Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended September 30, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Transition Period from              to             .

 

Commission File Number 1-12658

 


 

ALBEMARLE CORPORATION

(Exact name of registrant as specified in its charter)

 


 

VIRGINIA   54-1692118

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

330 SOUTH FOURTH STREET

RICHMOND, VIRGINIA

  23219
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code - (804) 788-6000

 


 

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

Number of shares of common stock, $.01 par value, outstanding as of October 31, 2005: 46,620,905

 



Table of Contents

ALBEMARLE CORPORATION

 

INDEX

 

        

Page

Number(s)


PART I.

  FINANCIAL INFORMATION     

ITEM 1.

  Financial Statements     
    Consolidated Balance Sheets – September 30, 2005 and December 31, 2004    3-4
    Consolidated Statements of Income – Third-Quarter and Nine-Month Periods Ended September 30, 2005 and 2004    5
    Consolidated Statements of Comprehensive Income – Third-Quarter and Nine-Month Periods Ended September 30, 2005 and 2004    6
    Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2005 and 2004    7
    Notes to the Consolidated Financial Statements    8-19

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations and Additional Information    19-32

ITEM 3.

  Quantitative and Qualitative Disclosures About Market Risk    33

ITEM 4.

  Controls and Procedures    33

PART II.

  OTHER INFORMATION     

ITEM 1.

  Legal Proceedings    34

ITEM 5.

  Other Information    34

ITEM 6.

  Exhibits    34

SIGNATURES

   35

EXHIBITS

   36-40

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)

 

    

September 30,

2005


  

December 31,

2004


     (Unaudited)     

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 47,859    $ 46,390

Trade accounts receivable, less allowance for doubtful accounts (2005 - $624; 2004 -$426)

     319,652      300,010

Other accounts receivable, less allowance for doubtful accounts (2005 - $356; 2004 -$403)

     34,959      41,541

Inventories:

             

Finished goods

     298,922      248,253

Raw materials

     95,730      59,198

Stores, supplies and other

     36,864      31,306
    

  

       431,516      338,757

Deferred income taxes and prepaid expenses

     20,729      20,712
    

  

Total current assets

     854,715      747,410
    

  

Property, plant and equipment, at cost

     2,194,471      2,064,585

Less accumulated depreciation and amortization

     1,211,712      1,168,601
    

  

Net property, plant and equipment

     982,759      895,984

Prepaid pension assets

     188,056      189,833

Investments

     97,930      170,957

Other assets and deferred charges

     28,801      34,433

Goodwill

     247,548      190,175

Other intangibles, net of amortization

     162,116      213,953
    

  

Total assets

   $ 2,561,925    $ 2,442,745
    

  

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except Share Amounts)

 

    

September 30,

2005


  

December 31,

2004


     (Unaudited)     

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 198,296    $ 202,410

Long-term debt, current portion

     59,303      45,047

Accrued expenses

     106,768      88,048

Dividends payable to shareholders

     7,014      4,574

Income taxes payable

     59,973      33,667
    

  

Total current liabilities

     431,354      373,746
    

  

Long-term debt

     820,613      899,584

Postretirement benefits

     64,636      69,775

Pension benefits

     51,054      54,989

Other noncurrent liabilities

     111,362      84,525

Deferred income taxes

     175,303      248,751

Commitments and contingencies (Note 20)

             

Shareholders’ equity:

             

Common stock, $.01 par value, issued and outstanding – 46,620,905 in 2005 and 41,898,201 in 2004

     466      419

Additional paid-in capital

     180,556      22,839

Accumulated other comprehensive income

     23,430      46,203

Retained earnings

     703,151      641,914
    

  

Total shareholders’ equity

     907,603      711,375
    

  

Total liabilities and shareholders’ equity

   $ 2,561,925    $ 2,442,745
    

  

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, Except Per-Share Amounts)

(Unaudited)

 

     Third Quarter Ended
September 30,


    Nine Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

Net sales

   $ 506,605     $ 413,904     $ 1,519,324     $ 1,062,672  

Cost of goods sold

     406,994       324,396       1,207,224       845,952  

Acquisition-related cost

     —         13,400       —         13,400  
    


 


 


 


Gross profit

     99,611       76,108       312,100       203,320  

Selling, general and administrative expenses

     50,423       43,075       161,118       106,078  

Research and development expenses

     10,107       9,101       31,429       18,768  

Special items

     —         2,801       (4,868 )     7,858  
    


 


 


 


Operating profit

     39,081       21,131       124,421       70,616  

Interest and financing expenses

     (10,882 )     (6,250 )     (31,270 )     (9,168 )

Equity in net income of unconsolidated investments

     4,124       1,826       22,583       2,494  

Other income (expenses), net

     534       (15,606 )     1,100       (12,278 )
    


 


 


 


Income before income taxes and minority interests

     32,857       1,101       116,834       51,664  

Income (taxes) benefits

     (4,502 )     1,097       (29,590 )     (12,714 )
    


 


 


 


Income after income taxes and before minority interests

     28,355       2,198       87,244       38,950  

Minority interests in income of consolidated subsidiaries

     (2,063 )     (1,371 )     (4,575 )     (3,748 )
    


 


 


 


Net income

   $ 26,292     $ 827     $ 82,669     $ 35,202  
    


 


 


 


Basic earnings per share

   $ 0.56     $ 0.02     $ 1.79     $ 0.85  
    


 


 


 


Diluted earnings per share

   $ 0.55     $ 0.02     $ 1.74     $ 0.83  
    


 


 


 


Cash dividends declared per share of common stock (Note 13)

   $ —       $ —       $ 0.46     $ 0.435  
    


 


 


 


 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of Dollars)

(Unaudited)

 

    

Third Quarter Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Net income

   $ 26,292     $ 827     $ 82,669     $ 35,202  

Other comprehensive (loss) income, net of tax:

                                

Unrealized gain (loss) on securities available for sale

     1       (4 )     16       (30 )

Unrealized gain on hedging derivatives

     14       77       420       26  

Realized (loss) on treasury lock agreements

     —         —         (932 )     —    

Amortization of realized loss on treasury lock agreements

     35       —         92       —    

Foreign currency translation adjustments

     (12,806 )     5,212       (22,369 )     1,558  
    


 


 


 


Other comprehensive (loss) income

     (12,756 )     5,285       (22,773 )     1,554  
    


 


 


 


Comprehensive income

   $ 13,536     $ 6,112     $ 59,896     $ 36,756  
    


 


 


 


 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(Unaudited)

 

    

Nine Months Ended

September 30,


 
     2005

    2004

 

Cash and cash equivalents at beginning of year

   $ 46,390     $ 35,173  
    


 


Cash flows from operating activities:

                

Net income

     82,669       35,202  

Adjustments to reconcile net income to cash flows from operating activities:

                

Depreciation and amortization

     86,197       69,288  

Minority interests in income of consolidated subsidiaries

     4,575       3,748  

Compensation payable in common stock and options

     5,944       —    

Loss on hedging of anticipated acquisition purchase price

     —         12,848  

Purchased in-process R&D charges

     —         3,000  

Working capital changes, net of the effects of acquisitions and the consolidation of Jordan Bromine Company Limited

     (45,686 )     15,133  

Equity in net income of unconsolidated investments

     (22,583 )     (2,494 )

Deferred income tax (benefit) expense

     (21,103 )     83  

Decrease (increase) in prepaid pension assets

     1,777       (3,776 )

Other, net

     2,229       (2,647 )
    


 


Net cash provided from operating activities

     94,019       130,385  
    


 


Cash flows from investing activities:

                

Capital expenditures

     (50,594 )     (37,602 )

Acquisitions

     (7,553 )     (762,378 )

Investments in joint ventures and other investments

     (3,088 )     (6,742 )

Proceeds from the liquidation of equity method investment and sale of nonmarketable security

     1,058       —    

Payments on hedging of anticipated acquisition purchase price

     —         (12,848 )

Other

     44       832  
    


 


Net cash used in investing activities

     (60,133 )     (818,738 )
    


 


Cash flows from financing activities:

                

Proceeds from issuance of senior notes

     324,665       —    

Proceeds from issuance of common stock

     147,862       —    

Proceeds from borrowings

     147,639       1,050,946  

Proceeds from exercise of stock options

     2,893       6,762  

Repayments of long-term debt

     (617,897 )     (325,806 )

Dividends paid to shareholders

     (18,992 )     (17,982 )

Payment of financing costs

     (2,306 )     —    

Dividends paid to minority interest

     (2,200 )     (3,269 )

Purchases of common stock

     —         (827 )

Other

     196       —    
    


 


Net cash (used in) provided from financing activities

     (18,140 )     709,824  
    


 


Net effect of foreign exchange on cash and cash equivalents

     (14,277 )     4,173  
    


 


Increase in cash and cash equivalents

     1,469       25,644  
    


 


Cash and cash equivalents at end of period

   $ 47,859     $ 60,817  
    


 


 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands of Dollars, Except Share and Per-Share Amounts)

(Unaudited)

 

1. In the opinion of management, the accompanying consolidated financial statements of Albemarle Corporation and its wholly owned and majority owned subsidiaries (“Albemarle” or the “Company”) contain all adjustments necessary for a fair presentation, in all material respects, of the Company’s consolidated financial position as of September 30, 2005 and December 31, 2004, the consolidated results of operations and comprehensive income for the third-quarter and nine-month periods ended September 30, 2005 and 2004, and condensed consolidated cash flows for the nine-month periods ended September 30, 2005 and 2004. The Company consolidates its majority owned and controlled subsidiaries and applies the equity method of accounting for investments in which it has an ownership interest of between 20% and 50% owned or where it exercises significant influence over the related investee’s operations. All significant intercompany accounts and transactions are eliminated in consolidation. Minority shareholders’ interests in consolidated subsidiaries are included in “other noncurrent liabilities” in the consolidated balance sheets and “minority interests in income of consolidated subsidiaries” in the consolidated statements of income. All adjustments are of a normal and recurring nature. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K. The results of operations for the third quarter ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made regarding minority interests and segment income for the nine-month period ended September 30, 2005 and the third-quarter and nine-month periods ended September 30, 2004 in the accompanying consolidated financial statements and the notes thereto to conform to the current presentation (See Note 18).

 

2. Cost of goods sold includes foreign exchange transaction gains (losses) of $120 and ($625), and ($907) and ($258) for the third-quarter and nine-month periods ended September 30, 2005 and 2004, respectively.

 

3. Cost of goods sold for the third-quarter and nine-month periods ended September 30, 2004 included an August 26, 2004 cash settlement whereby the Company and a former insurer settled a dispute related to payments to be made to the Company in connection with certain insurance coverage for the period 1950 through 2000. Pursuant to the agreement, the Company will receive $6,945 ($4,424 after income taxes, or 10 cents per diluted share) with $4,208 paid at the settlement date. Cost of goods sold for the third-quarter and nine-month periods ended September 30, 2004 also included a third-quarter charge amounting to $3,396 ($2,163 after income taxes, or five cents per diluted share) related to the establishment of a valuation reserve for the potential recoverability of a claim incurred by the Company regarding the discontinuance of product support for and withdrawal from a water treatment venture.

 

4. Acquisition-related cost totaling $13,400 ($8,536 after income taxes, or 20 cents per diluted share) for the third-quarter and nine-month periods ended September 30, 2004, consisted of a step-up increase in acquired inventory to fair value associated with the July 31, 2004 acquisition of the Akzo Nobel N.V. (“Akzo Nobel”) refinery catalysts business.

 

5. Special items:

 

    

Third Quarter Ended

September 30,


    Nine Months Ended
September 30,


 
     2005

   2004

    2005

    2004

 

Curtailment gain (a)

   $ —      $ —       $ 5,603     $ —    

Provisional charge for the potential settlement of future legal claims (b)

     —        —         (735 )     —    

Purchased in-process research and development charges (c)

     —        (3,000 )     —         (3,000 )

Reduction in force adjustments (d)

     —        199       —         (4,308 )

Cleanup of the Pasadena plant zeolite facility (e)

     —        —         —         (550 )
    

  


 


 


Special items

   $ —      $ (2,801 )   $ 4,868     $ (7,858 )
    

  


 


 



(a) Nine-month period ended September 30, 2005 includes a second-quarter 2005 curtailment gain amounting to $5,603 ($3,569 after income taxes, or seven cents per diluted share) that relates to a reduction in the Company’s accumulated postretirement benefit obligation (liability) at the June 29, 2005 remeasurement date associated with a change in coverage in the Company’s unfunded postretirement health care benefits plan for active employees’ future retiree medical premium payments effective December 31, 2005 (See Note 9).
(b) Nine-month period ended September 30, 2005 includes a second-quarter 2005 provisional charge of $735 ($468 after income taxes, or one cent per diluted share) for the potential settlement of future asbestos premises liability claims.
(c) Third-quarter and nine-month periods ended September 30, 2004 included purchased in-process research and development charges amounting to $3,000, or seven cents per diluted share, that were comprised of the write-off of estimated research and development costs associated with the acquired Akzo Nobel refinery catalysts business deemed not to have future use.

