<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, 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 - 58,483,261 Shares as of June 30, 1999
----------
<PAGE> 2
Part 1 - Financial Statements
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(millions)
<TABLE>
<CAPTION>
June 30 Dec. 31
1999 1998
--------- --------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 320.4 $ 411.6
Accounts and notes receivable, less allowance of $3.1 and $4.1, respectively 353.5 258.0
Inventories
Finished products 209.0 211.3
Raw materials 64.5 50.0
Supplies 37.2 31.9
-------- --------
Total inventories 310.7 293.2
Prepaid expenses 29.7 32.8
-------- --------
Total current assets 1,014.3 995.6
-------- --------
Plant and Equipment 1,265.1 1,241.5
Less allowance for depreciation (577.6) (552.0)
-------- --------
Net plant and equipment 687.5 689.5
Goodwill 194.5 115.6
Investments in and Advances to Unconsolidated Affiliates 67.3 80.3
Other Assets 21.8 21.1
Net Assets of Discontinued Operations 48.2 102.5
-------- --------
$2,033.6 $2,004.6
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 126.9 $ 129.3
Accrued expenses 146.0 163.8
Income taxes payable 42.7 44.2
Dividends payable 4.7 4.7
Notes payable and current portion of long-term debt 3.9 4.6
-------- --------
Total current liabilities 324.2 346.6
-------- --------
Long-Term Debt, less Current Portion 525.7 515.3
Other Noncurrent Liabilities 38.0 37.1
Deferred Income Taxes 52.0 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 131.3 128.6
Retained earnings 1,721.6 1,657.1
Accumulated other comprehensive income (57.5) (32.9)
Less treasury stock, at cost, 14.4 shares (1998 - 14.3 shares) (774.6) (771.2)
-------- --------
Total stockholders' equity 1,093.7 1,054.3
-------- --------
$2,033.6 $2,004.6
======== ========
</TABLE>
1
<PAGE> 3
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 374.8 $ 401.9 $ 709.0 $ 736.6
Operating Expenses
Cost of products sold 262.0 286.6 498.4 528.0
Selling, administrative and research expenses 55.7 54.9 107.2 100.9
Special charges -- -- -- 15.5
-------- -------- -------- --------
317.7 341.5 605.6 644.4
-------- -------- -------- --------
Operating Income 57.1 60.4 103.4 92.2
Interest and Other Income 10.1 8.1 17.8 16.2
Interest and Other Expense 7.2 11.0 14.2 23.4
-------- -------- -------- --------
Income from Continuing Operations before Income
Taxes 60.0 57.5 107.0 85.0
Income Taxes 17.2 19.6 33.2 29.9
-------- -------- -------- --------
Net Income from Continuing Operations 42.8 37.9 73.8 55.1
Net Income from Discontinued Operations -- 7.1 -- 32.6
-------- -------- -------- --------
Net Income $ 42.8 $ 45.0 $ 73.8 $ 87.7
======== ======== ======== ========
Earnings per Share:
Basic
Continuing Operations $ 0.73 $ 0.64 $ 1.26 $ 0.93
Discontinued Operations -- 0.12 -- 0.56
-------- -------- -------- --------
$ 0.73 $ 0.76 $ 1.26 $ 1.49
======== ======== ======== ========
Diluted
Continuing Operations $ 0.73 $ 0.64 $ 1.26 $ 0.93
Discontinued Operations -- 0.12 -- 0.55
-------- -------- -------- --------
$ 0.73 $ 0.76 $ 1.26 $ 1.48
======== ======== ======== ========
Cash Dividends Declared per Share $ 0.08 $ 0.08 $ 0.16 $ 0.24
</TABLE>
2
<PAGE> 4
GREAT LAKES CHEMICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
(millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------------------
1999 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income from continuing operations $ 73.8 $ 55.1
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 40.8 40.6
Changes in deferred items and other 0.5 (2.4)
------- -------
Cash provided by continuing operations excluding changes in working capital 115.1 93.3
Changes in working capital other than debt, net of effect from
business combinations (107.4) (27.4)
Other noncurrent liabilities (1.0) 8.2
------- -------
Net Cash Provided by Operating Activities from Continuing Operations 6.7 74.1
Discontinued Operations:
Net income -- 32.6
Change in net assets 69.3 433.7
------- -------
Net Cash Provided by Operating Activities 76.0 540.4
INVESTING ACTIVITIES
