1 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, 1997 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 October 31, 1997: 55,402,619
2 ALBEMARLE CORPORATION I N D E X Page Number ------ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3-4 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 6 Notes to the Consolidated Financial Statements 7-12 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition and Additional Information 13-17 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 18 ITEM 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 EXHIBIT INDEX 20 Exhibit 28.1 Current By-Laws As Amended 21-35 Exhibit 27 Financial Data Schedule 36-37
3 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements -------------------- <TABLE> ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars In Thousands) ----------------------- <CAPTION> September 30, 1997 December 31, (Unaudited) 1996 --------------- ------------- ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 10,339 $ 14,242 Accounts receivable, less allowance for doubtful accounts (1997- $1,510; 1996 - $1,290) 150,457 141,293 Inventories: Finished goods 63,441 58,271 Raw materials 14,139 10,148 Work-in-process 167 247 Stores, supplies and other 17,625 15,833 --------------- ------------- Total inventories 95,372 84,499 Deferred income taxes and prepaid expenses 17,248 19,107 --------------- ------------- Total current assets 273,416 259,141 --------------- ------------- Property, plant and equipment, at cost 1,180,169 1,148,832 Less accumulated depreciation and amortization (682,270) (653,108) --------------- ------------- Net property, plant and equipment 497,899 495,724 Other assets and deferred charges 74,694 68,304 Goodwill and other intangibles, net of amortization 18,107 23,092 --------------- ------------- Total assets $ 864,116 $ 846,261 --------------- ------------- --------------- ------------- <FN> See accompanying notes to the consolidated financial statements. </TABLE>
4 <TABLE> ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Dollars In Thousands) ---------------------- <CAPTION> September 30, 1997 December 31, (Unaudited) 1996 --------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Current liabilities: Accounts payable $ 53,499 $ 66,968 Long-term debt, current portion 380 7,457 Accrued expenses 51,674 55,783 Dividends payable 4,988 3,853 Income taxes payable 14,578 13,887 -------------- ------------- Total current liabilities 125,119 147,948 --------------- ------------- Long-term debt 38,055 24,406 Other noncurrent liabilities 67,501 64,166 Deferred income taxes 93,467 104,543 Shareholders' equity: Common stock, $.01 par value, issued - 55,432,619 in 1997 and 55,046,183 in 1996, respectively 554 550 Additional paid-in capital 256,154 250,890 Foreign currency translation adjustments (193) 16,677 Retained earnings 283,459 237,081 --------------- ------------- Total shareholders' equity 539,974 505,198 --------------- ------------- Total liabilities and shareholders' equity $ 864,116 $ 846,261 --------------- ------------- --------------- ------------- <FN> See accompanying notes to the consolidated financial statements. </TABLE>
5 <TABLE> ALBEMARLE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (In Thousands Except Per-Share Amounts) ---------------------------------------- (Unaudited) <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------ 1997 1996 1997 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $ 207,111 $ 183,776 $ 613,180 $ 649,986 Cost of goods sold 144,191 139,016 416,089 474,342 --------- --------- --------- --------- Gross profit 62,920 44,760 197,091 175,644 Selling, general and administrative expenses 27,786 25,212 82,054 88,436 Research and development expenses 7,709 8,480 22,934 22,317 --------- --------- --------- --------- Operating profit 27,425 11,068 92,103 64,891 Interest and financing expenses 152 323 559 2,367 Gain on sale of business -- -- -- (158,157) Other income, net (318) (271) (839) (3,823) ---------- ---------- ---------- --------- Income before income taxes 27,591 11,016 92,383 224,504 Income taxes 9,043 3,129 33,295 86,358 ---------- --------- --------- ---------- NET INCOME $ 18,548 $ 7,887 $ 59,088 $ 138,146 ---------- --------- --------- ---------- ---------- --------- --------- ---------- EARNINGS PER SHARE $ .33 $ .14 $ 1.06 $ 2.30 ---------- --------- --------- ---------- ---------- --------- --------- ---------- Shares used to compute earnings per share 55,910 56,017 55,681 59,988 ---------- --------- --------- ---------- ---------- --------- --------- ---------- Cash dividends declared per share of common stock $ .09 $ .07 $ .23 $ .18 ---------- --------- --------- ---------- ---------- --------- --------- ---------- <FN> See accompanying notes to the consolidated financial statements. </TABLE>