 

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(d) Third-quarter and nine-month periods ended September 30, 2004 included a $199 reversal adjustment of a reserve for work force reduction. Nine months ended September 30, 2004 included a first quarter 2004 charge totaling $4,507 ($2,871 after income taxes, or seven cents per diluted share) for layoffs related to the closing at the Pasadena plant zeolite facility and a related curtailment charge.
(e) Nine-month period ended September 30, 2004 included a second-quarter 2004 charge totaling $550 ($350 after income taxes, or one cent per diluted share) related to the cleanup of the Pasadena plant zeolite facility.

 

6. Interest and financing expenses for the nine months ended September 30, 2005 include a January 2005 write-off of deferred financing expenses totaling $1,386 ($883 after income taxes, or two cents per diluted share), associated with the 364-day bridge loan that was retired using the proceeds from the Company’s January 2005 public offerings of common stock and senior notes. Interest and financing expenses for the third-quarter and nine-month periods ended September 30, 2004 included the write-off of deferred financing expenses totaling $528 ($336 net of income taxes, or one cent per diluted share) related to the refinancing of the Company’s previous revolving credit agreement.

 

7. Other income (expenses), net for the nine-month period ended September 30, 2005 and the third-quarter and nine-month periods ended September 30, 2004 include the reclassification of minority interest for the Company’s majority-owned subsidiary, Stannica LLC, totaling ($4,030), and ($1,371) and ($3,748), respectively, from other income (expenses), net to a separate line on our consolidated statements of income. In addition, effective August 1, 2005, the Company began consolidating its 50% ownership interest in Jordan Bromine Company Limited (“JBC”), a Jordanian-American joint venture company that manufactures and markets bromine and bromine derivatives products from raw materials extracted from the Dead Sea. The Company had previously accounted for this investment on an equity basis. However, as a result of August 2005 amendments to the related joint venture agreement, Albemarle management concluded that consolidation accounting for this investment was appropriate under generally accepted accounting principles in the United States (“GAAP”). The impact of the consolidation of JBC on minority interests amounted to ($545) for the third-quarter and nine-month periods ended September 30, 2005. This change in accounting had no impact on the Company’s net income for the third-quarter and nine-month periods ended September 30, 2005 and 2004, respectively. (See Note 8.) Other income (expenses), net for the third-quarter and nine-month periods ended September 30, 2004 included foreign exchange hedging charges totaling $15,712 ($10,009 after income taxes, or 24 cents per diluted share) and $12,848 ($8,184 after income taxes, or 19 cents per diluted share), respectively, associated with the contracts entered into by the Company to hedge the euro-denominated purchase price for the Company’s acquisition of the Akzo Nobel refinery catalysts business.

 

8. The following unaudited pro forma data summarizes the results of operations for the third-quarter and nine-month periods ended September 30, 2005 as if the consolidation of JBC had been completed as of the beginning of each of the periods presented.

 

     Third Quarter Ended
September 30, 2005


    Nine Months Ended
September 30, 2005


 

Net sales

   $ 506,605     $ 1,519,324  
    


 


Operating profit

   $ 40,926     $ 136,614  
    


 


Interest and financing expenses

   $ (11,201 )   $ (33,426 )
    


 


Equity in net income of unconsolidated investments

   $ 2,984     $ 14,949  
    


 


Other income, net

   $ 534     $ 1,278  
    


 


Minority interests in income of consolidated subsidiaries

   $ (2,449 )   $ (7,156 )
    


 


Net income

   $ 26,292     $ 82,669  
    


 


Basic earnings per share

   $ 0.56     $ 1.79  
    


 


Diluted earnings per share

   $ 0.55     $ 1.74  
    


 


 

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Line items impacted on the Company’s September 30, 2005 consolidated balance sheets due to the consolidation of JBC were as follows:

 

Cash

   205  

Accounts receivable (including intercompany eliminations)

   (218 )

Inventory

   14,615  

Other current assets

   3,236  

Net property, plant and equipment

   113,726  

Other assets, primarily investment in JBC

   (39,712 )

Accounts payable (including intercompany eliminations)

   25,837  

Long-term debt, current portion

   (14,252 )

Other current liabilities

   (3,855 )

Long-term debt (See Note 16)

   (65,981 )

Minority interest in other noncurrent liabilities

   (31,648 )

Accumulated other comprehensive income

   (195 )

Retained earnings

   (1,758 )

 

9. On June 29, 2005, the Company announced a change in its coverage for its unfunded postretirement health care benefits plan effective December 31, 2005. The change in coverage (“plan change”) affects Company paid retiree medical premium payments for future retirees and results in the recognition of a special item for the acceleration of a portion of current unrecognized prior service credits in the current period of $5,603 ($3,569 after income taxes, or seven cents per diluted share). The plan change special item is reflected as a curtailment gain in accordance with Statement of Financial Accounting Standards No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The plan change did not affect the medical premium subsidy of retired employees. The plan change will affect the Company’s future retiree medical premium subsidy in two ways: (1) active employees who are age 50 or older as of December 31, 2005 and who commence their retirement benefit after January 1, 2006 and otherwise meet all other eligibility requirements will be eligible to receive a revised fixed Company subsidy; and (2) active employees who are under the age of 50 on December 31, 2005 and who otherwise meet the eligibility requirements will remain eligible for retiree medical coverage, but will be responsible for 100% of the cost of their coverage.

 

The plan change noted above reduced the Company’s accumulated postretirement benefit obligation (“APBO”) under its postretirement health care benefits plan by $16,223; the reduction in APBO will be amortized to income over the remaining service life to full eligibility of affected employees, amounting to four years effective July 1, 2005.

 

10. Basic and diluted earnings per share for the third-quarter and nine-month periods ended September 30, 2005 and 2004 are calculated as follows:

 

    

Third Quarter Ended

September 30,


  

Nine Months Ended

September 30,


     2005

   2004

   2005

   2004

Basic earnings per share:

                           

Numerator:

                           

Income available to shareholders, as reported

   $ 26,292    $ 827    $ 82,669    $ 35,202
    

  

  

  

Denominator:

                           

Average number of shares of common stock outstanding

     46,607      41,588      46,242      41,497
    

  

  

  

Basic earnings per share

   $ 0.56    $ 0.02    $ 1.79    $ 0.85
    

  

  

  

Diluted earnings per share:

                           

Numerator:

                           

Income available to shareholders, as reported

   $ 26,292    $ 827    $ 82,669    $ 35,202
    

  

  

  

Denominator:

                           

Average number of shares of common stock outstanding

     46,607      41,588      46,242      41,497

Shares issuable upon exercise of stock options

     1,407      956      1,400      845
    

  

  

  

Total shares

     48,014      42,544      47,642      42,342
    

  

  

  

Diluted earnings per share

   $ 0.55    $ 0.02    $ 1.74    $ 0.83
    

  

  

  

 

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11. The following table reflects the changes in consolidated shareholders’ equity from December 31, 2004 through September 30, 2005:

 

     Common Stock

   Additional
Paid-In
Capital


   Accumulated
Other
Comprehensive
Income


    Retained
Earnings


    Total
Share-
holders’
Equity


 
     Shares

   Amounts

         

Balance at December 31, 2004

   41,898,201    $ 419    $ 22,839    $ 46,203     $ 641,914     $ 711,375  

Net income

   —        —        —        —         82,669       82,669  

Foreign currency translation adjustments, net

   —        —        —        (22,369 )     —         (22,369 )

Realized loss on treasury lock agreements, net

   —        —        —        (932 )     —         (932 )

Amortization of realized loss on treasury lock agreements, net

   —        —        —        92       —         92  

Unrealized gain on securities available for sale, net

   —        —        —        16       —         16  

Unrealized gain on hedging derivatives, net

   —        —        —        420       —         420  

Cash dividends declared

   —        —        —        —         (21,432 )     (21,432 )

Compensation payable in common stock

   —        —        5,944      —         —         5,944  

Issuance of common stock, net

   4,573,000      46      147,816      —         —         147,862  

Exercise of stock options

   120,000      1      2,892      —         —         2,893  

Issuance of restricted stock

   29,704      —        1,065      —         —         1,065  
    
  

  

  


 


 


Balance at September 30, 2005

   46,620,905    $ 466    $ 180,556    $ 23,430     $ 703,151     $ 907,603  
    
  

  

  


 


 


 

On January 20, 2005, the Company concluded the public offering of 4,573,000 shares of common stock at a public offering price of $34.00 per share ($32.46 per share after underwriting discount but before offering related expenses).

 

12. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for the third-quarter and nine-month periods ended September 30, 2005 and 2004, respectively, are as follows:

 

     % of Income Before Income Taxes

 
    

Third Quarter Ended

September 30,


   

Nine Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Federal statutory rate

   35.0 %   35.0 %   35.0 %   35.0 %

Section 965 repatriation

   (14.8 )   —       (4.2 )   —    

Effect of minority interests

   (2.2 )   —       (1.4 )   (2.5 )

Depletion

   (1.4 )   nm     (1.2 )   (2.6 )

Extraterritorial income exclusion

   (0.8 )   nm     (1.2 )   (3.1 )

Domestic production deduction

   (0.4 )   —       (0.3 )   —    

State taxes, net of federal tax benefit

   0.3     nm     (0.1 )   0.7  

Other items, net

   (2.0 )   nm     (1.3 )   (2.9 )
    

 

 

 

Effective income tax rate

   13.7 %   (99.6 %)   25.3 %   24.6 %
    

 

 

 


nm – not meaningful

 

During the September 30, 2005 reporting period, the Company reclassified its minority interest in Stannica LLC for the nine-month period ended September 30, 2005 and the third-quarter and nine-month periods ended September 30, 2004 (See Note 7). The reclassification of minority interest for the nine-month period ended September 30, 2004 changed the effective income tax rate from 26.5% to 24.6%. The impact on the third-quarter period ended September 30, 2004 change in the effective income tax rate is not meaningful.

 

        In the third quarter of 2005, the Company adopted FASB Staff Position SFAS 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (“FSP SFAS 109-1”) and FASB Staff Position SFAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” that were issued in December 2004. The American Jobs Creation Act of 2004 (the “Act”), which was signed into law on October 22, 2004, provides for a deduction ranging from 3% to 9% for income from qualified domestic production activities (“QDPA”). The QDPA deduction is being phased in from 2005 through 2010. The QDPA deduction partially replaces the benefits from a two-year phase out of the then existing extra-territorial income exclusion (“ETI”) for foreign sales. The impact of the

 

11


Table of Contents

adoption of FSP SFAS 109-1 and its related QDPA deduction, which amounts to $129 and $388 for the third-quarter and nine month periods ended September 30, 3005, is being taken as a special deduction for the Company’s tax year ending December 31, 2005. The Act also created a temporary one-time tax incentive (savings) on certain accumulated and projected future earnings of certain controlled foreign subsidiaries, which have been or will be repatriated. On August 18, 2005, the Company’s chief executive officer approved a domestic reinvestment plan (“plan”) to repatriate foreign earnings in accordance with the temporary repatriation incentive under Section 965 of the Act. The Company’s one-time incentive (29.75%) results in an approximate 5.25% Federal tax rate on the 2005 repatriated earnings that had been previously taxed at the Company’s normal Federal tax rate of 35%. The Company recorded a tax benefit for the third-quarter and nine-month period ended September 30, 2005 of $4,857, or 10 cents per diluted share.

 

13. Cash dividends declared for the nine-month period ended September 30, 2005 totaled 46 cents per share, which included a dividend of 15 cents per share declared on February 2, 2005, paid April 1, 2005, a dividend of 15 cents per share declared on April 19, 2005, paid July 1, 2005, and a dividend of 16 cents per share declared on June 29, 2005, payable October 1, 2005. Cash dividends declared for the nine-month period ended September 30, 2004 totaled 43.5 cents per share, which included a dividend of 14.5 cents per share declared on January 30, 2004, paid April 1, 2004, a dividend of 14.5 cents per share declared March 31, 2004, paid July 1, 2004, and a dividend of 14.5 cents per share declared June 30, 2004, paid October 1, 2004. The reason for no dividend declarations in the third-quarter periods ended September 30, 2005 and 2004 was the timing of the Board of Directors meeting dates.

 

14. On July 31, 2004, the Company completed the acquisition of the Akzo Nobel refinery catalysts business for approximately $763,000, including expenses, at applicable exchange rates. During 2004 and 2005, the Company increased the purchase price by approximately $23,000 and $8,000, respectively, due primarily to payments to Akzo Nobel as part of the post-closing working capital adjustments. During 2005, significant progress was made in the determination of the final purchase price allocation versus the estimated allocation at December 31, 2004. However, none of the changes made to the December 31, 2004 allocation were material to the financial position or results of operations of the Company. As part of the acquisition, the Company acquired 50% ownership of non-consolidated joint ventures in Brazil (Fábrica Carioca de Catalisadores S.A.), Japan (Nippon Ketjen Co., Ltd,) and France (Eurecat S.A. with affiliates in the United States, Saudi Arabia and Italy).