Plant and equipment additions (54.0) (74.9)
Business combinations, net of cash acquired (125.0) (1.6)
Other 11.0 (1.9)
------- -------
Net Cash Used in Investing Activities (168.0) (78.4)
FINANCING ACTIVITIES
Net borrowings under short-term credit lines (0.3) (1.6)
Net increase (decrease) in commercial paper and other long-term obligations 12.7 (50.7)
Proceeds from stock options exercised 2.9 3.9
Cash dividends paid (9.3) (14.3)
Repurchase of common stock (7.1) (1.4)
Other 3.7 1.9
------- -------
Net Cash Provided (Used) by Financing Activities 2.6 (62.2)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.8) (1.5)
------- -------
(Decrease) Increase in Cash and Cash Equivalents (91.2) 398.3
Cash and Cash Equivalents at Beginning of Year 411.6 73.7
------- -------
Cash and Cash Equivalents at End of Period $ 320.4 $ 472.0
======= =======
Parentheses indicate decrease in cash and cash equivalents
</TABLE>
3
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
FOR THE SIX MONTHS ENDED JUNE 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.
CONTINUING OPERATIONS
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 Six Months Ended
June 30 June 30
------------------ -----------------
1999 1998 1999 1998
------ --------- ------- -------
% % % %
<S> <C> <C> <C> <C>
Net Sales 100.0 100.0 100.0 100.0
Gross Profit 30.1 28.7 29.7 28.3
Selling, Administrative and Research Expenses 14.9 13.7 15.1 13.7
------ ------ ------ ------
Operating Contribution 15.2 15.0 14.6 14.6
Special Charges -- -- -- 2.1
------ ------ ------ ------
Operating Income 15.2 15.0 14.6 12.5
Interest and Other Income 2.7 2.0 2.5 2.3
Interest and Other Expense 1.9 2.7 2.0 3.2
------ ------ ------ ------
Income before Income Taxes 16.0 14.3 15.1 11.6
Income Taxes 4.6 4.9 4.7 4.1
------ ------ ------ ------
Net Income from Continuing Operations 11.4 9.4 10.4 7.5
====== ====== ====== ======
</TABLE>
RESULTS OF CONTINUING OPERATIONS
Gross profit and operating income margin improved compared to the 1998 quarter
on lower sales. Second quarter 1999 sales amounted to $375 million compared to
$402 million reported in the prior year period. This 7% decrease is primarily
attributable to lower volumes resulting from softness in oil exploration,
competitive conditions in flame retardants and a delayed production campaign for
a fine chemicals pharmaceutical intermediates customer. Average selling prices
declined 1.5% due to competitive pricing in oil services and flame retardants.
The addition of NSC Technologies contributed 2% to sales in the quarter. Cost
initiatives and lower raw materials prices more than offset the lower sales and
increased spending for the Company's new ERP system and related information
technology infrastructure as operating income margin improved slightly.
Interest and other income was $10 million for the 1999 second quarter an
increase of approximately $2 million over the prior year period. Slightly lower
interest income and earnings of affiliates were more than offset by a gain
resulting from the partial disposition of an equity investment.
4
<PAGE> 6
Interest and other expense decreased by $4 million to $7 million for the period.
Favorable foreign exchange coupled with a reduction in other expenses more than
offset increased costs from higher average borrowings resulting from the NSC
Technologies acquisition.
Income taxes were $17 million or 29% of income before taxes compared to 34% in
the prior year quarter. 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 our foreign operations
that result in generating a substantially higher percentage of income in lower
tax rate jurisdictions.
Net income from continuing operations was $43 million or $0.73 per share in
1999, as compared to $38 million or $0.64 per share in 1998. The 1998 second
quarter included net income from discontinued operations of $7 million or $0.12
per share, reflecting the earnings of the petroleum additives business through
the date of the spin off, May 22, 1998. Total 1998 second quarter net income and
earnings per share amounted to $45 million and $0.76, respectively.
