Page 1 Page 1 of 23 Pages 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 March 31, 2002 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 (I.R.S. Employer incorporation or organization) Identification No.) 330 SOUTH FOURTH STREET P. O. BOX 1335 RICHMOND, VIRGINIA 23210 - -------------------- ------- (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 Number of shares of common stock, $.01 par value, outstanding as of April 30, 2002: 41,610,716
Page 2 ALBEMARLE CORPORATION I N D E X Page Number ------ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 3-4 Consolidated Statements of Income - Three Months Ended March 31, 2002 and 2001 5 Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2002 and 2001 6 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001 7 Notes to the Consolidated Financial Statements 8-14 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition, and Additional Information 15-21 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 21 ITEM 4. Submission of Matters to a Vote of Security Holders 22 ITEM 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23
Page 3 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements ---------------------- ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars In Thousands) ---------------------- <TABLE> <CAPTION> March 31, December 31, 2002 2001 ----------- ------------ (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 29,498 $ 30,585 Accounts receivable, less allowance for doubtful accounts (2002 - $1,910; 2001 - $4,193) 171,626 175,160 Inventories: Finished goods 121,804 114,337 Raw materials 18,809 19,551 Stores, supplies and other 25,222 25,773 ------------ ----------- 165,835 159,661 Deferred income taxes and prepaid expenses 17,378 18,255 ------------ ----------- Total current assets 384,337 383,661 ------------ ----------- Property, plant and equipment, at cost 1,434,971 1,425,203 Less accumulated depreciation and amortization 911,669 895,531 ------------ ----------- Net property, plant and equipment 523,302 529,672 Prepaid pension assets 131,510 128,195 Other assets and deferred charges 59,047 56,199 Goodwill 27,488 26,704 Other intangibles, net of amortization 5,226 5,044 ------------ ----------- Total assets $1,130,910 $1,129,475 ============ =========== </TABLE> See accompanying notes to the consolidated financial statements.
Page 4 ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars In Thousands) ---------------------- <TABLE> <CAPTION> March 31, December 31, 2002 2001 ------------ ------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: <S> <C> <C> Accounts payable $ 65,619 $ 63,559 Long-term debt, current portion 227,051 157,862 Accrued expenses 60,096 59,978 Dividends payable 5,404 5,915 Income taxes payable 19,907 16,523 ----------- ----------- Total current liabilities 378,077 303,837 ----------- ----------- Long-term debt 12,060 12,353 Other noncurrent liabilities 127,910 120,269 Deferred income taxes 100,961 99,714 Shareholders' equity: Common stock, $.01 par value, issued and outstanding- 41,546,341 in 2002 and 45,498,201 in 2001 415 455 Additional paid-in capital 171 51,025 Accumulated other comprehensive loss (19,377) (18,453) Retained earnings 530,693 560,275 ----------- ----------- Total shareholders' equity 511,902 593,302 ----------- ----------- Total liabilities and shareholders' equity $1,130,910 $1,129,475 =========== =========== </TABLE> See accompanying notes to the consolidated financial statements.
Page 5 ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (In Thousands Except Per-Share Amounts) --------------------------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------ 2002 2001 -------- -------- <S> <C> <C> Net sales $224,628 $224,410 Cost of goods sold 168,868 164,955 -------- -------- Gross profit 55,760 59,455 Selling, general and administrative expenses 25,704 22,704 Research and development expenses 4,776 5,777 Special item 850 - -------- -------- Operating profit 24,430 30,974 Interest and financing expenses (1,225) (1,069) Other income, net 792 1,582 -------- -------- Income before income taxes 23,997 31,487 Income taxes 7,199 8,942 -------- -------- Net income $ 16,798 $ 22,545 ======== ======== Basic earnings per share $ 0.39 $ 0.49 ======== ======== Diluted earnings per share $ 0.38 $ 0.48 ======== ======== Cash dividends declared per share of common stock $ 0.13 $ 0.26 ======== ======== </TABLE> See accompanying notes to the consolidated financial statements.