 

The final purchase price allocation is summarized below:

 

Cash

   $ 31,341  

Accounts receivable

     78,404  

Inventory

     108,117  

Other current assets

     5,048  

Net property, plant and equipment

     402,252  

Other assets, including investment in joint ventures

     50,228  

Goodwill and other intangibles

     304,160  

In-process research and development assets

     3,235  

Current liabilities

     (53,487 )

Noncurrent deferred tax liabilities

     (70,738 )

Other noncurrent liabilities

     (28,116 )

Long-term environmental liabilities

     (5,403 )
    


Net cash paid

     825,041  

Less: cash acquired

     (31,341 )
    


Net cash paid less cash acquired

   $ 793,700  
    


 

The following unaudited pro forma data summarizes the results of operations for the third-quarter and nine-month periods ended September 30, 2004 as if the acquisition of the Akzo Nobel refinery catalysts business had been completed as of the beginning of each of the periods presented. The pro forma data gives effect to actual operating results prior to the acquisition, and includes adjustments for tangible and intangible asset depreciation and amortization, interest expense, various other income (expenses), net accounts and related income tax effects associated with the acquisition. Additionally, non-recurring items associated with the acquisition, including acquired inventory step-up charges, in-process research and development charges and net losses associated with the contracts used to hedge the euro-denominated purchase price, are reflected in the pro forma data for each of the periods presented. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of the beginning of each of the periods presented or that may be obtained in the future.

 

12


Table of Contents
     Third Quarter Ended
September 30, 2004


   Nine Months Ended
September 30, 2004


Net sales

   $ 447,846    $ 1,345,639
    

  

Net income

   $ 5,193    $ 50,806
    

  

Basic earnings per share

   $ 0.12    $ 1.22
    

  

Diluted earnings per share

   $ 0.12    $ 1.20
    

  

 

The above pro forma data includes pro forma amounts for depreciation and amortization, interest expense and income taxes as follows:

 

     Third Quarter Ended
September 30, 2004


   Nine Months Ended
September 30, 2004


Depreciation and amortization

   $ 29,084    $ 88,291
    

  

Interest and financing expenses

   $ 7,549    $ 22,658
    

  

Income taxes (benefits)

   $ 1,195    $ 17,620
    

  

 

15. At September 30, 2005, goodwill and other intangibles consist principally of goodwill, customer lists, trademarks, patents and other intangibles.

 

     Balances at
Beginning of
Year


   Additions
and Other
Changes


    Amortization
Charged to
Expense


   Foreign
Exchange


   

Balances at
September 30,

2005


Changes by operating segment:

                                    

Goodwill:

                                    

Polymer Additives

   $ 24,322    $ —       $ —      $ (828 )   $ 23,494

Catalysts

     145,824      61,100 (a)     —        (1,195 )     205,729

Fine Chemicals

     20,029      —         —        (1,704 )     18,325
    

  


 

  


 

     $ 190,175    $ 61,100     $ —      $ (3,727 )   $ 247,548
    

  


 

  


 

Other intangibles:

                                    

Polymer Additives

   $ 75,275    $ —       $ 3,388    $ (2,895 )   $ 68,992

Catalysts

     136,742      (39,021 )(b)     6,117      —         91,604

Fine Chemicals

     1,936      —         348      (68 )     1,520
    

  


 

  


 

     $ 213,953    $ (39,021 )   $ 9,853    $ (2,963 )   $ 162,116
    

  


 

  


 


(a) The increase in goodwill in the Catalysts segment is associated with changes, principally in second-quarter 2005, to the allocation of the purchase price of the Akzo Nobel refinery catalysts business primarily in other assets $50,135, other intangibles $39,021, property, plant and equipment ($22,252), and other various items ($13,357) as well as additional cash payments made in 2005.
(b) Other intangibles changes in the Catalysts segment are associated with changes, principally in second-quarter 2005, to the allocation of the purchase price of the Akzo Nobel refinery catalysts business as follows: trade name ($51,706), patents ($9,154), customer list and relationships $21,946, non-compete agreements ($5,423), and licenses and other $5,316. The estimated useful lives range from 2.5 to 22 years with a weighted average of approximately 14 years. These changes do not have a material impact on previously reported results. Consistent with previous disclosures, amortization for each of the next five years should approximate $8,500.

 

13


Table of Contents

16. Long-term debt consists of the following:

 

    

September 30,

2005


  

December 31,

2004


Variable-rate bank loans

   $ 460,790    $ 923,624

Senior notes

     324,688      —  

Industrial revenue bonds

     11,000      11,000

Foreign borrowings and obligations

     82,573      9,095

Miscellaneous

     865      912
    

  

Total

     879,916      944,631

Less amounts due within one year

     59,303      45,047
    

  

Long-term debt

   $ 820,613    $ 899,584
    

  

 

On July 29, 2004, in connection with the acquisition of the Akzo Nobel refinery catalysts business, the Company entered into (1) a senior credit agreement, with a group of lenders, consisting of a $300,000 revolving credit facility ($25,000 outstanding at September 30, 2005) and a $450,000 five-year term loan facility ($393,750 outstanding at September 30, 2005), and (2) a $450,000 364-day loan agreement. The Company used the initial borrowings under the senior credit agreement and the $450,000 364-day loan agreement to consummate the acquisition, refinance the then-existing credit agreement and pay related fees and expenses incurred in connection therewith. The $450,000 five-year loan facility is payable in quarterly installments of $11,250 through September 30, 2008, with three final quarterly payments of $90,000 beginning September 30, 2008 through March 31, 2009. The revolving credit facility and the five-year term loan facility bore variable interest rates at September 30, 2005 of 4.42% and 4.64%, respectively. These credit facilities contain certain restrictive financial covenants, including fixed charge coverage, debt to capitalization and other covenants as set forth in the agreements. The credit facilities were amended on July 8, 2005. The amendment reduces the applicable borrowing rates and fees payable under the revolving credit facility and five-year term loan facility, based on the ratings of the Company’s senior unsecured long-term debt as rated by outside credit rating agencies, eliminates certain conditions for borrowings under the revolving credit facility, and provides an option to increase the amount available for borrowings under the revolving credit facility by up to $50,000.

 

On January 20, 2005, the Company concluded the sale of $325,000 aggregate principal amount of senior notes through a public offering at a price of 99.897% of par. The Company used the net proceeds from the sale of the senior notes along with the proceeds from its concurrent sale of common stock through a public offering to retire the $450,000 364-day bridge loan. The senior notes bear an interest rate of 5.10%, which is payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2005. The notes mature on February 1, 2015.

 

On August 1, 2005, the Company’s reported debt balances increased when it began consolidating its 50% ownership interest in JBC (See Note 7). The JBC debt, which amounts to $80,233 at September 30, 2005, consists of (1) foreign plant-related construction borrowings amounting to $47,299, which bear interest at rates ranging from 4.28% to 7.12% at September 30, 2005 with principal and interest payable in 22 semiannual installments and (2) a capitalized lease obligation related to certain plant equipment amounting to $19,195 with semiannual payments of $1,370, including interest calculated at 5.50%, through June 1, 2012. Additionally, the JBC debt also included unsecured short-term debt totaling $7,725 and a $6,014 unsecured non-interest bearing loan from its minority interest shareholder.

 

17. The Company has the following recorded environmental liabilities primarily included in “Other noncurrent liabilities” at September 30, 2005:

 

Beginning balance at December 31, 2004

   $ 33,739  

Additions

     1,635  

Expenditures

     (1,134 )

Change in estimate

     (1,162 )

Foreign exchange

     (3,055 )
    


Ending balance at September 30, 2005

   $ 30,023  
    


 

The amounts recorded represent the Company’s probable future remediation and other anticipated environmental liabilities. Although it is difficult to quantify the potential financial impact of compliance with environmental protection laws, management estimates (based on the latest available information) that there is a reasonable possibility that future environmental remediation costs associated with the Company’s past operations, in excess of amounts already recorded, could be up to approximately $12,000 before income taxes.

 

14


Table of Contents

The Company believes that any sum it may be required to pay in connection with environmental remediation matters in excess of the amounts recorded should occur over a period of time and should not have a material adverse effect upon results of operations, financial condition or cash flows of the Company on a consolidated annual basis, although any such sum could have a material adverse impact in a particular quarterly reporting period.

 

On another matter, the Company is awaiting a response from the arbitration panel in its arbitration against Aventis S. A., the predecessor in interest to Sanofi Aventis (“Aventis”), to confirm that Aventis is obligated to indemnify the Company pursuant to the terms of a stock purchase agreement for certain present and future claims asserted against the Company arising out of soil and groundwater contamination at the site of the Thann, France facility. (See Note 20.)

 

18. The presentation of the Company’s segment results has been modified during the nine-month period ended September 30, 2005 for the following items:

 

  (a) Effective January 1, 2005, the Company revised the way it evaluates the performance of its segment results by including the operating results of its joint ventures termed “equity in net income (losses) of unconsolidated investments” along with its operating profit (losses), which represents income (loss) before income taxes and minority interests, and before interest and financing expenses and “other income (expenses), net.” Segment results for the 2004 were reclassified to reflect the manner in which the chief operating decision maker reviews our three segments. The change to segment income versus segment operating profit resulted from the material effect of the joint ventures acquired from Akzo Nobel as part of our acquisition of Akzo Nobel’s refinery catalysts business on July 31, 2004.

 

  (b) Effective August 1, 2005, the Company began consolidating its 50% ownership interest in JBC (See Note 7). Segment income for the nine-months ended September 30, 2005 reflects the impact of this change.

 

  (c) The presentation of segment results was further changed during third-quarter 2005 to reflect the reclassification of the minority ownership interest in Stannica LLC from “other income (expenses), net” to a separate disclosure line under income after income taxes and before minority interests in the consolidated statements of income. Reclassifications have been made herein for third-quarter 2004 and nine-month periods ended September 30, 2005 and 2004 totaling ($4,030), and ($1,371) and ($3,748), respectively, to reflect the change.

 

Segment data continues to include intersegment transfers of raw materials at cost and foreign exchange transaction gains and losses, as well as allocations for certain corporate costs.

 

Summarized financial information concerning the Company’s reportable segments is shown in the following table. Corporate & Other expenses include corporate-related items not allocated to the reportable segments.

 

Third Quarter Ended September 30, 2005


  

Polymer

Additives


   Catalysts

   

Fine

Chemicals


   

Corporate

& Other


    Total

 

Net sales

   $ 195,356    $ 173,501     $ 137,748       —       $ 506,605  
    

  


 


 


 


Operating profit (loss)

   $ 21,860    $ 12,837     $ 11,836     $ (7,452 )   $ 39,081  

Equity in net income (losses) of unconsolidated investments

     1,586      1,929       646       (37 )     4,124  
    

  


 


 


 


Segment income (loss)

   $ 23,446    $ 14,766     $ 12,482     $ (7,489 )     43,205  
    

  


 


 


       

Interest and financing expenses

                                    (10,882 )

Other income (expenses), net

                                    534  
                                   


Income before income taxes and minority interests

                                  $ 32,857  
                                   


Third Quarter Ended September 30, 2004


  

Polymer

Additives


   Catalysts

   

Fine

Chemicals


   

Corporate

& Other


    Total

 

Net sales

   $ 185,902    $ 106,518     $ 121,484       —       $ 413,904  
    

  


 


 


 


Operating profit (loss)

   $ 24,279    $ (2,962 )   $ 9,830     $ (10,016 )   $ 21,131  

Equity in net income of unconsolidated investments

     993      1,654       (728 )     (93 )     1,826  
    

  


 


 


 


Segment income (loss)

   $ 25,272    $ (1,308 )   $ 9,102     $ (10,109 )     22,957  
    

  


 


 


       

Interest and financing expenses

                                    (6,250 )

Other (expenses) income, net

                                    (15,606 )
                                   


Income before income taxes and minority interests

                                  $ 1,101  
                                   


 

15


Table of Contents

Nine Months Ended September 30, 2005


  

Polymer

Additives


   Catalysts

  

Fine

Chemicals


   

Corporate

& Other


    Total

 

Net sales

   $ 597,893    $ 493,629    $ 427,802       —       $ 1,519,324  
    

  

  


 


 


Operating profit (loss)

   $ 70,460    $ 52,075    $ 34,377     $ (32,491 )   $ 124,421  

Equity in net income (losses) of unconsolidated investments

     6,159      12,096      4,505       (177 )     22,583  
    

  

  


 


 


Segment income (loss)

   $ 76,619    $ 64,171    $ 38,882     $ (32,668 )     147,004  
    

  

  


 


       

