of Directors in 1998. A review of the activities
by business unit is summarized below and a progression of the special charge
liability is provided in Note 5 to financial statements included herein.
In the Polymer Additives business unit, the repositioning plan focuses on
improving manufacturing efficiency, reducing cost and increasing the focus on
the customer. The elimination of excess polymer stabilizer production capacity
was completed in April. The downsizing of two plants in France is expected to be
essentially completed by the end of the year. Certain of the actions related to
the consolidation of brominated flame retardant manufacturing in El Dorado,
Arkansas have been completed; the remaining actions have been delayed and the
timing is under review. In connection with these activities, a workforce
reduction of approximately 260 employees will occur late in 1999 and early 2000.
In the Performance Chemicals business unit, the Company is eliminating certain
nonperforming product lines and underutilized assets and reducing the workforce
by approximately 100 employees. Through September 30, 1999, approximately 37
people have been involuntary terminated and an additional 8 people have
volunteered for termination. The balance will be terminated over the next two
quarters.
In both the Polymer Additives and Performance Chemicals business units the
Company is reevaluating portions of the restructuring plan to determine the
effect, if any, of integration or in-sourcing opportunities from the two
recently completed acquisitions. It is anticipated that the reevaluation will be
completed during the fourth quarter.
As a result of reduced near term requirements for oil well completion fluids and
services, the Company's Energy Services and Products business unit abandoned a
lease on a deep water service vessel, decommissioned the related service
equipment and reduced its workforce by approximately 160 employees. A small
facility remains to be closed.
13
<PAGE> 15
DISPOSITIONS
The Company completed the sale of the environmental services business in January
1999 and the sale of the furfural and derivatives business was completed on June
30, 1999. In September 1999, the Company announced its intentions to sell
approximately 50% of its interest in its Energy Services and Products business
(OSCA). OSCA has been included in continuing operations because the Company will
retain the ability to exert significant influence over OSCA due to its
continuing ownership interest.
YEAR 2000 READINESS
The Year 2000 (Y2K) Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or any hardware that have date sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in a temporary inability to process transactions or engage in
normal manufacturing or other business activities. Failure by the Company or any
of its significant suppliers or customers to complete Year 2000 readiness
activities in a timely manner could have a material adverse effect on the
Company's business and results of operations.
Great Lakes is actively engaged in a company-wide effort to achieve Year 2000
readiness for both information technology (IT) and non-information technology
(Non-IT) systems and to determine the readiness of significant suppliers and
customers.
The Company's approach to addressing its Y2K issues consists of the following:
- Inventory - identification of items to be assessed for Y2K readiness.
- Assessment - prioritizing the inventoried items, assessing their Y2K
readiness, defining corrective actions and developing contingency plans.
- Deployment - implementing corrective actions, verifying implementation
and finalizing contingency plans.
The Company's IT systems are comprised of business computer systems and
technical infrastructure. In 1996, the Company determined that the IT systems
supporting its Polymer Additives and Performance Chemical business units were
inadequate to meet the business requirements and embarked on a project to
replace critical systems for these businesses. In April and June of 1999 the new
system was successfully implemented in Europe and the United States,
respectively.
In the Water Treatment and Energy Services and Products business units, IT
systems, inventories and assessments were completed in the first part of 1998
and replacement of non-conforming systems was undertaken during the fourth
quarter of 1998. The Company has completed the implementation of these critical
systems and now considers Water Treatment and Energy Services and Products to be
Year 2000 ready.
Non-IT systems are comprised of manufacturing and warehousing systems and
facility support systems. When the Company completed the inventory and
assessment of critical systems in this area, a target of October, 1999 was
established for completion of required remediation. All remediation projects
were completed within the established timeframe. The company now considers its
process instrumentation, process control systems and facility infrastructures to
be Year 2000 ready.
14
<PAGE> 16
In 1998 Great Lakes began contacting its suppliers regarding their Y2K
readiness. The suppliers readiness program addresses all suppliers currently
providing materials and/or services to Great Lakes. The Company first focused on
suppliers which were considered essential for the prevention of material
disruption of Great Lakes business operations (mission critical) and then
focused on suppliers who could impact a portion of Great Lakes business
(critical) suppliers. Assessment of both groups has been completed. The majority
of suppliers have indicated a readiness position acceptable to Great Lakes.