6 <TABLE> ALBEMARLE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Dollars In Thousands) ---------------------- (Unaudited) <CAPTION> Nine Months Ended September 30, ------------------ 1997 1996 --------- -------- <S> <C> <C> CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 14,242 $ 33,130 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 59,088 138,146 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 50,717 54,204 Gain on sale of business, net of income taxes of $63,780 -- (94,377) Working capital increases excluding cash and cash equivalents: Income tax payments on gain on sale of business -- (59,324) Other working capital increases, net of the effects of the sale of business in 1996 (41,807) (10,059) Other, net (303) (9,829) --------- --------- Net cash provided from operating activities 67,695 18,761 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures and cost of business acquired in 1997 (73,285) (64,094) Proceeds from sale of business, net of $42,297 of trade accounts payable retained by the Company -- 487,345 Other, net 1,587 1,982 --------- --------- Net cash (used in) provided from investing activities (71,698) 425,233 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 17,889 26,641 Repayments of long-term debt (10,978) (204,334) Dividends paid (11,575) (10,380) Purchases of common stock -- (251,518) Proceeds from exercise of stock options 4,764 1,793 --------- --------- Net cash provided from (used in) financing activities 100 (437,798) --------- --------- (Decrease) increase in cash and cash equivalents (3,903) 6,196 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,339 $ 39,326 --------- --------- --------- --------- <FN> See accompanying notes to the consolidated financial statements. </TABLE>
7 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except 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 to present fairly, in all material respects, the Company's consolidated financial position as of September 30, 1997 and December 31, 1996, the consolidated results of operations for the three- and nine-month periods ended September 30, 1997 and 1996, and the condensed consolidated cash flows for the nine-month periods ended September 30, 1997 and 1996. 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 1996 Annual Report which was incorporated by reference in the Company's Form 10-K filed on March 26, 1997. The December 31, 1996 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- and nine-month periods ended September 30, 1997, are not necessarily indicative of the results to be expected for the full year. Certain amounts in the accompanying consolidated financial statements have been reclassified for the nine months ended September 30, 1996, to conform to the current presentation. 2. On March 1, 1996, the Company sold its alpha olefins, poly alpha olefins, and synthetic alcohol businesses ("Olefins Business") to Amoco Chemical Company ("Amoco") for $487.3 million, including plant and equipment (primarily located in Pasadena, Texas, Deer Park, Texas and Feluy, Belgium), other assets, inventory and accounts receivable, net of expenses and trade accounts payable retained and paid by the Company, and certain business-related liabilities transferred at the date of sale. The sale involved the transfer of approximately 550 people who supported these businesses. The gain on the sale was $158.2 million ($94.4 million after income taxes or $1.57 per share), net of $44.3 million of costs incurred in connection with the sale for early retirements and work-force reductions, abandonment costs of certain facilities and certain other costs (including environmental costs) related to the sale and/or businesses sold. The transaction included numerous operating and service agreements primarily focusing on the sharing of common facilities at the Pasadena plant site of Albemarle and the Feluy plant site operated by Amoco.
8 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Per-Share Amounts) (Unaudited) 3. Long-term debt consists of the following: <TABLE> <CAPTION> September 30, December 31, 1997 1996 ------------- ------------- <S> <C> <C> Variable-rate bank loans $ 28,200 $ 16,300 Foreign bank borrowings 9,087 14,392 Miscellaneous 1,148 1,171 ------------- ------------- Total 38,435 31,863 Less amounts due within one year 380 7,457 ------------- ------------- Long-term debt $ 38,055 $ 24,406 ------------- ------------- ------------- ------------- </TABLE> 4. The provision for income taxes on the earnings of the Company in the accompanying consolidated statement of income for the nine-month period ended September 30, 1996 is higher than the statutory income tax rates primarily due to a lower tax basis than book basis related to the sale of the Olefins Business, offset in part, by the benefits in 1996 of foreign tax credits. 5. The shares used to compute earnings per share for the three- and nine-month periods ended September 30, 1997 and 1996, reflect the April 1, 1996 purchase by the Company of 9,484,465 shares of its common stock, at a price of $23 per share plus expenses for a total aggregate cost of $219.4 million, through a tender offer, which began on March 4, 1996 and concluded on April 1, 1996, following the sale of the Olefins Business to Amoco. The Company purchased 275,400 and 1,481,100 common shares in the second and third quarters of 1996, respectively, at an aggregate cost of $6.1 million and $26.0 million, respectively. 6. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" in February, 1997 which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted; however, restatement of all prior-period earnings per share data presented is required. Based upon the Company's preliminary determination, the effect of the adoption of SFAS No. 128 on the financial statements of the Company is not expected to be material.