Interest and financing expenses

                                   (31,270 )

Other income (expenses), net

                                   1,100  
                                  


Income before income taxes and minority interests

                                 $ 116,834  
                                  


Nine Months Ended September 30, 2004


  

Polymer

Additives


   Catalysts

  

Fine

Chemicals


   

Corporate

& Other


    Total

 

Net sales

   $ 538,630    $ 153,795    $ 370,247     $ —       $ 1,062,672  
    

  

  


 


 


Operating profit (loss)

   $ 65,688    $ 2,227    $ 25,886     $ (23,185 )   $ 70,616  

Equity in net income (losses) of unconsolidated investments

     2,538      1,794      (1,611 )     (227 )     2,494  
    

  

  


 


 


Segment income (loss)

   $ 68,226    $ 4,021    $ 24,275     $ (23,412 )     73,110  
    

  

  


 


       

Interest and financing expenses

                                   (9,168 )

Other (expenses) income, net

                                   (12,278 )
                                  


Income before income taxes and minority interests

                                 $ 51,664  
                                  


 

19. SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) encourages, but does not require, companies to record, at fair value, compensation cost for stock-based employee compensation plans. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. If compensation cost had been determined based on the fair value at the grant date under the plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

 

     Third Quarter Ended
September 30,


   Nine Months Ended
September 30,


     2005

    2004

   2005

   2004

Stock based compensation (income) expense, net of taxes

                            

as reported

   $ (277 )   $ 950    $ 4,025    $ 2,741

pro forma

   $ 25     $ 1,358    $ 4,648    $ 4,309

Net income

                            

as reported

   $ 26,292     $ 827    $ 82,669    $ 35,202

pro forma

   $ 25,990     $ 419    $ 82,046    $ 33,634

Basic earnings per share on net income

                            

as reported

   $ 0.56     $ 0.02    $ 1.79    $ 0.85

pro forma

   $ 0.56     $ 0.01    $ 1.77    $ 0.81

Diluted earnings per share on net income

                            

as reported

   $ 0.55     $ 0.02    $ 1.74    $ 0.83

pro forma

   $ 0.54     $ 0.01    $ 1.70    $ 0.79

 

16


Table of Contents

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for options granted in the third-quarter and nine-months periods ended September 30, 2005 and 2004.

 

     Third Quarter Ended
September 30,


    Nine Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

Fair values of options granted

   $ 11.24     $ 8.95     $ 11.22     $ 8.58  

Dividend yield

     1.97 %     2.37 %     1.97 %     2.37 %

Volatility

     30.19 %     29.74 %     30.14 %     29.91 %

Average expected life (in years)

     6       5.97       6       5.61  

Risk-free interest rate

     4.48 %     4.42 %     4.49 %     4.37 %

 

20. Commitments and Contingencies

 

The following table summarizes the Company’s contractual obligations and commitments at September 30, 2005:

 

    

4Q

2005


   2006

   2007

   2008

   2009

   2010

   There-
after


Long-term debt borrowings and obligations

   $ 22,211    $ 51,670    $ 51,882    $ 209,606    $ 165,707    $ 7,591    $ 371,249

Expected interest payments on long-term debt borrowings and obligations*

     11,884      33,434      31,779      29,187      18,790      17,615      74,619

Operating lease obligations (rental)

     2,986      8,264      5,951      4,772      3,273      3,220      25,759

Take or pay / throughput agreements

     88,183      111,809      12,868      8,898      7,394      5,875      27,416

Letters of credit and guarantees

     6,062      37,253      8,257      3,342      221      53      1,128

Capital projects

     16,679      6,023      1,019      607      607      607      607

Additional investment commitment payments

     163      115      105      55      —        —        —  

Other

     196      —        —        —        —        —        —  
    

  

  

  

  

  

  

Total

   $ 148,364    $ 248,568    $ 111,861    $ 256,467    $ 195,992    $ 34,961    $ 500,778
    

  

  

  

  

  

  


* These amounts are based on a weighted-average interest rate of 5.1% for term loans and the revolving credit facility, 4.3% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes for 2005. The weighted average rate for years 2006 and thereafter are 4.8% for term loans and the revolving credit facility and 4.0% for the variable rate long-term debt obligations and an interest rate of 5.1% for the senior notes.

 

The Company has pledged certain of its land and housing facilities at its Bergheim, Germany plant site with a recorded value of $5,360 in connection with the Company’s remediation of a local landfill site as required by German environmental authorities.

 

The Company has commitments, in the form of guarantees, for 50% of certain plant construction loans and obligations of its consolidated 50%-owned joint venture investment, JBC. At September 30, 2005, the Company’s share of these amounts was $33,247.

 

The Company executes, through financial institutions, contracts with certain of its customers that serve as guarantees on product delivery and performance according to customer specifications that can cover both shipments on an individual basis as well as blanket coverage of multiple shipments under customer supply contracts. The financial coverage provided by these guarantees is typically based on a percentage of net sales value.

 

On April 2, 2004, Albemarle Overseas Development Company (“AODC”), a wholly owned subsidiary of the Company, initiated a Request for Arbitration against Aventis through the International Chamber of Commerce, International Court of Arbitration, Paris, France. The dispute arises out of a 1992 Stock Purchase Agreement (“Agreement”) between a predecessor to AODC, and a predecessor to Aventis under which 100% of the stock of Potasse et Produits Chimiques, S.A., now known as Albemarle PPC (“APPC”), was acquired by AODC. The dispute relates to a chemical facility in Thann, France owned by APPC. Under the terms of the Agreement, the Company believes that Aventis is obligated to indemnify AODC and APPC, and hold them harmless from certain claims, losses, damages, costs or any other present or prospective liabilities arising out of soil and groundwater contamination at the site in Thann.

 

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Beginning in May 2000, the French government, with respect to the management of pollution risk on the site of active industrial installations, required APPC to conduct an environmental risk study of the Thann facility. In June 2002, the French government directed APPC to undertake a more detailed risk study of groundwater contamination. The administrative process of the French government is still ongoing as of the present date. AODC has demanded indemnification from Aventis for the cost of the studies, but Aventis has refused to pay.

 

The Request for Arbitration requests indemnification of AODC by Aventis for certain costs incurred by APPC, in connection with any environmental claims of the French government for the APPC facility and a declaratory judgment as to the liability of Aventis under the Agreement for costs to be incurred in the future by APPC in connection with such claims. Arbitration related to the question of liability took place in June 2005 and we currently expect a response from the arbitration panel by the end of 2005.

 

On July 13, 2005, the French environmental authorities instructed APPC to conduct additional testing and take certain measures with respect to the containment of certain contamination at the Thann facility. At this time, it is not possible to predict what the French government will otherwise require, since this matter is in its initial stages and environmental matters are subject to many uncertainties. The Company believes, however, that it is entitled to be fully indemnified by Aventis for all liabilities arising from this matter, but no assurance can be given that it will prevail in this matter. If the Company does not prevail in the arbitration and the government requires additional remediation, the costs of remediation could be significant.

 

21. In accordance with SFAS No. 132 (R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106,” the following information is provided for interim domestic and foreign pension and postretirement benefit plans:

 

     Third Quarter Ended
September 30,


    Nine Months Ended
September 30,


 
     2005

    2004

    2005

    2004

 

Net Periodic Pension Benefit Cost:

                                

Service cost

   $ 4,470     $ 2,494     $ 14,081     $ 7,491  

Interest cost

     7,546       6,370       22,477       19,124  

Expected return of assets

     (10,827 )     (10,338 )     (32,634 )     (31,014 )

Plan curtailment*

     —         —         —         898  

Amortization of Unrecognized Amounts:

                                

Net transition obligation

     7       6       26       17  

Prior service cost

     106       180       318       540  

Net loss

     2,285       758       6,453       2,272  
    


 


 


 


Total expense (income)

   $ 3,587     $ (530 )   $ 10,721     $ (672 )
    


 


 


 


Net Periodic Postretirement Benefit Expense:

                                

Service cost

   $ 191     $ 417     $ 1,128     $ 1,249  

Interest cost

     832       1,062       3,027       3,186  

Expected return of assets

     (136 )     (128 )     (376 )     (383 )

Plan curtailment*

     —         —         (5,603 )     —    

Amortization of Unrecognized Amounts:

                                

Prior service benefit

     (1,035 )     (349 )     (1,751 )     (1,047 )

Net loss

     182       74       374       221  
    


 


 


 


Total expense (benefit)

   $ 34     $ 1,076     $ (3,201 )   $ 3,226  
    


 


 


 



* During the second quarter ended June 30, 2005, the Company benefited from a curtailment gain amounting to $5,603 relating to a reduction in the Company’s accumulated postretirement benefit obligation (liability) at the June 29, 2005 remeasurement date. This reduction was associated with a change in coverage in the Company’s unfunded postretirement heath care benefits plan for active employees’ future retiree medical premium payments effective December 31, 2005. During the first quarter ended March 31, 2004, a SFAS No. 88 pension curtailment charge was incurred totaling $898 due to the layoffs at the zeolite facility in Pasadena, Texas.

 

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The Company did not make any contributions to its pension plans in the first nine months of 2005.

 

22. Recently Issued Accounting Pronouncements

 

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handing costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” which was the criterion specified in ARB No. 43. In addition, this statement requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material effect on the Company.

 

In December 2004, FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and its related implementation guidance. SFAS No. 123R will be effective as of the first annual reporting period that begins after June 15, 2005. SFAS No. 123R will result in the recognition of additional compensation expense relating to the Company’s incentive plans. This revision will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The Company currently uses the intrinsic value method from APB No. 25 to measure compensation expense for stock-based awards to its employees. Under this standard, the Company generally does not recognize any compensation related to stock option grants the Company issues under its incentive plans. Under the new rules, the Company is required to adopt a fair-value-based method for measuring the compensation expense related to incentive stock awards. The adoption of SFAS No. 123R is not expected to have a significant impact on the Company’s reported results of operations.

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that conditional asset retirement obligations meet the definition of liabilities and should be recognized when incurred if their fair values can be reasonably estimated. FIN 47 is effective no later than December 31, 2005. The cumulative effect of initially applying FIN 47 will be recognized as a change in accounting principle. The Company is in the process of evaluating the expected effect of FIN 47 on its consolidated financial statements.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement is effective for fiscal years beginning after December 15, 2005.

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Additional Information

 

Forward-looking Statements

 

Some of the information presented in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and variations of such words and similar expressions to identify such forward-looking statements.

 

These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. There can be no assurance, therefore, that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:

 

    the timing of orders received from customers;

 

    the gain or loss of significant customers;

 

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    competition from other manufacturers;

 

    changes in the demand for our products;

 

    increases in the cost of raw materials and energy, and our inability to pass through such increases;

 

    changes in our markets in general;

 

    fluctuations in foreign currencies;

 

    changes in laws and regulations;

 

    the occurrence of claims or litigation;

 

    the inability to maintain current levels of product or premises liability insurance or the denial of such coverage;

 

    political unrest affecting the global economy, including adverse effects from terrorism or hostilities;

 

    changes in accounting standards;

 

    the inability to achieve results from our global manufacturing cost reduction initiatives as well as our ongoing continuous improvement and rationalization programs;

 

    changes in interest rates, to the extent they (1) affect our ability to raise capital or increase our cost of funds, (2) have an impact on the overall performance of our pension fund investments and (3) increase our pension expense and funding obligations; and

 

    the other factors detailed from time to time in the reports we file with the Securities and Exchange Commission (“SEC”).

 

We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. The following discussion should be read together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

 

The following is a discussion and analysis of our results of operations and financial condition since December 31, 2004.

 

Changes in Reporting

 

Segments

 

Effective January 1, 2005, we revised the way we evaluate the performance of our segment results by including the operating results of our joint ventures, termed “equity in net income (losses) of unconsolidated investments,” along with our operating profit (losses). Segment results for the quarter ended September 30, 2004 have been recast to reflect the manner in which the chief operating decision maker reviews our three segments. The change to segment income versus segment operating profit resulted from the material effect of the joint ventures acquired from Akzo Nobel N.V. (“Akzo Nobel”) as part of our July 31, 2004 acquisition of Akzo Nobel’s refinery catalysts business (“refinery catalysts business”) on our consolidated operating results.

 

Effective August 1, 2005, we began consolidating our 50% ownership interest in Jordan Bromine Company Limited (“JBC”), a Jordanian-American joint venture company that manufactures and markets bromine and bromine derivatives products from raw materials extracted from the Dead Sea. We had previously accounted for this investment on an equity basis. However, as a result of August 2005 amendments to the related joint venture agreement our management concluded that consolidation accounting for this investment was appropriate under generally accepted accounting principals in the United States (“GAAP”). This change in accounting has no impact on our net income for the third-quarter and nine-month periods ended September 30, 2005 and 2004, respectively.