Page 6 ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ----------------------------------------------- (Dollars In Thousands) ---------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------ 2002 2001 --------- --------- <S> <C> <C> Net income $16,798 $22,545 Other comprehensive gain (loss), net of tax: Unrealized gain (loss) on securities available for sale 27 (271) Foreign currency translation adjustments (951) (3,801) --------- --------- Other comprehensive loss (924) (4,072) --------- --------- Comprehensive income $15,874 $18,473 ========= ========= </TABLE> See accompanying notes to the consolidated financial statements.
Page 7 ALBEMARLE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Dollars In Thousands) ---------------------- (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- 2002 2001 --------- --------- <S> <C> <C> Cash and cash equivalents at beginning of year $ 30,585 $ 19,300 --------- --------- Cash flows from operating activities: Net income 16,798 22,545 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 20,269 18,445 Working capital increase (decrease) excluding cash and cash equivalents 1,057 (8,759) Other, net (4,452) (795) --------- --------- Net cash provided from operating activities 33,672 31,436 --------- --------- Cash flows from investing activities: Capital expenditures (8,182) (14,469) Investments in joint ventures and nonmarketable securities (1,277) (6,143) Restricted cash from industrial revenue bond proceeds 1,741 - Other, net 1,872 22 --------- --------- Net cash used in investing activities (5,846) (20,590) --------- --------- Cash flows from financing activities: Proceeds from borrowings 100,099 - Repayments of long-term debt (31,164) (9,216) Dividends paid (5,918) (5,956) Purchases of common stock (92,943) - Proceeds from exercise of stock options 445 591 --------- --------- Net cash used in financing activities (29,481) (14,581) --------- --------- Net effect of foreign exchange on cash and cash equivalents 568 (1,000) --------- --------- Net decrease in cash and cash equivalents (1,087) (4,735) --------- --------- Cash and cash equivalents at end of period $ 29,498 $ 14,565 ========= ========= </TABLE> See accompanying notes to the consolidated financial statements
Page 8 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) 1. In the opinion of management, the accompanying consolidated financial statements of Albemarle Corporation and 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 March 31, 2002, and December 31, 2001, the consolidated results of operations and comprehensive income for the three-month periods ended March 31, 2002, and 2001, and condensed consolidated cash flows for the three-month periods ended March 31, 2002, and 2001. All adjustments are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2001 Annual Report & Form 10-K filed on February 27, 2002. The December 31, 2001 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the three-month period ended March 31, 2002, are not necessarily indicative of the results to be expected for the full year. 2. Long-term debt consists of the following: March 31, December 31, 2002 2001 ------------ ------------ Variable-rate bank loans $213,940 $144,600 Foreign borrowings 13,174 13,584 Industrial revenue bonds 11,000 11,000 Miscellaneous 997 1,031 ------------ ------------ Total 239,111 170,215 Less amounts due within one year 227,051 157,862 ------------ ------------ Long-term debt $ 12,060 $ 12,353 ============ ============ The Company's Competitive Advance and Revolving Facility Agreement ("Revolving Credit Agreement") will mature on September 29, 2002. Accordingly, the balance outstanding thereunder is included in current liabilities. The Company anticipates entering into a new long-term agreement in the coming months. 3. Cost of goods sold includes foreign exchange transaction gains (losses) of $791 and ($502) for the three-months ended March 31, 2002 and 2001, respectively.
Page 9 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) 4. Basic and diluted earnings per share for the three-month periods ended March 31, 2002 and 2001, are calculated as follows: Three Months Ended March 31, --------------------------- Basic earnings per share 2002 2001 - ------------------------ -------- -------- Numerator: Income available to stockholders, as reported $16,798 $22,545 -------- -------- Denominator: Average number of shares of common stock outstanding 43,438 45,838 -------- -------- Basic earnings per share $ 0.39 $ 0.49 ======== ======== Diluted earnings per share - -------------------------- Numerator: Income available to stockholders, as reported $16,798 $22,545 -------- -------- Denominator: Average number of shares of common stock outstanding 43,438 45,838 Shares issuable upon exercise of stock options and other common stock equivalents 752 848 -------- -------- Total shares 44,190 46,686 -------- -------- Diluted earnings per share $ 0.38 $ 0.48 ======== ======== 5. Cash dividends declared for the three-month period ended March 31, 2001 totaled $0.26 per share which included a dividend of $0.13 per share declared on February 28, 2001, payable April 1, 2001, as well as a dividend of $0.13 per share declared March 28, 2001, payable July 1, 2001.