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. 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, intumescent and antimony based flame retardants and
antioxidants, UV absorbers and light stabilizers.
Results for the quarter and year-to-date follow:
<TABLE>
<CAPTION>
Second Quarter Year to Date
-------------- --------------
1999 1998 1999 1998
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net Sales $141 $152 $282 $298
Operating Income $ 21 $ 22 $ 42 $ 44
</TABLE>
A 1 percentage point expansion in operating margin contributed to maintaining
operating income at a level comparable to the prior year quarter on lower sales.
The margin improvement was driven by productivity gains, repositioning benefits,
an improved sales mix and raw material savings, which more than offset increased
costs associated with our ERP systems implementation and the lower sales. Net
sales for the quarter were approximately 7% below the second quarter of 1998
reflecting competitive price pressure which resulted in a 3% decrease in average
selling prices, a decline in volume of 4% and negative foreign exchange effects.
High volume flame retardants experienced the majority of the price pressure and
in certain situations the Company consciously passed on lower margin
opportunities. In contrast, price erosion in polymer stabilizers has slowed.
5
<PAGE> 7
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>
Second Quarter Year to Date
---------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales $ 76 $ 79 $156 $149
Operating Income $ 15 $ 19 $ 35 $ 34
</TABLE>
Continued strong operating performance by Fluorine and Ag Products was more than
offset by lower sales volume in the Fine Chemicals group. On an overall basis,
the Performance Chemicals unit achieved net sales of $76 million a decrease of
approximately 4% from the 1998 second quarter. Average selling prices increased
2% and the NSC Technologies acquisition added 10%. Volumes were off 14%
primarily due to the decision of a Fine Chemical's pharmaceutical customer to
postpone a production campaign until next year. Second quarter operating income
amounted to $15 million compared to $19 million in the year ago period
reflecting the effects of the aforementioned decline in volume, an unfavorable
shift in product mix and the impact of the ERP implementation.
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. Results for the quarter and year-to-date follow:
<TABLE>
<CAPTION>
Second Quarter Year to Date
---------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales $134 $134 $223 $223
Operating Income $ 32 $ 26 $ 46 $ 37
</TABLE>
Second quarter operating earnings and margins were at record levels. In a
quarter considered about average for pool weather and cooler than last year, the
Water Treatment business unit was able to move margins substantially higher from
the prior year period. Sales of higher margin products, better profitability in
Europe and lower raw material costs fueled the increase in operating income.
Volumes in the U.S. recreational water treatment market were up approximately 3%
in the quarter, offset by lower volumes in international markets. Changes in
average selling prices and currency had little effect on net sales for the
quarter.
6
<PAGE> 8
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>
Second Quarter Year to Date
---------------- --------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales $ 25 $ 37 $ 49 $ 66
Operating (Loss) Income $ (2) $ 5 $ (1) $ 10
</TABLE>
Conditions in the oil and gas drilling market remained depressed. U.S. rig
counts ranged 30-40% lower during the quarter versus the prior year quarter and
price competition for the smaller available business was intense. The 32%
decline in sales reflects volume reductions and price decreases of approximately
25% and 8%, respectively.
FINANCIAL CONDITION AND LIQUIDITY
Inventories were $311 million at June 30, 1999, a decline of $12 million from
year end and $21 million from a year ago after excluding amounts related to the
NSC Technologies acquisition. The improvement in inventory management was led by
the Polymer Additives and Water Treatment business units.
Trade accounts receivable amounted to $330 at June 30,1999, an increase of $81
million as compared to December 31, 1998 after excluding amounts related to the
NSC Technologies acquisition and including the higher trade receivables from the
peak selling season for the Water Treatment business. Days sales outstanding
were 79 days.
Current liabilities declined approximately $22 million from year end primarily
due to the settlement of a lawsuit and spending against reserves for special
charges.
The cash provided by discontinued operations reflects the disposition of the
environmental services and the furfural businesses.
Capital spending through June amounted to $54 million. Spending for the year is
expected to be approximately $115 million.
Approximately 180,000 shares were repurchased during the first half of 1999 at a
cost of $7 million.