 

Other Income (Expenses), Net and Minority Interests

 

During third-quarter 2005, we changed our presentation of the minority ownership interest in Stannica LLC from other income (expenses), net to a separate disclosure line under income after income taxes and before minority interests in the consolidated statements of income. Reclassifications have been made herein for third-quarter 2004 and nine-month periods

 

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ended September 30, 2005 and 2004 to reflect the change. We have also made the appropriate reclassifications to our effective tax rates disclosures for third-quarter 2004 and nine-month periods ended September 30, 2005 and 2004 that were impacted as well.

 

Overview

 

We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals. Our products and services enhance the value of our customers’ end-products by improving performance, providing essential product attributes, lowering cost and simplifying processing. We sell a highly diversified mix of products to a wide range of customers, including manufacturers of consumer electronics, building and construction materials, automotive parts, packaging, pharmachemicals and agrichemicals, and petroleum refiners. We believe that our commercial and geographic diversity, technical expertise, flexible, low-cost global manufacturing base, strong cash flows and experienced management team enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.

 

Pricing Initiatives

 

We recently announced, and are working to implement, a number of pricing initiatives across our business segments to offset raw material and energy inflation and to help bring margins back to levels warranted by the value addition of our products and technologies. We announced price increases in our hydroprocessing (“HPC”) catalysts, aluminum alkyl co-catalysts, elemental bromine, brominated flame retardants, bromine-based clear completion fluids, along with a number of other products. In addition, we have added a surcharge to our fluidized catalytic cracking (“FCC”) catalysts to offset rising natural gas and raw material inflation.

 

Decabrom Exemption from RoHS

 

We were pleased with the recent announcement regarding the European Union’s exemption of the brominated flame retardant deca-BDE (decabrom) from the Restriction of Hazardous Substances (RoHS) directive. Decabrom is the second most widely produced brominated flame retardant, and is used in televisions, office equipment, mobile phones and upholstered furniture.

 

Hurricane Impacts

 

Like many companies with operations in the Gulf Coast region of the United States, we were impacted by both Hurricanes Katrina and Rita. Unlike some companies, however, we were spared any direct damage to our manufacturing facilities. However, we were required to idle our plants for several days due to mandatory evacuations, power outages and flooding. These production losses reduced operating profits by $3.6 million this quarter. In addition, we were forced into the open market to purchase raw materials when several of our suppliers declared force majeure. This further reduced operating profits by an additional $0.7 million.

 

Outlook

 

The increase in flame retardant sales in September, following a very slow July and August, has continued into the fourth quarter. We are optimistic that these improved volumes, along with recently announced price increases, will help offset raw material and energy costs and improve margins in our Polymer Additives segment.

 

We anticipate stronger sequential results in our Catalysts segment and are working to improve our operating profit margins. Both FCC catalysts and HPC catalysts production are at full capacity for the fourth quarter.

 

We are working to continue the turn around of our Fine Chemicals portfolio through many new product opportunities. We are encouraged by the transformation of our naproxen manufacturing unit into a multi-purpose production unit, which we believe serves as a model for how to build a sustainable fine chemistry business. We announced this quarter that we have started our discussions with the Works Council at our Port de Bouc, France site to cease production of bromine from seawater at that site. We continue to evaluate various asset rationalization plans to reduce operating costs.

 

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Industry Conditions

 

We conduct our business in many regions of the world including the United States, Europe and Asia. As a result, our business is subject to economic cycles. In addition, many of our customers are in industries, including the consumer electronics, building and construction, and automotive industries, that are cyclical in nature and sensitive to changes in general economic conditions. We view these cyclical conditions often to be self-hedging and mitigated to a large degree by the geographical and industrial diversity of our product portfolio. Our results are impacted by the effect on our customers of economic upturns and downturns, our own costs to produce our products and changes in our customers supply chains. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices.

 

Additional Information

 

Set forth below is a reconciliation of net income excluding special items, a financial measure that is not required by, or presented in accordance with GAAP to net income, the most directly comparable financial measure calculated and reported in accordance with GAAP, for the third-quarter and nine-months periods ended September 30, 2005 and 2004, respectively. This information is included to provide further support of the fluctuations discussed in the results of operations below. We believe this measure is more reflective of our operations, provides transparency to investors and enables period-to-period comparability of financial performance.

 

ALBEMARLE CORPORATION AND SUBSIDIARIES

(In Thousands, Except Per-Share Amounts)

(Unaudited)

 

    

Third Quarter Ended

September 30, 2005


   

Third Quarter Ended

September 30, 2004


 
     As
Reported


    Special
Items


   Excluding
Special Items


    As
Reported


    Special
Items


    Excluding
Special Items


 

Net sales

   $ 506,605     $ —      $ 506,605     $ 413,904     $ —       $ 413,904  

Cost of goods sold

     (406,994 )     —        (406,994 )     (324,396 )     (3,549 )(a)     (327,945 )

Acquisition-related cost

     —         —        —         (13,400 )     13,400 (b)     —    
    


 

  


 


 


 


Gross profit

     99,611       —        99,611       76,108       9,851       85,959  

Selling, general and administrative expenses (including SFAS No. 2 R&D)

     (60,530 )     —        (60,530 )     (52,176 )     —         (52,176 )

Special items

     —         —        —         (2,801 )     2,801 (c)     —    
    


 

  


 


 


 


Operating profit

     39,081       —        39,081       21,131       12,652       33,783  

Interest and financing expenses

     (10,882 )     —        (10,882 )     (6,250 )     528 (d)     (5,722 )

Equity in net income of unconsolidated investments

     4,124       —        4,124       1,826       —         1,826  

Other income (expenses), net

     534       —        534       (15,606 )     15,712 (e)     106  
    


 

  


 


 


 


Income before income taxes and minority interests

     32,857       —        32,857       1,101       28,892       29,993  

Income tax (expense) benefits

     (4,502 )     —        (4,502 )     1,097       (9,399 )     (8,302 )
    


 

  


 


 


 


Income after income taxes and before minority interests

     28,355       —        28,355       2,198       19,493       21,691  

Minority interests in income of consolidated subsidiaries

     (2,063 )     —        (2,063 )     (1,371 )     —         (1,371 )
    


 

  


 


 


 


Net income

   $ 26,292     $ —      $ 26,292     $ 827     $ 19,493     $ 20,320  
    


 

  


 


 


 


Diluted earnings per share

   $ 0.55     $ —      $ 0.55     $ 0.02     $ 0.46     $ 0.48  
    


 

  


 


 


 


 

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES

(In Thousands, Except Per-Share Amounts)

(Unaudited)

 

    

Nine Months Ended

September 30, 2005


   

Nine Months Ended

September 30, 2004


 
    

As

Reported


    Special
Items


    Excluding
Special Items


   

As

Reported


    Special
Items


    Excluding
Special Items


 

Net sales

   $ 1,519,324     $ —       $ 1,519,324     $ 1,062,672     $ —       $ 1,062,672  

Cost of goods sold

     (1,207,224 )     —         (1,207,224 )     (845,952 )     (3,549 )(a)     (849,501 )

Acquisition-related cost

     —         —         —         (13,400 )     13,400 (b)     —    
    


 


 


 


 


 


Gross profit

     312,100       —         312,100       203,320       9,851       213,171  

Selling, general and administrative expenses (including SFAS No. 2 R&D)

     (192,547 )     —         (192,547 )     (124,846 )     —         (124,846 )

Special items

     4,868       (4,868 )(c)     —         (7,858 )     7,858 (c)     —    
    


 


 


 


 


 


Operating profit

     124,421       (4,868 )     119,553       70,616       17,709       88,325  

Interest and financing expenses

     (31,270 )     1,386 (d)     (29,884 )     (9,168 )     528 (d)     (8,640 )

Equity in net income of unconsolidated investments

     22,583       —         22,583       2,494       —         2,494  

Other income (expenses), net

     1,100       —         1,100       (12,278 )     12,848 (e)     570  
    


 


 


 


 


 


Income before income taxes and minority interests

     116,834       (3,482 )     113,352       51,664       31,085       82,749  

Income tax (expense) benefits

     (29,590 )     1,264       (28,326 )     (12,714 )     (10,196 )     (22,910 )
    


 


 


 


 


 


Income after income taxes and before minority interests

     87,244       (2,218 )     85,026       38,950       20,889       59,839  

Minority interests in income of consolidated subsidiaries

     (4,575 )     —         (4,575 )     (3,748 )     —         (3,748 )
    


 


 


 


 


 


Net income

   $ 82,669     $ (2,218 )   $ 80,451     $ 35,202     $ 20,889     $ 56,091  
    


 


 


 


 


 


Diluted earnings per share

   $ 1.74     $ (0.05 )   $ 1.69     $ 0.83     $ 0.49     $ 1.32  
    


 


 


 


 


 



(a) Cost of goods sold for the third-quarter and nine-month periods ended September 30, 2004 included an August 26, 2004 cash settlement whereby the Company and a former insurer settled a dispute related to payments to be made to the Company in connection with certain insurance coverage for the period 1950 through 2000. Pursuant to the agreement, the Company will receive $6,945 ($4,424 after income taxes, or 10 cents per diluted share) with $4,208 paid at the settlement date. Cost of goods sold for the third-quarter and nine-month periods ended September 30, 2004 also includes a third-quarter charge amounting to $3,396 ($2,163 after income taxes, or five cents per diluted share) related to the establishment of a valuation reserve for the potential recoverability of a claim incurred by the Company regarding the discontinuance of product support for and withdrawal from a water treatment venture.
(b) Acquisition-related cost totaling $13,400 ($8,536 after income taxes, or 20 cents per diluted share) for the third-quarter and nine-month periods ended September 30, 2004 consisted of a step-up increase in acquired inventory to fair value associated with the July 31, 2004 acquisition of the refinery catalysts business.
(c) Special items:

 

     Third Quarter Ended
September 30,


    Nine Months Ended
September 30,


 
     2005

   2004

    2005

    2004

 

Curtailment gain (1)

   $ —      $ —       $ 5,603     $ —    

Provisional charge for the potential settlement of future legal claims (2)

     —        —         (735 )     —    

Purchased in-process research and development charges (3)

     —        (3,000 )     —         (3,000 )

Reduction in force adjustments (4)

     —        199       —         (4,308 )

Cleanup of the Pasadena plant zeolite facility (5)

     —        —         —         (550 )
    

  


 


 


Special items

   $ —      $ (2,801 )   $ 4,868     $ (7,858 )
    

  


 


 


 

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1. Nine-month period ended September 30, 2005 includes a second-quarter 2005 curtailment gain amounting to $5,603 ($3,569 income taxes, or seven cents per diluted share) that relates to a reduction in the Company’s accumulated postretirement benefit obligation (liability) at the June 29, 2005 remeasurement date associated with a change in coverage in the Company’s unfunded postretirement health care benefits plan for active employees’ future retiree medical premium payments effective December 31, 2005.
2. Nine-month period ended September 30, 2005 includes a second-quarter 2005 provisional charge of $735 ($468 after income taxes, or one cent per diluted share) for the potential settlement of future legal claims with respect to certain future asbestos premises liability claims.
3. Third-quarter and nine-month periods ended September 30, 2004 included purchased in-process research and development charges amounting to $3,000, or seven cents per diluted share, that were comprised of the write-off of the estimated research and development costs associated with the acquired refinery catalysts business deemed not to have future use.
4. Third-quarter and nine-month periods ended September 30, 2004 included a $199 reversal adjustment of a reserve for work force reduction. Nine months ended September 30, 2004 included a first quarter 2004 charge totaling $4,507 ($2,871 after income taxes, or seven cents per diluted share) for layoffs related to the closing of the Pasadena plant zeolite facility and a related curtailment charge.
5. Nine-month period ended September 30, 2004 included a second-quarter 2004 charge totaling $550 ($350 after income taxes, or one cent per diluted share) related to the cleanup of the Pasadena plant zeolite facility.
(d) Interest and financing expenses for the nine months ended September 30, 2005 include a January 2005 write-off of deferred financing expenses totaling $1,386 ($883 after income taxes, or two cents per diluted share), associated with the 364-day bridge loan that was retired using the proceeds from the Company’s January 2005 public offerings of common stock and senior notes. Interest and financing expenses for the third-quarter and nine-months periods ended September 30, 2004 included the write-off of deferred financing expenses totaling $528 ($336 net of income taxes, or one cent per diluted share) related to the refinancing of the Company’s previous revolving credit agreement.
(e) Other income (expenses), net for the nine months ended September 30, 2005 and the third-quarter and nine-month periods ended September 30, 2004 include the effect of the reclassification of minority interest for the Company’s majority-owned subsidiary, Stannica LLC, totaling ($4,030), and ($1,371) and ($3,748), respectively. Other income (expenses), net for the third-quarter and nine-month periods ended September 30, 2004 include foreign exchange hedging charges totaling $15,712 ($10,009 after income taxes, or 24 cents per diluted share) and $12,848 ($8,184 after income taxes, or 19 cents per diluted share), respectively, associated with the contracts entered into by the Company to hedge the euro-denominated purchase price for the Company’s acquisition of the refinery catalysts business.