Great Lakes continues to monitor and assess supplier status and has developed
contingencies for those considered to be "at risk". All mission critical
suppliers have responded to the Company's request. However, some critical
suppliers still have not responded to our Year 2000 inquires. Alternative
sources for supplies from these vendors has been developed. Contingency plans
will continue to be modified based on any change in a supplier's status.
The Company has completed the development of plans for end of year rollover
event management and response. Included in these plans is a determination of
operational scenarios focused on health and safety considerations and the
protection of company facilities. The Company will idle all plants prior to and
for a period of time after the actual date change. Each site will be
appropriately staffed. The Manufacturing sites will be brought back online in a
phase-in fashion at the appropriate time. All other sites will be reviewed to
ensure they are ready to support the business operation. The Company will be
performing additional business system backups and will validate each system's
operation shortly after the date roll over. A centralized command center will be
operational to coordinate Year 2000 rollover activities from a global company
perspective. Year 2000 roll over management teams have been established to
provide support at each location, to monitor overall company status and to be
ready to mobilize for action if required. In addition to the on-duty staff,
Emergency Response Teams, Information Services Staff, Health Safety and
Environmental staff and key support vendors have been organized to be on call.
The Company is using both internal and external resources to complete its Y2K
readiness plan. The Company currently estimates that the total cost of resolving
the Year 2000 issues including computer systems, facilities infrastructure and
supplier readiness will be approximately $12 million. Of this amount, the
Company has spent approximately $11 million, of which $7 million occurred in
1999. Approximately 50% of the total Year 2000 costs will be for equipment or
software replacement and the remainder on assessment and remediation. The
Company expects all costs will be funded out of operating cash flow. Year 2000
costs are expensed except for new systems and equipment. Such costs are
capitalized and charged to expense over the estimated useful life of the asset
in accordance with existing Company policy. The estimated costs are based on
currently available information and may be subject to change.
While the Company believes its efforts to address Y2K issues has been complete
and timely, the Company recognizes that failing to resolve Y2K issues on a
timely basis would, in a reasonably likely worst case scenario, significantly
limit the Company's ability to manufacture and distribute its products and
process business transactions. Also, the Company could be adversely affected by
the failure of suppliers, external entities or customers to conduct their
operations due to Y2K-related issues. Adverse effects on the Company could
include, among other things, disruption of manufacturing operations, increased
costs and loss of business which can not be reasonably quantified.
15
<PAGE> 17
THE EURO
Effective January 1, 1999, member states of the European Economic and Monetary
Union converted to a common currency known as the Euro. Modifications to certain
of the Company's information systems software were made in connection with this
conversion. The Company has completed these modifications at a nominal cost, and
has not experienced any operational impact from the implementation of the Euro.
The Company does not expect the conversion to the Euro to have a material impact
on results of operations, financial position or liquidity of its European
businesses.
ACCOUNTING CHANGES
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. This accounting standard specifically defines the criteria under which
costs incurred in connection with internal-use computer software projects are to
be treated as a current period expense or to be capitalized. Adoption of SOP
98-1 increased third quarter 1999 operating costs by approximately $2 million
and it is anticipated that the full year effect will be approximately $10
million.
Effective January 1, 1999, the Company adopted the AICPA SOP 98-5, Reporting on
the Costs of Start-Up Activities. This accounting standard requires that certain
costs of start-up activities and organization costs be expensed as incurred. The
adoption of SOP 98-5 has not had a material effect on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This accounting standard, as amended by SFAS
No.137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, and requires that all derivatives be recognized as either assets
or liabilities at fair value. The Company is evaluating the new statement's
provisions and has not yet determined either the date on which it will adopt
SFAS No. 133 or the impact of adoption on the results of operations or financial
position.
FORWARD-LOOKING STATEMENT
This report contains forward-looking statements involving risks and
uncertainties that affect the Company's operations as discussed in the 1998
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.
16
<PAGE> 18
Part II. Other Information
Item 1. Legal Proceedings
See Note 7 to the financial statements included herein for information regarding
certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of the report are listed below:
Exhibits Number
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K on July 7, 1999 describing a U.S.
Department of Justice and European Commission investigation of the bromine and
brominated products industry. See Note 7 to the financial statements included
herein.
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 12, 1999 By: /s/ KEVIN J. MULCRONE
----------------- ------------------------------
Kevin J. Mulcrone
Vice President and Controller
17
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