On July 15, 1999, the Company sold $400 million of 7% notes due July 15, 2009.
Proceeds from the sale of the notes are being used to replace a portion of the
commercial paper borrowings. 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 our growth.
7
<PAGE> 9
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 is part of the Fine Chemicals group 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).
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 downsizing of two plants in France is progressing and is
expected to be essentially completed by the end of the year; consolidating
brominated flame retardant manufacturing in El Dorado, Arkansas, originally
expected to be completed in the third quarter has been delayed and the timing is
under review; and, eliminating excess polymer stabilizer production capacity was
completed in April. In connection with these activities, a workforce reduction
of approximately 260 employees will occur late in the year.
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 June 30, 1999, approximately 40 people
have been involuntary terminated and an additional 25 people have volunteered
for termination. The balance will be terminated during the fourth quarter
coincident with the planned closure of a plant.
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.
8
<PAGE> 10
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 100 employees. A small
facility remains to be closed.
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.
YEAR 2000 READINESS
The Year 2000 Issue (Y2K) 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 all 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. Completion is on schedule for October 1999. The Company has
developed contingency plans for these critical systems and is positioned to
implement the plan, if required.
Non-IT systems are comprised of manufacturing and warehousing systems and
facility support systems. The Company has completed the inventory and assessment
of all critical systems in this area. The majority of the remediation of mission
critical systems has been completed and all essential corrective actions are
expected to be completed by September 30, 1999.
9
<PAGE> 11
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. Great Lakes 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. Assessments of both groups have been completed. The
majority of suppliers have indicated a readiness position acceptable to Great
Lakes or have a readiness target date of October, 1999. Great Lakes is in direct
contact with suppliers who are not yet compliant and Great Lakes is monitoring
their progress towards readiness. All mission critical suppliers have responded
to the Company's request. However, some critical suppliers have not responded to
our Year 2000 inquires and we are developing alternative sources as required.
Supply and inventory contingency plans are being developed for both mission
critical and critical suppliers. Contingency plans will continue to be modified
based on any change in a suppliers status.
We are currently in the progress of developing 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. A centralized command center will be
operational to coordinate Year 2000 rollover from a company perspective. Year
2000 teams will be established to provide support at each location.
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 $15 to 20 million. Of this amount, the
Company spent approximately $8 million, of which $5 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 will be completed
in a timely manner, 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 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.
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.
10
<PAGE> 12
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 second quarter 1999 operating costs by approximately $3 million
and it is anticipated that the full year effect will be in the $7 million range.
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 is not expected to have 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, which is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999, 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.
11
<PAGE> 13
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>
Six Months Ended June 30
------------------------
1999 1998
--------- -----------
% %
<S> <C> <C>
Statutory U.S. Federal tax rate 35.0 35.0
State income taxes 2.6 2.1
Special charge rate differential -- 1.2
International operations (1.6) 3.5
Other (5.0) (6.7)
---------- --------
31.0 35.1
========= =========
</TABLE>
NOTE 3: COMPREHENSIVE INCOME
Comprehensive income for the quarter and year to date was as follows:
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Second Quarter $29.6 $37.2
Year to Date $49.2 $76.3
</TABLE>
12
<PAGE> 14
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 June 30 Six Months Ended June 30
-------------------------- -------------------------
1999 1998 1999 1998
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Denominator for basic earnings per share
weighted-average shares 58.5 59.1 58.4 60.3
Effect of dilutive securities 0.3 0.2 0.3 0.3
---- ---- ---- ----
Denominator for diluted earnings per share 58.8 59.3 58.7 60.6
==== ==== ==== ====
</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 charge since
December 31, 1998 is shown in the following table:
<TABLE>
<CAPTION>
Dec.31 June 30
1998 Spending 1999
----------- ---------- ----------
<S> <C> <C> <C>
Severance $15.5 $1.9 $13.6
Plant Closure 10.1 0.1 10.0
Senior Management Transition 9.3 1.5 7.8
Lease Costs and Other 7.6 5.1 2.5
----- ---- -----
$42.5 $8.6 $33.9
===== ===== =====
</TABLE>
NOTE 6: SEGMENT INFORMATION
The Company is organized in the 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.