 

Additional information regarding the Company, our products, markets and financial performance is provided at our web site, www.albemarle.com. Our web site is not a part of this document nor is it incorporated herein by reference.

 

Results of Operations

 

The following data and discussion provide an analysis of the significant factors affecting our results of operations during the periods included in the accompanying condensed consolidated statements of income.

 

Third-Quarter 2005 Compared with Third-Quarter 2004

 

Net Sales

 

Net sales by operating segment for the third-quarter periods ended September 30, 2005 and 2004 are as follows:

 

     Net Sales

     Third Quarter

     2005

   2004

     (In Thousands of Dollars)

Polymer Additives

   $ 195,356    $ 185,902

Catalysts

     173,501      106,518

Fine Chemicals

     137,748      121,484
    

  

Segment totals

   $ 506,605    $ 413,904
    

  

 

Net sales for third-quarter 2005 of $506.6 million were up $92.7 million (22.4%) from third-quarter 2004 net sales of $413.9 million.

 

        Polymer Additives’ net sales in third-quarter 2005 increased $9.5 million (5.1%) from third-quarter 2004 due mainly to improved pricing ($20.6 million) offset, in part, by lower shipments ($13.1 million) in flame retardants and improved pricing ($2.1 million) and offset, in part, by lower shipments ($0.2 million) in stabilizers and curatives. Polymer Additives’ net sales were also favorably impacted by foreign exchange ($0.1 million).

 

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Catalysts’ net sales in third-quarter 2005 increased $67.0 million from third-quarter 2004 due mainly to three months net sales of the refinery catalysts business (acquired July 31, 2004) in the current period versus two months in third-quarter 2004 and higher pricing due to increased raw material costs ($65.1 million).

 

Fine Chemicals’ net sales in third-quarter 2005 increased $16.3 million (13.4%) from third-quarter 2004 primarily due to improved pricing ($9.0 million) and shipments ($1.8 million) in performance chemicals, improved volumes ($7.4 million) in fine chemistry services and intermediates and improved volumes ($0.1 million) offset by unfavorable pricing ($2.2 million) in pharmaceutical and agricultural actives. Fine Chemicals’ net sales were also impacted by favorable foreign exchange ($0.1 million).

 

Operating Costs and Expenses

 

Cost of goods sold in third-quarter 2005 increased $82.6 million (25.5%) from third-quarter 2004. Excluding the benefit from an insurance settlement ($6.9 million) offset, in part, by the establishment of a $3.4 million valuation reserve for the potential recovery of a claim, costs of goods sold increased $79.0 million (24.1%). The increase was due mainly to the impact of three months shipments of the refinery catalysts business (acquired July 31, 2004) in the third-quarter 2005 versus two months in third-quarter 2004 ($57.3 million) as well as higher raw material and energy costs ($13.6 million) in our heritage businesses and higher volume variances ($7.5 million) based upon lower capacity utilization in Polymer Chemicals, primarily flame retardants. Third-quarter 2004 costs included $13.4 million in acquisition-related charges consisting of the step-up increase in acquired inventory associated with the acquisition of the refinery catalysts business. Our gross profit margin, excluding the third-quarter 2004 acquisition-related charges and the adjustments mentioned above, decreased approximately 110 basis points to 19.7% in third-quarter 2005 from 20.8% from third-quarter 2004 including the favorable 55 basis point impact of consolidating JBC.

 

Selling, general and administrative (“SG&A”) expenses and research and development (“R&D”) expenses increased $8.4 million (16.0%) in third-quarter 2005 versus third-quarter 2004. The increase is due mainly to the impact of three months SG&A and R&D of the refinery catalysts business (acquired July 31, 2004) in the third-quarter 2005 versus two months in third-quarter 2004 ($6.6 million) and higher employee related costs ($4.3 million) offset, in part, by an adjustment to reduce certain of our incentive plan accruals ($2.8 million). As a percentage of net sales, SG&A and R&D were 11.9% in 2005 versus 12.6% in the 2004 quarter.

 

Special items for third-quarter 2004 included a $3.0 million purchased in-process research and development (“in-process R & D”) charge associated with our acquisition of the refinery catalysts business and a $0.2 million reversal of a previously accrued reduction in force accrual.

 

Segment Income

 

Segment income by reportable operating segment for third-quarter periods ended September 30, 2005 and 2004 is as follows:

 

     Segment Income

 
     Third Quarter

 
     2005

    2004

 
     (In Thousands of Dollars)  

Polymer Additives

   $ 23,446     $ 25,272  

Catalysts

     14,766       (1,308 )

Fine Chemicals

     12,482       9,102  
    


 


Segment totals

     50,694       33,066  

Corporate and other expenses

     (7,489 )     (10,109 )
    


 


Segment income

   $ 43,205     $ 22,957  
    


 


 

Polymer Additives’ third-quarter 2005 segment income decreased $1.8 million (7.2%) from third-quarter 2004, which included an allocation related to an insurance settlement of $3.6 million. Excluding this item, Polymer Additives’ third-quarter 2005 segment income increased $1.8 million (8.1%) from third-quarter 2004. This increase was due mainly to improved pricing ($20.6 million) offset, in part, by unfavorable raw material and energy costs ($5.0 million) and higher costs ($13.5 million). These higher costs were due primarily to lower capacity utilization (primarily flame retardants) in third-quarter 2005.

 

Catalysts’ third-quarter 2005 segment income was up $16.1 million from third-quarter 2004. This increase included purchase price adjustments associated with the July 2004 acquisition of the refinery catalysts business for the step-up in accounting values assigned to the refinery catalysts business inventory ($13.4 million) and the write-off of purchased in-process

 

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R&D charges ($3.0 million). Excluding these adjustments, Catalysts’ third-quarter 2005 segment income decreased $0.3 million from third-quarter 2004. Third-quarter 2005 segment income for the refinery catalysts business was up $2.2 million. This increase was primarily due to the inclusion of three months net sales in third-quarter 2005 versus two months net sales in third-quarter 2004, offset by the impact of higher raw material costs and three months SG&A and R&D expenses in third-quarter 2005. In polyolefin catalysts, higher raw material and energy costs ($1.8 million) as well as higher overall costs ($1.3 million) and lower pricing ($0.3 million) were offset, in part, by higher shipments ($1.5 million).

 

Fine Chemicals’ third-quarter 2005 segment income increased $3.4 million (37.1%) from third-quarter 2004. The third-quarter 2004 results included offsetting special items consisting mainly of the benefit from an insurance settlement ($3.4 million) offset by a $3.4 million valuation reserve for the potential recovery of a claim. Excluding the third-quarter 2004 special items, Fine Chemicals’ third-quarter 2005 segment income increased 39.7% from third-quarter 2004. This increase was due to better results in performance chemicals ($8.0 million favorable due mainly to improved pricing), higher volumes in fine chemistry services and intermediates ($3.7 million) and favorable results in pharmaceutical and agricultural intermediates ($0.8 million). In addition, the increase in the equity in net income of unconsolidated consolidated earnings, together with the effects of the August 1, 2005 consolidation of JBC, contributed $2.2 million to the segment income increase. The increases in Fine Chemicals segment income were offset, in part, by higher overall raw material and energy costs ($6.7 million) primarily in performance chemicals, higher manufacturing costs ($4.5 million) and higher SG&A and R&D costs ($2.1 million).

 

Corporate and other expenses for third-quarter 2005 decreased $2.6 million (25.9%) from third-quarter 2004 primarily due to lower incentive compensation ($4.7 million) offset, in part, by higher consulting ($1.5 million) and higher pension costs ($0.6 million).

 

Interest and Financing Expenses

 

Interest and financing expenses for third-quarter 2005 amounted to $10.9 million, an increase of $4.6 million from third-quarter 2004, which included a third-quarter 2004 write-off of deferred financing expenses ($0.5 million) relating to the refinancing of our prior revolving credit agreement. This increase was primarily due to higher average outstanding debt in the 2005 period related to the July 2004 acquisition of the refinery catalysts business and the impact of the inclusion of JBC debt into consolidated results effective August 1, 2005.

 

Other Income (Expenses), Net

 

Other income (expenses), net for third-quarter 2005 amounted to $0.5 million, up from third-quarter 2004 other income (expenses), net ($15.6 million) which included a special charge associated with foreign exchange hedging charges totaling $15.7 million for contracts we entered into to hedge the euro-denominated purchase price for our July 2004 acquisition of the Akzo Nobel refinery catalysts business. Excluding the special charge, third-quarter 2004 other income (expenses), net amounted to $0.1 million. Other income (expenses), net for third-quarter 2004 also includes the effect of the reclassification of minority interest for our majority-owned subsidiary, Stannica LLC, totaling $1.4 million to the line item “minority interests in income of consolidated subsidiaries.”

 

Income Taxes

 

The effective income tax rate for third-quarter 2005 was 13.7%. The effective income tax rate includes a tax benefit ($4.9 million) associated with Section 965 of the Internal Revenue Code that was enacted as a part of the American Jobs Creation Act of 2004 which created a one-time tax savings during the period on certain accumulated and projected future earnings of certain controlled foreign subsidiaries which have been or will be repatriated for the third-quarter 2005 and the impact the of the geographical mix of income after the July 2004 refinery catalysts business acquisition.

 

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The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for third-quarter 2005 are as follows; the third-quarter 2004 effective income tax reconciliation is not meaningful due to the impact of third-quarter 2004 special items mentioned on page 22 above and therefore not presented:

 

     % of Income Before Income Taxes

 
    

Third Quarters Ended

September 30,


 
     2005

    2004

 

Federal statutory rate

   35.0 %   35.0 %

Section 965 repatriation

   (14.8 )   —    

Effect of minority interests

   (2.2 )   —    

Depletion

   (1.4 )   nm  

Extraterritorial income exclusion

   (0.8 )   nm  

Domestic production deduction

   (0.4 )   —    

State taxes, net of federal tax benefit

   0.3     nm  

Other items, net

   (2.0 )   nm  
    

 

Effective income tax rate

   13.7 %   (99.6 )%
    

 


nm – not meaningful

 

During the third-quarter 2005 reporting period, we made a third-quarter 2004 reclassification adjustment for minority interest in Stannica LLC of $1.4 million from other income (expenses), net including minority interest to a new minority interest line item after income (taxes) benefits on the consolidated statements of income. The impact of this reclassification adjustment on the effective income tax rate for third-quarter 2004 is not meaningful.

 

Minority Interests

 

Third-quarter 2005 minority interests ($2.1 million) include the minority ownership interests in Stannica LLC and JBC. Third-quarter 2005 includes two months of minority ownership interest in JBC, which had previously been accounted for on an equity basis. We changed our method of accounting for JBC to the consolidation method effective August 1, 2005, as a result of amendments to the related joint venture agreement. Third-quarter 2004 minority interests include the effect of the third-quarter 2005 reclassification adjustment ($1.4 million) of minority interest for our majority-owned subsidiary, Stannica LLC, from other income (expenses), net.

 

Results of Operations

 

Nine-Months 2005 Compared with Nine-Months 2004

 

Net Sales

 

Net sales by operating segment for the nine-month periods ended September 30, 2005 and 2004 are as follows:

 

     Net Sales

     Nine Months

     2005

   2004

     (In Thousands of Dollars)

Polymer Additives

   $ 597,893    $ 538,630

Catalysts

     493,629      153,795

Fine Chemicals

     427,802      370,247
    

  

Segment totals

   $ 1,519,324    $ 1,062,672
    

  

 

Net sales for nine-months 2005 of $1.5 billion were up $456.7 million (43.0%) from nine-months 2004 net sales of $1.1 billion.

 

Polymer Additives’ nine-months 2005 net sales increased $59.3 million (11.0%) from nine-months 2004 due mainly to improved pricing ($59.7 million) offset, in part, by lower shipments ($25.7 million) in flame retardants and improved pricing ($26.2 million) offset, in part, by lower shipments ($8.7 million) in stabilizers and curatives. Polymer Additives’ net sales were also favorably impacted by foreign exchange ($7.8 million).

 

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Catalysts’ nine-months 2005 net sales increased $339.8 million from nine-months 2004 due mainly to the July 2004 acquisition of the refinery catalysts business including the impact of higher pricing ($332.6 million) associated with increased raw material costs and higher shipments ($7.0 million).

 

Fine Chemicals’ nine-months 2005 net sales increased $57.6 million (15.5%) from nine-months 2004 primarily due to higher shipments ($18.1 million) and improved pricing ($11.1 million) in fine chemistry services and intermediates and improved pricing ($20.1 million) and higher shipments ($9.4 million) in performance chemicals offset, in part, by unfavorable pricing ($6.3 million) and lower shipments ($1.0 million) in pharmaceutical and agricultural actives. Fine Chemicals’ net sales were also favorably impacted by foreign exchange ($6.1 million).