Page 10 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) 6. The significant differences between the U.S. Federal statutory income tax rate on pretax income and the effective income tax rate for the three-month periods ended March 31, 2002 and 2001, respectively, are as follows: % of Income Before Income Taxes --------------------------------- Three Months Ended March 31, --------------------------------- 2002 2001 -------- --------- Federal statutory rate 35.0% 35.0% Foreign sales corporation benefit (2.4) (2.5) State taxes, net of federal tax benefit 1.0 1.0 Depletion (1.9) (1.4) Reversal of valuation allowance - (3.3) Other (1.7) (0.4) --------- --------- Effective income tax rate 30.0% 28.4% ========= ========= During the first quarter of 2001, the Company released a valuation allowance that had been required on a deferred tax asset related to the Company's facilities in Louvain-la-Neuve, Belgium, which was established in 1996 when the Company's Olefins Business was sold. 7. On May 31, 2001, the Company, through its wholly-owned subsidiary Albemarle Deutschland GmbH, acquired Martinswerk GmbH for approximately $34,000 in cash plus expenses and the assumption of approximately $64,000 in current and long-term liabilities. The assets acquired included Martinswerk's manufacturing facilities and headquarters in Bergheim, Germany and its 50-percent stake in Magnifin Magnesiaprodukte GmbH, which has manufacturing facilities at St. Jakobs Breitenau, Austria. The acquisition was financed through the Company's existing Revolving Credit Agreement. The acquisition is being accounted for by the purchase method of accounting, and accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. See pro forma financial information presented below. The purchase price allocation is still open at March 31, 2002, pending the Company's final determination of an accrual related to the valuation and the number of participants of the Company's liability for a planned workforce reduction in Germany which will be finalized by May 31, 2002. Martinswerk produces mineral-based flame retardants for the plastics and rubber markets, brightening pigments for high-quality paper applications and specialty aluminum oxides for polishing, catalyst and niche ceramic applications. Magnifin produces high-purity magnesium hydroxide flame retardant products used in applications requiring higher processing temperatures.
Page 11 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) On July 1, 2001, the Company acquired the custom and fine chemicals businesses of ChemFirst Inc. for approximately $79,000 in cash, plus the assumption of certain current liabilities and expenses associated with the acquisition. The acquisition was financed through the Company's existing Revolving Credit Agreement. The Asset Purchase Agreement provides for additional contingent payments to ChemFirst Inc. which are dependant upon the contribution margin of certain products and are not expected to exceed $10,000. Additional payments, if any, will be recorded as goodwill. The acquisition is being accounted for by the purchase method of accounting, and accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. See pro forma financial information presented below. The purchase price allocation valuation, excluding the effects of additional contingent consideration, has been included in the March 31, 2002 financial statements based upon the use of certain estimates. The assets acquired included working capital, property, plant and equipment and certain intangibles, including goodwill and technical know how. The purchase price allocation is still open at March 31, 2002, pending the Company's receipt and reconciliation of certain inventory information from ChemFirst Inc. We expect to finalize the purchase price allocation in the second quarter of 2002. Albemarle's new businesses focus on the manufacture of custom and proprietary fine chemicals and chemical services for the pharmaceutical and life sciences industries. They also include additives for ultraviolet light-cured polymer coatings, which should broaden the portfolio of Albemarle's polymer chemicals business. Included is a multi-functional manufacturing plant in Tyrone, Pennsylvania, and a cGMP (current Good Manufacturing Practices) pilot plant in Dayton, Ohio. Pro forma information is presented as follows for the three-month period ended March 31, 2001, prior to the finalization of the purchase price allocations, as if Martinswerk GmbH and Martinswerk's 50-percent stake in Magnifin Magnesiaprodukte GmbH, and the custom and fine chemicals businesses of ChemFirst Inc., which were acquired on May 31, 2001 and July 1, 2001, respectively, had been acquired on January 1, 2001. Three Months Ended March 31, 2001 ------------------------ Net sales $265,591 ============= Net income $24,736 ============= Basic earnings per share $0.54 ============= Diluted earnings per share $0.53 ============= The pro forma information presented above primarily includes adjustments for interest expense, depreciation expense and amortization of intangibles.