13
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
1999 1998 1999 1998
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales by Segment to External Customers:
Polymer Additives $140.7 $152.3 $282.0 $297.9
Performance Chemicals 76.0 78.8 156.1 148.8
Water Treatment 133.5 133.8 222.6 223.4
Energy Services and Products 24.8 36.6 48.6 66.3
------ ------ ------ ------
Total Sales of Reportable Segments 375.0 401.5 709.3 736.4
Corporate and Other (0.2) 0.4 (0.3) 0.2
------ ------ ------ ------
$374.8 $401.9 $709.0 $736.6
====== ====== ====== ======
Segment Profit:
Polymer Additives $ 21.2 $ 21.6 $ 41.5 $ 43.6
Performance Chemicals 15.3 19.2 34.8 33.6
Water Treatment 32.1 25.6 45.9 37.4
Energy Services and Products (2.2) 5.4 (1.2) 9.8
------ ------ ------ ------
Total Profits of Reportable Segments 66.4 71.8 121.0 124.4
Corporate and Other (9.3) (11.4) (17.6) (16.7)
Special Charges -- -- -- (15.5)
------ ------ ------ ------
Operating Income 57.1 60.4 103.4 92.2
Interest and Other Income 10.1 8.1 17.8 16.2
Interest and Other Expense 7.2 11.0 14.2 23.4
------ ------ ------ ------
Income before Income Taxes $ 60.0 $ 57.5 $107.0 $ 85.0
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30 Dec. 31
Segment Assets: 1999 1998
--------- --------
<S> <C> <C>
Polymer Additives $ 655.1 $ 695.3
Performance Chemicals 422.9 309.3
Water Treatment 280.2 226.8
Energy Services and Products 139.6 152.2
Corporate and Other 487.6 518.5
Discontinued Operations 48.2 102.5
-------- --------
$2,033.6 $2,004.6
======== ========
</TABLE>
The change in the Water Treatment business unit results from the seasonal nature
of recreational water treatment sales. The NSC Technologies acquisition is
included in the Performance Chemical business unit. At June 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.
14
<PAGE> 16
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
instituted after the Company self-reported to those agencies certain business
practices that raised questions under 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 our 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 these amnesty programs does not
however provide the Company with immunity from civil liability, including
restitution claims. In July 1999, two civil lawsuits were filed against the
Company, claiming among other things that Great Lakes conspired with others in
violation of the antitrust laws regarding the pricing of bromine and brominated
products. The Company is just beginning its review of the lawsuits.
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: SUBSEQUENT EVENTS
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).
The Company will use the purchase method of accounting to record the
acquisition. The amount of goodwill that will result from the transaction and
the amortization periods thereof are currently under evaluation.
Part II. Other Information
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 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.
15
<PAGE> 17
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 13, 1999 By: /s/ Mark E. Tomkins
-------------------- ----------------------------------
Mark E. Tomkins
Senior Vice President and
Chief Financial Officer
16
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 320.4
<SECURITIES> 0.0
<RECEIVABLES> 356.6
<ALLOWANCES> 3.1
<INVENTORY> 310.7
<CURRENT-ASSETS> 1,014.3
<PP&E> 1,265.1
<DEPRECIATION> 577.6
<TOTAL-ASSETS> 2,033.6
<CURRENT-LIABILITIES> 324.2
<BONDS> 525.7
0.0
0.0
<COMMON> 72.9
<OTHER-SE> 1,020.8
<TOTAL-LIABILITY-AND-EQUITY> 2,033.6
<SALES> 709.0
<TOTAL-REVENUES> 726.8
<CGS> 498.4
<TOTAL-COSTS> 605.1
<OTHER-EXPENSES> 2.4
<LOSS-PROVISION> 0.5
<INTEREST-EXPENSE> 11.8
<INCOME-PRETAX> 107.0
<INCOME-TAX> 33.2
<INCOME-CONTINUING> 73.8
<DISCONTINUED> 0.0
<EXTRAORDINARY> 0.0
<CHANGES> 0.0
<NET-INCOME> 73.8
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.26
</TABLE>