 

Operating Costs and Expenses

 

Cost of goods sold for nine-months 2005 increased $361.3 million (42.7%) from nine-months 2004. Excluding the benefit from an August 2004 insurance settlement ($6.9 million) offset, in part, by a third-quarter 2004 valuation reserve ($3.4 million) for the potential recovery of a claim, costs of goods sold increased $357.7 million (42.1%). The increase in cost of goods sold was due mainly to the impact of the July 2004 acquisition of the refinery catalysts business as well as higher raw material and energy costs ($58.9 million) for our heritage businesses and the unfavorable impact of foreign exchange ($11.7 million) in the 2005 period. Our gross profit margin, excluding the third-quarter 2004 acquisition-related charges and the adjustments mentioned above, increased approximately 50 basis points to 20.5% in nine-months 2005 from 20.1% for nine-months 2004. The consolidation of JBC provided a favorable gross profit margin impact of 18 basis points.

 

Special acquisition-related costs for nine-months 2004 included a third-quarter 2004 $13.4 million charge related to a step-up increase in acquired inventory associated with the acquisition of the refinery catalysts business.

 

SG&A expenses and R&D expenses increased $67.7 million (54.2%) for nine-months 2005 versus nine-months 2004. The increase is primarily due to higher SG&A and R&D costs related to the July 2004 acquisition of the refinery catalysts business ($44.9 million), higher employee related costs ($7.3 million), higher legal and consulting expenses ($5.8 million), higher incentive compensation provision ($4.5 million) and the unfavorable impact of foreign exchange ($0.9 million). As a percentage of net sales, SG&A and R&D amounted to 12.7% for nine-months 2005 versus 11.7% for nine-months 2004.

 

Special items for nine-months 2005 include a June 2005 curtailment gain ($5.6 million) associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments and a second-quarter 2005 provisional charge ($0.7 million) for the potential settlement of future legal claims. Special items for nine-months 2004, included a third-quarter 2004 charge ($3.0 million) related to July 2004 purchased in-process R&D for the refinery catalysts business, a second-quarter 2004 charge ($0.6 million) related to the cleanup of the Pasadena plant zeolite facility and a first-quarter 2004 charge ($4.5 million) related to layoffs at the zeolite facility amounting to $3.6 million and related curtailment charges of $0.9 million as well as a third-quarter 2004 reversal of the first-quarter 2004 reduction in force reserve ($0.2 million).

 

Segment Income

 

Segment income by reportable operating segment for nine-month periods ended September 30, 2005 and 2004 is as follows:

 

     Segment Income

 
     Nine Months

 
     2005

    2004

 
     (In Thousands of Dollars)  

Polymer Additives

   $ 76,619     $ 68,226  

Catalysts

     64,171       4,021  

Fine Chemicals

     38,882       24,275  
    


 


Segment totals

     179,672       96,522  

Corporate and other expenses

     (32,668 )     (23,412 )
    


 


Segment income

   $ 147,004     $ 73,110  
    


 


 

Polymer Additives’ nine-months 2005 segment income increased $8.4 million (12.3%) from nine-months 2004. Nine-months 2005 segment income included an allocation of a June 2005 curtailment gain ($2.2 million) associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments. Nine-months 2004 segment income benefited from an allocation of an August 2004 insurance settlement ($3.6 million). Excluding the impact of the special adjustments in both periods, nine-months 2005 segment income increased

 

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$9.8 million (15.2%) from nine-months 2004 due mainly to improved pricing in flame retardants ($59.7 million) and stabilizers and curatives ($26.2 million), favorable results from joint ventures ($3.6 million) and the overall favorable net effects of foreign exchange ($2.2 million). These favorable impacts were offset, in part, by unfavorable raw material and energy costs ($31.2 million), unfavorable manufacturing costs ($37.8 million), a higher allocation of SG&A and R&D ($4.5 million) and lower shipments ($9.4 million), primarily flame retardants.

 

Catalysts’ nine-months 2005 segment income was up ($60.2 million) from nine-months 2004, which included purchase price adjustments associated with the July 2004 acquisition of the refinery catalysts business for the step-up accounting values assigned to the acquired inventory ($13.4 million) and the write-off of purchased in-process R&D charges associated with the acquisition ($3.0 million). Catalysts’ results for nine-months 2005 also benefited $0.6 million from an allocation of a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments. Excluding these adjustments, Catalysts’ nine-months 2005 segment income was up $43.2 million primarily due to the impact of the acquisition of the refinery catalysts business ($42.2 million), including the change in equity in our refinery catalysts business joint ventures ($10.3 million).

 

Fine Chemicals’ nine-months 2005 segment income increased $14.6 million (60.2%) from nine-months 2004. Nine-months 2005 segment income includes the benefit of $2.2 million from an allocation of a June 2005 curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments. Special items for nine-months 2004 included special charges for employee layoffs and cleanup activities totaling $4.9 million relating to the exit of the zeolites business initiated in first-quarter 2004. Third-quarter 2004 cost of goods sold included the benefit of an allocation of an August 2004 insurance settlement ($3.4 million) offset by a third-quarter 2004 valuation reserve charge ($3.4 million) for the potential recovery of a claim. Excluding the special items and adjustments in both periods, Fine Chemicals’ nine-months 2005 segment income increased $7.5 million (25.6%) from nine-months 2004 primarily due to higher pricing in performance chemicals ($20.1 million) and fine chemistry services and intermediates ($11.1 million), the impact of higher volumes in fine chemistry services and intermediates ($5.7 million) and pharmaceutical and agricultural actives ($4.5 million), and higher income from our joint ventures ($6.1 million – primarily JBC prior to consolidation). This increase was offset, in part, by higher overall raw material and energy costs ($22.6 million), lower pricing ($6.3 million) in pharmaceutical actives, a higher allocation of SG&A and R&D costs ($5.5 million), higher overall manufacturing costs ($4.3 million) and the impact of lower volumes in performance chemicals ($2.6 million).

 

Corporate and other expenses for nine-months 2005 increased $9.3 million (39.5%) from nine-months 2004 primarily due to higher employee incentive costs ($4.9 million) and higher legal and consulting costs ($3.9 million). Corporate and other expenses for nine-months 2005 includes two second-quarter 2005 special items: (1) a provisional charge of $0.7 million for the potential settlement of future legal claims; and (2) a $0.6 million allocation from a June 2005 special item curtailment gain associated with a change in coverage in our unfunded postretirement health care benefits plan for active employees’ future retiree medical premium subsidy payments.

 

Interest and Financing Expenses

 

Interest and financing expenses for nine-months 2005 amounted to $31.3 million, including the January 2005 write-off of $1.4 million of deferred financing expenses associated with our $450 million 364-day bridge loan that we entered into in connection with the refinery catalysts business acquisition and that we retired using the proceeds from our public offering of senior notes and common stock, an increase of $22.1 million from nine-months 2004, which included a third-quarter 2004 write-off of deferred financing expenses ($0.5 million) relating to the refinancing of our prior revolving credit agreement. This increase was primarily due to higher average outstanding debt in the 2005 period related to the July 2004 acquisition of the refinery catalysts business and the impact of the inclusion of JBC debt into our consolidated results effective August 1, 2005.

 

Other Income (Expenses), Net

 

Other income (expenses), net for nine-months 2005 amounted to $1.1 million up from nine-months 2004 other income (expenses), net ($12.3 million) which included a special charge associated with foreign exchange hedging charges totaling $12.8 million for contracts we entered into to hedge the euro-denominated purchase price for our July 2004 acquisition of the Akzo Nobel refinery catalysts business. Excluding the special charge, nine-months 2004 other income, net amounted to $0.6 million. Other income (expenses), net for nine-months 2005 and 2004 also include the effect of reclassification adjustments for the minority interest for our majority-owned subsidiary, Stannica LLC, totaling $2.5 million and $3.7 million, respectively, to the line item “minority interests in income of consolidated subsidiaries.”

 

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Table of Contents

Income Taxes

 

The effective income tax rate for nine-months 2005 was 25.3%, up from 24.6% for nine-months 2004 primarily due to the effect of the geographical mix of income from the July 2004 refinery catalysts business acquisition and the impact associated with Section 965 of the Internal Revenue Code that was enacted as a part of the American Jobs Creation Act of 2004 which created a one-time tax savings during the period on certain accumulated and projected future earnings of certain controlled foreign subsidiaries which have been or will be repatriated for the third-quarter 2005. The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for nine-months 2005 and 2004, respectively, are as follows:

 

     % of Income Before Income Taxes

 
    

Nine Months Ended

September 30,


 
     2005

    2004

 

Federal statutory rate

   35.0 %   35.0 %

Section 965 repatriation

   (4.2 )   —    

Effect of minority interests

   (1.4 )   (2.5 )

Depletion

   (1.2 )   (2.6 )

Extraterritorial income exclusion

   (1.2 )   (3.1 )

Domestic production deduction

   (0.3 )   —    

State taxes, net of federal tax benefit

   (0.1 )   0.7  

Other items, net

   (1.3 )   (2.9 )
    

 

Effective income tax rate

   25.3 %   24.6 %
    

 

 

During third-quarter 2005, we reclassified our minority interest in Stannica LLC for nine-months 2004, in the amount of $3.7 million from other income (expenses), net including minority interest to a new minority interest line item after income taxes in the consolidated statements of income. The impact of this reclassification reduced our effective income tax rate for the nine-month period ended September 30, 2004 from 26.5% to 24.6%.

 

Minority Interests

 

Minority interests for the nine-month periods 2005 and 2004 include the effect of the reclassification of minority interest for our majority-owned subsidiary, Stannica LLC, totaling $2.5 million and $3.7 million, respectively from other income (expenses), net in the current period as well as the two month’s effect of consolidating our 50% ownership interest in JBC. We previously accounted for our investment in JBC on the equity basis of accounting, but changed to the consolidation method effective August 1, 2005, as a result of amendments to the related joint venture agreement.

 

Financial Condition and Liquidity

 

Cash and cash equivalents at September 30, 2005 were $47.9 million, representing an increase of $1.5 million from $46.4 million at year-end 2004.

 

For the nine months ended September 30, 2005, cash provided from operating activities of $94.0 million, together with approximately $324.7 million and $147.9 million of proceeds from the issuance of senior notes and common stock, respectively, and $147.6 million of proceeds from borrowings, were used to cover operating activities, retire debt of $617.9 million, fund capital expenditures totaling $50.6 million, pay quarterly dividends to shareholders of $19.0 and make a working capital settlement payment to Akzo Nobel and pay additional professional fees relating to the refinery catalysts acquisition of approximately $7.0 million and $0.6 million, respectively.

 

We anticipate that cash provided from operations in the future and borrowings under our senior credit agreement will be sufficient to pay our operating expenses, satisfy debt-service obligations, fund capital expenditures and make dividend payments for the foreseeable future.

 

The change in our accumulated other comprehensive income from December 31, 2004 was due primarily to net foreign currency translation adjustments (strengthening of the U.S. dollar versus the euro), net of related deferred taxes.

 

        On July 29, 2004, in connection with the acquisition of the refinery catalysts business, we entered into (1) a senior credit agreement with a group of lenders, consisting of a $300 million revolving credit facility and a $450 million five-year term loan facility, and (2) a $450 million 364-day loan agreement. We used the initial borrowings under the senior credit agreement and the $450 million 364-day loan agreement to consummate the acquisition, refinance the then-existing credit agreement and pay related fees and expenses incurred in connection therewith. The remaining balance of the $450 million five-year facility is payable in quarterly installments of $11.25 million through September 30, 2008, with three final quarterly payments of $90 million beginning September 30, 2008 through March 31, 2009.

 

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Borrowings under our senior credit agreement are conditioned upon compliance with the following financial covenants: (a) consolidated fixed charge coverage ratio (as defined) must be greater than or equal to 1.25:1.00 as of the end of any fiscal quarter; (b) consolidated debt to capitalization ratio, as defined, at the end of any fiscal quarter must be less than or equal to 60%; (c) consolidated tangible domestic assets (as defined) must be or greater than or equal to $750 million for us to make investments in entities and enterprises that are organized outside the United States; and (d) with the exception of liens specified in our new senior credit agreement, liens may not attach to assets where the aggregate amount of all indebtedness secured by such liens at any time exceeds 10% of consolidated net worth (as defined in the agreement).

 

On July 8, 2005 we amended our senior credit agreement. Generally, the amendment (1) reduces the applicable borrowing rates and fees payable under the revolving credit facility and five-year term loan facility, based on the ratings of the our senior unsecured long-term debt as rated by outside credit rating agencies, (2) eliminates certain conditions for borrowings under the revolving credit facility, and (3) provides an option to increase the amount available for borrowings under the revolving credit facility by up to $50 million.