Page 12 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) 8. On February 13, 2002, the Company completed the purchase of 4,000,000 shares of its common stock from Bruce C. Gottwald and his related immediate family interests for an aggregate price of $92,680. The Company's purchase price was 25 cents per share less than the weighted average trading price from New York Stock Exchange transactions in Albemarle common stock during the 10 business days' period beginning with the third business day following the announcement of Albemarle's 2001 year-end earnings. 9. During the first quarter of 2002, the Company continued its efforts to reduce operating costs through an involuntary separation program that resulted in a special charge of $850 ($541 after income taxes or 1 cent per share on a diluted basis). The program impacted a total of 12 salaried employees throughout the Company. The following table summarizes the total liability assumed related to the involuntary separation program: Three Months Ended March 31, 2002 ------------------ Total 2002 workforce reduction charge $1,114 Less: over accrual from prior year accruals 264 ------------------ Net workforce reduction charge for 2002 $ 850 ================== Approximately $733 of the total 2002 work force accrual was paid in the first quarter. In addition, essentially all of the fourth quarter 2001 work force accrual was paid during the first quarter of 2002. 10. During the first quarter ended March 31, 2002, the Company recorded a net charge of $2,000 ($1,274 after income taxes or 3 cents per share on a diluted basis) to costs of sales that related to the discontinuance of product support for and the withdrawal from a water treatment venture. The Company's balance sheet at March 31, 2002, included entries reflecting the accrual of a probable insurance recovery of $3,700 in other assets and deferred charges and accruals totaling $5,700 in current and noncurrent liabilities. 11. The Company has recorded environmental liabilities of approximately $29,970 and $30,245 at March 31, 2002 and December 31, 2001, respectively, which represents management's best estimate of the Company's future remediation and other anticipated environmental costs relating to past operations. We believe that such estimate is reasonable based on available information and that the liabilities and related loss contingencies and the expected outcome of uncertainties have been adequately described in the Company's consolidated financial
Page 13 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) statements at December 31, 2001. 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 $10,000 before income taxes, to be incurred over a period of time. However, 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 impact on its financial condition or results of operations, but could have a material adverse impact in a particular quarterly reporting period. 12. The Company is a global manufacturer of specialty polymer and fine chemicals, currently grouped into two operating segments: Polymer Chemicals and Fine Chemicals. The operating segments were determined based on management responsibility. The Polymer Chemicals segment is comprised of flame retardants, organometallics and catalysts, and polymer additives and intermediates. The Fine Chemicals operating segment is comprised of agrichemicals and pharmachemicals, performance chemicals and fine chemistry services. Segment data includes intersegment transfers of raw materials at cost and foreign exchange gains and losses as well as allocations for certain corporate costs. The corporate and other expenses include certain corporate-related items not allocated to the reportable segments. <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------------------------------------------------- 2002 2001 ----------------------------- ----------------------------- Summary of Segment Results Revenues Income Revenues Income ---------- --------- ---------- -------- <S> <C> <C> <C> <C> Polymer Chemicals $116,463 $11,729 $120,956 $ 20,858 Fine Chemicals 108,165 16,503 103,454 14,892 ---------- --------- ---------- --------- Segment totals $224,628 28,232 $224,410 35,750 ========== ========== Corporate and other expenses (3,802) (4,776) --------- --------- Operating profit 24,430 30,974 Interest and financing expenses (1,225) (1,069) Other income, net 792 1,582 --------- --------- Income before income taxes $ 23,997 $ 31,487 ========= ========= </TABLE>