 

On January 20, 2005, we concluded the public offering of 4,573,000 shares of our common stock at a price of $34.00 per share ($32.46 per share after underwriting discount but before offering-related expenses) and $325 million of 5.10% senior notes at a price of 99.897% of par. We used the net proceeds from both of the offerings to retire the $450 million 364-day bridge loan that we incurred in connection with the acquisition of the refinery catalysts business. The notes are senior unsecured obligations and rank equally with all of our other senior unsecured indebtedness from time to time outstanding. The notes will be effectively subordinated to any of our future secured indebtedness and to existing and future indebtedness of our subsidiaries.

 

We may redeem the notes before their maturity, in whole at any time or in part from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the indenture governing the notes) plus 15 basis points, plus, in each case, accrued interest thereon to the date of redemption.

 

The principal amount of the notes becomes immediately due and payable upon the occurrence of certain bankruptcy or insolvency events involving us or certain of our subsidiaries and may be declared immediately due and payable by the trustee or the holders of not less than 25% of the notes upon the occurrence of an event of default. Events of default include, among other things: failure to pay principal or interest at required times; failure to perform or remain in breach of covenants within prescribed periods; and an event of default on any of our other indebtedness or certain of our subsidiaries of $40 million or more that is caused by a failure to make a payment when due or that results in the acceleration of that indebtedness before its maturity; and certain bankruptcy or insolvency events involving us or certain of our subsidiaries.

 

The noncurrent portion of our long-term debt amounted to $820.6 million at September 30, 2005, which includes $66.0 million from the consolidation of JBC, compared to $899.6 million at the end of 2004. Our long-term debt, including the current portion, as a percentage of total capitalization amounted to 49.2% at September 30, 2005. In addition, at September 30, 2005, we had the ability to borrow an additional $407 million under our various credit arrangements. Our consolidated balance sheet as of September 30, 2005 includes $66.5 million of certain JBC debt for which the Company guarantees 50% of this amount or $33.25 million. During the second quarter of 2005, both the Company and our joint venture partner each advanced $6 million to JBC for operating capital purposes.

 

On June 29, 2005, we announced a change in our coverage for our unfunded postretirement health care benefits plan effective December 31, 2005. The change in coverage (“plan change”) affects our paid retiree medical premium payments for future retirees and results in the recognition of a special item for the acceleration of a portion of current unrecognized prior service credits in the current period of $5.6 million ($3.6 million after income taxes, or seven cents per diluted share). The plan change special item is reflected as a curtailment gain in accordance with Statement of Financial Accounting Standards No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The plan change did not affect the medical premium subsidy of retired employees. The plan change will affect our future retiree medical premium subsidy in two ways: (1) active employees who are age 50 or older as of December 31, 2005 and who commence their retirement benefit after January 1, 2006 and otherwise meet all other eligibility requirements will be eligible to receive a revised fixed Company subsidy; and (2) active employees who are under the age of 50 on December 31, 2005 and who otherwise meet the eligibility requirements will remain eligible for retiree medical coverage, but will be responsible for 100% of the cost of their coverage.

 

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The plan change noted above reduced our accumulated postretirement benefit obligation (“APBO”) under our postretirement health care benefits plan by $16.2 million; the reduction in APBO will be amortized to income over the remaining service life to full eligibility of affected employees, amounting to four years, beginning July 1, 2005.

 

Our capital expenditures for nine-months 2005 were up by $13.0 million from the same period in 2004. Our capital spending program (including investments in joint ventures) is expected to be approximately $100 million over the next few years, with expenditures expected to expand capacity at existing facilities to support an expected increase in sales. We anticipate that future capital spending will be financed primarily with cash flow provided from operations with additional cash needed, if any, provided by borrowings, including borrowings under our senior credit agreement. The amount and timing of any additional borrowings will depend on our specific cash requirements.

 

The following table summarizes our contractual obligations and commitments in thousands of dollars at September 30, 2005:

 

    

4Q

2005


   2006

   2007

   2008

   2009

   2010

   There-after

Long-term debt borrowings and obligations

   $ 22,211    $ 51,670    $ 51,882    $ 209,606    $ 165,707    $ 7,591    $ 371,249

Expected interest payments on long-term debt borrowings and obligations*

     11,884      33,434      31,779      29,187      18,790      17,615      74,619

Operating lease obligations (rental)

     2,986      8,264      5,951      4,772      3,273      3,220      25,759

Take or pay / throughput agreements

     88,183      111,809      12,868      8,898      7,394      5,875      27,416

Letters of credit and guarantees

     6,062      37,253      8,257      3,342      221      53      1,128

Capital projects

     16,679      6,023      1,019      607      607      607      607

Additional investment commitment payments

     163      115      105      55      —        —        —  

Other

     196      —        —        —        —        —        —  
    

  

  

  

  

  

  

Total

   $ 148,364    $ 248,568    $ 111,861    $ 256,467    $ 195,992    $ 34,961    $ 500,778
    

  

  

  

  

  

  


* These amounts are based on a weighted-average interest rate of 5.1% for term loans and the revolving credit facility, 4.3% for variable rate long-term debt obligations and an interest rate of 5.1% for senior notes for 2005. The weighted average rate for years 2006 and thereafter are 4.8% for term loans and the revolving credit facility and 4.0% for the variable rate long-term debt obligations and an interest rate of 5.1% for the senior notes.

 

We are subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials (some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection of the environment. To our knowledge, we are currently complying, and expect to continue to comply, in all material respects with existing environmental laws, regulations, statutes and ordinances applicable to its operations. Compliance with federal, state, local and foreign environmental protection laws is not expected to have in the future a material effect on earnings or our competitive position, but increased legal or regulatory requirements could have an adverse effect on our results.

 

Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a potentially responsible party (“PRP”) and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Management believes that in most cases our participation is de minimis. Further, almost all such sites represent environmental issues that are quite mature and have been investigated, studied, and in many cases settled. In de minimis situations, our policy generally is to negotiate a consent decree and to pay any apportioned settlement, enabling us to be effectively relieved of any further liability as a PRP, except for remote contingencies. In other than de minimis PRP matters, our records indicate that unresolved PRP exposures should be immaterial. We accrue and expense our proportionate share of PRP costs. Because management has been actively involved in evaluating environmental matters, we are able to conclude that the outstanding environmental liabilities for unresolved PRP sites should not be material to operations.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no significant changes in our interest rate risk, marketable security price risk or raw material price risk from the information provided in the Annual Report on Form 10-K for the year ended December 31, 2004, except as noted below.

 

We had outstanding variable interest rate borrowings at September 30, 2005 of $500.0 million, bearing an average interest rate of 4.36%. A change of 0.125% in the interest rate applicable to these borrowings would change our annualized interest expense by approximately $0.6 million. Due to the increase in our outstanding indebtedness as a result of the acquisition of the refinery catalysts business, we may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs.

 

During the fourth quarter of 2004, we entered into treasury lock agreements (“T-locks”) with a notional value of $275 million to fix the yield on the U.S. Treasury security used to set the yield for approximately 85% of our public offering of $325 million of senior notes in January 2005. The T-locks fixed the yield on the U.S. Treasury security at approximately 4.25%. The value of the T-locks depended on the difference between (1) the yield-to-maturity of the 10-year U.S. Treasury security that has the maturity date most comparable to the maturity date of the notes when issued and (2) the fixed rate of approximately 4.25%. The cumulative effect of the T-lock agreements (a charge of approximately $2.2 million) is being amortized over the life of the notes as an adjustment to the interest expense of the notes. At September 30, 2005, there were unamortized realized losses of approximately $2.0 million ($1.3 million after income taxes) in accumulated other comprehensive income.

 

Our operations are exposed to market risk from changes in natural gas prices. We purchase natural gas to meet our production requirements for a portion of our 12-month rolling forecast for North American natural gas requirements. We enter into these natural gas futures contracts to help mitigate uncertainty and volatility of our usage requirements.

 

Our hedge transactions are executed with a major financial institution. Such derivatives are held to secure natural gas at fixed prices and not for trading.

 

The natural gas contracts qualify as cash flow hedges under SFAS No. 133 and are marked to market. The unrealized gains and/or losses are deferred and reported in accumulated other comprehensive income to the extent that the unrealized gains and losses are offset by the forecasted transaction. At September 30, 2005, there were unrealized gains of approximately $0.2 million ($0.1 million after income taxes). Realized natural gas hedge gains for third-quarter 2005 amounted to approximately $0.5 million ($0.3 million after income taxes). Any unrealized gains and/or losses on the derivative instrument that are not offset by the forecasted transaction are recorded in earnings.

 

ITEM 4. Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

No change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) occurred during the third quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

We have invested significant resources to document and analyze our system of internal controls, and we are continuing our evaluation of such internal controls versus the standards adopted by the Public Company Accounting Oversight Board. In the course of our ongoing evaluation, we have identified certain areas of our internal controls requiring improvement, and are in the process of designing enhanced processes and controls to address issues identified through this review. We believe that our efforts will allow management and our Independent Registered Public Accounting Firm to complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in connection with our annual report for the fiscal year ended December 31, 2005; however, we cannot guarantee such outcome.

 

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Part II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

On April 2, 2004, Albemarle Overseas Development Company (“AODC”), a wholly owned subsidiary of the Company, initiated a Request for Arbitration against Aventis S.A., the predecessor in interest to Sanofi Aventis (“Aventis”), through the International Chamber of Commerce, International Court of Arbitration, Paris, France. The dispute arises out of a 1992 Stock Purchase Agreement (“Agreement”) between a predecessor to AODC, and a predecessor to Aventis under which 100% of the stock of Potasse et Produits Chimiques, S.A., now known as Albemarle PPC (“APPC”), was acquired by AODC. The dispute relates to a chemical facility in Thann, France owned by APPC. Under the terms of the Agreement, we believe that Aventis is obligated to indemnify AODC and APPC, and hold us harmless from certain claims, losses, damages, costs or any other present or prospective liabilities arising out of soil and groundwater contamination at the site in Thann.

 

Beginning in May 2000, the French government, with respect to the management of pollution risk on the site of active industrial installations, required APPC to conduct an environmental risk study of the Thann facility. In June 2002, the French Government directed APPC to undertake a more detailed risk study of groundwater contamination. The administrative process of the French government is still ongoing as of the present date. AODC has demanded indemnification from Aventis for the cost of the studies, but Aventis has refused to pay.

 

The Request for Arbitration requests indemnification of AODC by Aventis for certain costs incurred by APPC, in connection with any environmental claims of the French government for the APPC facility and a declaratory judgment as to the liability of Aventis under the Agreement for costs to be incurred in the future by APPC in connection with such claims. Arbitration related to the question of liability took place in September 2005 and we currently expect a response from the arbitration panel by the end of 2005.

 

On July 13, 2005, the French environmental authorities instructed APPC to conduct additional testing and take certain measures with respect to the containment of certain contamination at the Thann facility. At this time, it is not possible to predict what the French government will otherwise require, since this matter is in its initial stages and environmental matters are subject to many uncertainties. We believe, however, that we are entitled to be fully indemnified by Aventis for all liabilities arising from this matter, but no assurance can be given that we will prevail in this matter. If we do not prevail in the arbitration and the government requires additional remediation, the costs of remediation could be significant.

 

In addition, we are involved from time to time in legal proceedings of types regarded as common in our businesses, particularly administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability and premises liability litigation. We maintain a financial accrual for these proceedings that includes defense costs and potential damages, as estimated by our general counsel. We also maintain insurance to mitigate certain of such risks.

 

ITEM 5. Other Information

 

None

 

ITEM 6. Exhibits

 

(a) Exhibits

 

31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
32.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

 

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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.

 

    ALBEMARLE CORPORATION
    (Registrant)
Date: November 9, 2005   By:  

/s/ RICHARD J. DIEMER, JR.


       

Richard J. Diemer, Jr.

Senior Vice President and

Chief Financial Officer

 

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EXHIBIT INDEX

 

    

Page

Numbers


31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)    37
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)    38
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350    39
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350    40

 

36

Section 302 CEO Certification

EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, Mark C. Rohr, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Albemarle Corporation for the period ending September 30, 2005,

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2005

/s/ MARK C. ROHR


Mark C. Rohr,

President and Chief Executive Officer

 

37

Section 302 CFO Certification

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

I, Richard J. Diemer, Jr. certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Albemarle Corporation for the period ending September 30, 2005;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2005

/s/ RICHARD J. DIEMER, JR.


Richard J. Diemer, Jr.

Senior Vice President and Chief Financial Officer

 

38

Section 906 CEO Certification

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Albemarle Corporation (the “Company”) for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark C. Rohr, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ MARK C. ROHR


Mark C. Rohr

President and Chief Executive Officer

November 9, 2005

 

39

Section 906 CFO Certification

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Albemarle Corporation (the “Company”) for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Diemer, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ RICHARD J. DIEMER, JR.


Richard J. Diemer, Jr.

Senior Vice President and Chief Financial Officer

November 9, 2005

 

40