Page 14 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share and Per-Share Amounts) (Unaudited) 13. During July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 eliminates the amortization of goodwill and instead requires a periodic review of any goodwill balance for possible impairment. SFAS No. 142 also requires that goodwill be allocated at the reporting unit level. This statement was effective for years beginning after December 15, 2001, with the exception of goodwill and intangible assets acquired after June 30, 2001, which were subject immediately to the nonamortization and amortization provisions of the statement. For financial reporting purposes, the Company discontinued amortization of goodwill as of January 1, 2002, with the exception of goodwill associated with the acquisition of the custom and fine chemicals businesses of ChemFirst Inc., and is in compliance with periodic impairment test procedures. The Company has completed its transitional goodwill impairment testing and has determined that goodwill is not impaired at January 1, 2002. The following schedule presents net income, basic earnings per share and diluted earnings per share, exclusive of goodwill amortization expense, including any related tax effects, for all periods presented in which the standard had not been adopted. Three Months Ended March 31, 2001 --------------------- Reported net income $22,545 Add back: goodwill amortization, net of tax 281 --------------------- Adjusted net income $22,826 ===================== Basic earnings per share: Reported net income $0.49 Goodwill amortization, net of tax 0.01 --------------------- Adjusted net income $0.50 ===================== Diluted earnings per share: Reported net income $0.48 Goodwill amortization, net of tax 0.01 --------------------- Adjusted net income $0.49 ===================== During October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on January 1, 2002. This Statement has not had an impact on the Company's financial statements as of March 31, 2002.
Page 15 ITEM 2. Management's Discussion and Analysis of Results of Operations -------------------------------------------------------------- and Financial Condition and Additional Information --------------------------------------------------- The following is management's discussion and analysis of certain significant factors affecting the results of operations of Albemarle Corporation ("Albemarle" or "the Company") during the periods included in the accompanying consolidated statements of income and changes in the Company's financial condition since December 31, 2001. Some of the information presented in the following discussion may constitute forward-looking comments within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include, without limitation, the timing of orders received from customers, the gain or loss of significant customers, competition from other manufacturers, changes in the demand for the Company's products, increases in the cost of the products, changes in the market in general, fluctuations in foreign currencies and significant changes in new product introduction resulting in an increase in capital project requests and approvals leading to additional capital spending. Results of Operations --------------------- First Quarter 2002 Compared with First Quarter 2001 --------------------------------------------------- Net sales for first quarter 2002 of $224.6 million were about even with first quarter 2001 net sales of $224.4 million primarily due to $35.6 million in first quarter net sales from the mid-year 2001 acquisitions of Martinswerk GmbH and the custom and fine chemicals businesses of ChemFirst Inc. offset, in part, by lower shipments and selling prices in flame retardants ($14.1 million), catalysts and additives ($7.6 million) and agrichemicals ($4.9 million), lower selling prices and shipments in performance chemicals ($6.7 million) and lower shipments in pharmachemicals ($2.2 million). The gross profit margin decreased to 24.8% in first quarter 2002 from 26.5% for the corresponding period in 2001. First quarter 2002 operating profit was down 21.1% or $6.5 million from first quarter 2001 operating profit primarily due to lower shipments and selling prices in flame retardants and catalyst and additives and the net unfavorable effects of foreign exchange offset, in part, by favorable raw material and energy costs and the favorable net effects of the mid-year 2001 acquisitions. First quarter 2002 operating profit also includes a charge of $2.0 million ($5.7 million, net of a probable insurance recovery of $3.7 million) to costs of sales that related to the discontinuance of product support for and the withdrawal from a water treatment venture as well as a $0.9 million charge for workforce reductions as the Company continues to aggressively pursue its cost reduction efforts. Selling, general and administrative expenses ("SG&A") and research and development expenses ("R&D"), increased 7.0% or $2.0 million in the first quarter of 2002 versus first quarter 2001 primarily due to SG&A and R&D costs related to the businesses acquired in 2001 ($3.2 million) offset, in part, by the benefits of cost reduction efforts initiated in 2001. As a percentage of net sales, selling, general and administrative expenses, and research and
Page 16 development expenses, were 13.6% in 2002 versus 12.7% in the 2001 quarter. OPERATING SEGMENTS Net sales by reportable business operating segment for the first quarter periods ended March 31, 2002 and 2001 are as follows: Net Sales (In Thousands) ------------------------------ 2002 2001 ----------- ----------- Polymer Chemicals $116,463 $120,956 Fine Chemicals 108,165 103,454 ----------- ----------- Segment totals $224,628 $224,410 =========== =========== Polymer Chemicals' net sales for first quarter 2002 decreased 3.7%, or $4.5 million, from first quarter 2001 net sales, primarily due to lower shipments and pricing of flame retardants ($14.1 million) and catalysts and additives ($7.6 million), which includes the unfavorable net effects of foreign exchange ($2.4 million) offset, in part, by net sales of $17.1 million from the May 31, 2001 acquisition of Martinswerk GmbH. Fine Chemicals' net sales for first quarter 2002 increased 4.6% or $4.7 million from first quarter 2001 primarily due to net sales of $18.5 million from the mid-year 2001 acquisitions of Martinswerk GmbH and the custom and fine chemicals businesses of ChemFirst Inc. offset, in part, by lower pricing and shipments in performance chemicals ($6.7 million), and lower shipments and pricing in agrichemicals ($4.9 million) and pharmachemicals ($2.2 million), which includes the unfavorable net effects of foreign exchange ($1.5 million). Operating profit by reportable business operating segment for the first quarter periods ended March 31, 2002, and 2001 are as follows: Operating Profit (In Thousands) ----------------------------------- 2002 2001 -------------- -------------- Polymer Chemicals $11,729 $20,858 Fine Chemicals 16,503 14,892 -------------- -------------- Segment totals 28,232 35,750 Corporate and other expenses (3,802) (4,776) -------------- ---------------- Operating profit $24,430 $30,974 ============== ================ Polymer Chemicals' first quarter 2002 segment operating profit was down 43.8% or $9.1 million from first quarter 2001 primarily due to lower sales volumes ($5.0 million), net of the favorable effects of the mid-year 2001 acquisition of Martinswerk GmbH and sales prices ($4.3 million), a reclassification of bad debt expense for an account written off to the corporate allowance for doubtful accounts from corporate and other expenses ($2.0 million) and the net unfavorable effects of foreign exchange ($2.0 million) offset, in part, by favorable raw material costs ($4.6 million).
Page 17 Fine Chemicals' first quarter 2002 segment operating profit increased 10.8% or $1.6 million from first quarter 2001 primarily due to favorable plant utilization and production costs ($7.5 million) and favorable raw material costs ($4.9 million) offset, in part, by lower sales prices ($4.6 million) and volumes ($3.6 million) and a charge of $2.0 million ($5.7 million, net of a probable insurance recovery of $3.7 million) that related to the discontinuance of product support for and the withdrawal from a water treatment venture. Corporate and other expenses for the first quarter of 2002 were down 20.4%, or $1.0 million, from first quarter 2001 primarily due to a reclassification of bad debt expense to Polymer Chemicals ($2.0 million) offset, in part, by a first quarter 2001 workforce reduction charge ($0.9 million). INTEREST AND FINANCING EXPENSES Interest and financing expenses for first quarter 2002 increased $0.1 million from $1.1 million in first quarter 2001. OTHER INCOME, NET Other income, net for the first quarter 2002 amounted to $0.8 million, down $0.8 million from the corresponding period in 2001. INCOME TAXES Income taxes for first quarter 2002 were lower compared to the same period in 2001 primarily due to lower income before taxes in 2002. The first quarter 2002 effective income tax rate was 30.0%, up from 28.4% in first quarter 2001. During the first quarter of 2001, the Company released a valuation allowance that had been required on a deferred tax asset related to the Company's facilities in Louvain-la-Neuve, Belgium, which was established in 1996 when the Company's Olefins Business was sold. Financial Condition and Liquidity --------------------------------- Cash and cash equivalents at March 31, 2002, were $29.5 million, representing a decrease of $1.1 million from $30.6 million at year-end 2001. Cash flows provided from operating activities of $33.7 million, together with $100.1 million of proceeds from borrowings primarily from the Company's Competitive Advance and Revolving Facility Agreement ("Revolving Credit Agreement") were used primarily to purchase 4,000,000 shares of the Company's common stock, to cover repayment of debt, capital expenditures, and payment of dividends. The Company anticipates that cash provided from operations in the future will be sufficient to pay its operating expenses, satisfy debt-service obligations and make dividend payments. The change in the Company's accumulated other comprehensive loss from December 31, 2001, was primarily due to net foreign currency adjustments, net of related deferred taxes, primarily related to the strengthening of the U.S. Dollar versus the Euro and the Japanese Yen.
Page 18 The noncurrent portion of the Company's long-term debt amounted to $12.1 million at March 31, 2002, compared to $12.4 million at the end of 2001. The Company's long-term debt, including the current portion, as a percentage of total capitalization amounted to 31.8% at March 31, 2002. The Company is guarantor of $11.8 million of long-term debt, in the form of commitments, on behalf of its 50-percent owned joint venture company, Jordan Bromine Company Limited. The Company's long-term debt, including the guarantee, as a percent of total capitalization amounted to 32.9% at March 31, 2002. The Company's Revolving Credit Agreement will mature on September 29, 2002. Accordingly, the balance outstanding at March 31, 2002, is included in current liabilities. The Company anticipates entering into a new long-term agreement in the coming months based upon market conditions at the time the agreement is consummated. The Company's capital expenditures in the first three months of 2002 were lower than the same period of 2001. For the year capital expenditures are forecasted to be slightly lower than the 2001 level. Capital spending will be financed primarily with cash flow from operations with additional cash needed, if any, to be provided from debt. The amount and timing of any additional borrowings will depend on the Company's specific cash requirements. The Company is 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 the Company's knowledge, it currently is complying, and expects to continue to comply, in all material respects with existing environmental laws, regulations, statutes and ordinances. Such compliance with federal, state, local and foreign environmental protection laws is not expected to have in the future a material effect on earnings or the competitive position of Albemarle. Among other environmental requirements, the Company is subject to the federal Superfund law, and similar state laws, under which the Company may be designated as a potentially responsible party and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Additional Information ---------------------- Summary of Critical Accounting Policies: ---------------------------------------- CONSOLIDATION The consolidated financial statements include the accounts and operations of Albemarle Corporation and all of its majority-owned and controlled subsidiaries. The Company applies the equity method of accounting for investments between 20% and 50% owned and the Company has significant influence. All significant intercompany accounts and transactions are eliminated in consolidation. ESTIMATES AND RECLASSIFICATIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
Page 19 amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION Sales revenue is recognized when (1) ownership and all rewards and risks of loss have been transferred to the buyer, (2) the price is fixed and determinable and (3) collectibility is reasonably assured. Revenue from services is recognized when costs of providing services are incurred. INVENTORIES Inventories are stated at the lower of cost or market, with cost determined on the last-in, first-out ("LIFO") basis for substantially all domestic inventories except stores and supplies, and on either the weighted-average or first-in, first-out cost basis for other inventories. PROPERTY, PLANT AND EQUIPMENT Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income. Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets. The Company evaluates historical and expected undiscounted operating cash flows of the related business segments or fair value of property, plant and equipment to determine the future recoverability of any property, plant and equipment recorded. Recorded property, plant and equipment is reevaluated on the same basis at the end of each accounting period whenever any significant permanent changes in business or circumstances have occurred which might impair recovery. The costs of brine wells, leases and royalty interests are primarily amortized over the estimated average life of the well. On a yearly basis for all wells, this approximates a unit-of-production method based upon estimated reserves and production volumes. ENVIRONMENTAL COMPLIANCE AND REMEDIATION Environmental compliance costs include the cost of purchasing and/or constructing assets to prevent, limit and/or control pollution or to monitor the environmental status at various locations. These costs are capitalized and depreciated based on estimated useful lives. Environmental compliance costs also include maintenance and operating costs with respect to pollution prevention and control facilities and other administrative costs. Such operating costs are expensed as incurred. Environmental remediation costs of facilities used in current operations are generally immaterial and are expensed as incurred.
Page 20 The Company accrues for environmental remediation costs and post-remediation costs on an undiscounted basis at facilities or off-plant disposal sites that relate to existing conditions caused by past operations in the accounting period in which responsibility is established and when the related costs are estimable. In developing these cost estimates, evaluation is given to currently available facts regarding each site, with consideration given to existing technology, presently enacted laws and regulations, prior experience in remediation of contaminated sites, the financial capability of other potentially responsible parties and other factors, subject to uncertainties inherent in the estimation process. Additionally, these estimates are reviewed periodically, with adjustments to the accruals recorded as necessary. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Annual costs of pension plans are determined actuarially based on Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87"). The Company's policy is to fund U.S. pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974 and generally for obligations under its foreign plans to deposit funds with trustees and/or under insurance policies. Annual costs of other postretirement plans are accounted for based on SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The policy of the Company is to fund post-retirement health benefits for retirees on a pay-as-you-go basis. INCOME TAXES The Company and its subsidiaries file consolidated U.S. Federal income tax returns and individual foreign income tax returns. Deferred income taxes result from temporary differences in the recognition of income and expenses for financial and income tax reporting purposes, using the liability or balance sheet method. Such temporary differences result primarily from differences between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. It is the Company's policy to record deferred income taxes on any undistributed earnings of foreign subsidiaries that are not deemed to be, or are not intended to be, permanently reinvested in those subsidiaries. Outlook ------- In Polymer Chemicals, we hope the improvement in flame retardant volumes that we have seen earlier this year will continue. We are uncertain, at this point, about its sustainability because we are still trying to validate whether it is based on true end-market demand strength or the result of inventory buildup in the supply chain. We hope to have this sorted out by the middle of the year. We are, however, seeing some erosion in pricing, primarily in some of our larger volume flame retardant products, brought on by excess capacity that resulted from the electronics industry slowdown. We continue to watch the polyolefins end markets closely in order to determine when we can expect strengthening in our customers demand for our catalysts and additives businesses.
Page 21 In Fine Chemicals, we anticipate a slightly weaker second quarter of 2002 due to the seasonality in our agrichemicals business, but then stronger succeeding quarters such that 2002 should exceed last year operating profits. Overall, we believe our business will be essentially flat through the first half of this year followed by a period of gradual improvement as the polymer industry starts to recover. Additional information regarding the Company, its products, markets and financial performance is provided at the Company's Internet web site, www.Albemarle.com. 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 our Form 10-K for the year ended December 31, 2001. Part II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings ------------------ The Company and its subsidiaries are involved from time to time in legal proceedings of types regarded as common in the Company's businesses, particularly administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, and products liability litigation. While it is not possible to predict or determine the outcome of the proceedings presently pending, in the Company's opinion they should not result ultimately in liabilities likely to have a material adverse effect upon the results of operations or financial condition of the Company and its subsidiaries on a consolidated basis.
Page 22 ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- At the annual meeting of shareholders held on March 27, 2002, there were 41,535,476 shares of common stock outstanding and entitled to vote, and 37,901,755 were represented in person or by proxy. The voting shareholders elected the directors nominated in the Proxy Statement with the following affirmative votes and votes withheld: Director Affirmative Votes Votes Withheld --------- ----------------- -------------- Craig R. Andersson 37,229,678 672,077 Floyd D. Gottwald, Jr. 37,117,213 784,542 John D. Gottwald 37,149,751 752,004 William M. Gottwald 37,123,017 778,738 Richard L. Morrill 37,224,721 677,034 Seymour S. Preston III 37,228,045 673,710 Paul F. Rocheleau 37,220,437 681,318 Mark C. Rohr 37,204,177 697,578 Charles E. Stewart 37,151,695 750,060 Charles B. Walker 37,208,274 693,481 Anne M. Whittemore 37,225,684 676,071 The shareholders also approved the appointment of PricewaterhouseCoopers LLP as the Company's auditors for 2002 with 36,766,985 affirmative votes, 1,069,845 negative votes and 64,925 abstentions. ITEM 6. Exhibits and Reports on Form 8-K --------------------------------- (a) Exhibits - None (b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
Page 23 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: May 8, 2002 By: s/ Robert G. Kirchhoefer -------------------------- Robert G. Kirchhoefer Treasurer and Chief Accounting Officer (Principal Accounting Officer)