9 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share Amounts) (Unaudited) The FASB issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", in June, 1997, which are effective for financial statements for annual periods beginning after December 15, 1997. Earlier application of both Statements is permitted. SFAS No. 130 establishes standards for reporting comprehensive income in a full set of general-purpose financial statements, either in the income statement or in a separate statement, and also requires display of "accumulated other comprehensive income" in a separate caption in the equity section of the balance sheet. SFAS No. 131 establishes standards for reporting information about operating segments, including related disclosures about products and services, geographic areas, and major customers. The Company has not yet determined the effect SFAS Nos. 130 and 131 will have on the Company's financial statements. At the time of their adoption these standards are not expected to have a material impact on the financial position or results of operations of the Company. 7. On March 31, 1997, the Company and Mitsui Toatsu Chemicals, Inc. (Mitsui Toatsu) completed the formation of an alliance whereby Albemarle acquired for cash 50 percent of the outstanding stock of Nippon Aluminum Alkyls, Ltd. (NAA). Mitsui Toatsu continued to hold the remaining 50% of NAA until October 1, 1997, when Mitsui Toatsu and Mitsui Petrochemical Industries, Ltd. merged to form Mitsui Chemicals, Inc. Therefore Mitsui Chemicals, Inc. became owner on October 1, 1997 of the remaining 50%. NAA produces organometallic catalysts at its facility in Takaishi City, Osaka and distributes products to the petrochemical and synthetic rubber industries in Japan and the Asia Pacific area. No historical pro forma financial information is required for this acquisition. 8. The following unaudited supplemental pro forma condensed consolidated statement of income for the nine months ended September 30, 1996, is presented assuming that the disposition of the Olefins Business had occurred as of January 1, 1996. The related pro forma information is presented for informational purposes only and is not necessarily indicative of what the consolidated results of operations would have been had the Company operated without the Olefins Business for the nine months ended September 30, 1996. Additionally, the accompanying pro forma information, consistent with the data presented in the Company's Form 8-K filed on March 15, 1996, does not reflect the impact of the purchase of 9,484,465 shares of common stock acquired in the Company's tender offer as if they had occurred on January 1, 1996.
10 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Per-Share Amounts) (Unaudited) 8. Continued. <TABLE> <CAPTION> Pro Forma Condensed Consolidated Statement of Income Nine Months Ended September 30, 1996 -------------------------------------- Adjustments Increase Historical (Decrease) Pro Forma ---------- -------------- ----------- <S> <C> <C> <C> <C> Net sales $ 649,986 $ (79,763) (a) 799 (b) $ 571,022 Cost of goods sold 474,342 (71,200) (a) 420 (b) 403,562 ---------- -------------- ----------- Gross profit 175,644 (8,184) 167,460 Selling, R&D and general expenses 110,753 (5,221) (a) 105,532 ---------- -------------- ----------- Operating profit 64,891 (2,963) 61,928 Interest and financing expenses 2,367 (1,563) (c) 804 Gain on sale of business (158,157) 158,157 (d) -- Other income, net (3,823) 16 (a) (60) (e) (3,867) ---------- -------------- ------------ Income before income taxes 224,504 (159,513) 64,991 Income taxes 86,358 (63,780) (d) (519) (f) 22,059 ----------- -------------- ------------ Net income $ 138,146 $ (95,214) $ 42,932 ----------- -------------- ------------ ----------- -------------- ------------ Earnings per share $ 2.30 $ 0.72 ----------- ------------ ----------- ------------ Shares used to compute earnings per share 59,988 59,988 (g) ----------- ------------ ----------- ------------ <FN> See accompanying notes to the pro forma condensed consolidated statement of income. </TABLE>
11 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ----------------------------------------------- (In Thousands Except Per-Share Amounts) (Unaudited) 8. Continued. Notes to the pro forma condensed consolidated statement of income are described below: (a) To eliminate the results of operations of the Olefins Business for the period January 1, 1996 thru February 29, 1996 as though the sale to Amoco occurred on January 1, 1996, and to reflect reductions in administrative and other costs which occurred because of personnel, employee benefits (including compensation) and other cost reductions assumed implemented following the sale of the Olefins Business to Amoco. (b) To record service fee income and incremental sales revenue generated from providing various services and products under contracts to Amoco and to record costs and expenses for services and products provided by Amoco. The service and supply arrangements were entered into in connection with the sale of the Olefins Business to Amoco. (c) To reflect the pro forma interest cost savings resulting from the repayment of certain domestic and Belgian debt, using the proceeds received from the sale of the Olefins Business. (d) To eliminate the gain and related income taxes on the March 1, 1996, sale of the Olefins Business. (e) To record the related amortization of certain advance rents received from Amoco upon closing of the sale of the Olefins Business associated with an arrangement in the nature of an operating lease in Belgium. (f) To record the income tax effects of the adjustments set forth in Notes (a) through (c) and (e) above, calculated at an assumed combined U.S. state and federal income tax rate of 37.92%. The Company's income tax provision on the results of operations of the remaining businesses was adjusted for utilization of a portion of the Belgian net operating loss carryforwards for which a valuation allowance had previously been provided on the related deferred tax assets and for the estimated additional income taxes which would have resulted if undistributed foreign earnings had been remitted to the Company.
12 ALBEMARLE CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (In Thousands Except Share Amounts) (Unaudited) 8. Continued. (g) The average number of shares used to compute earnings per share does not include the effects of the Company's tender offer concluded on April 1, 1996, as if it had occurred on January 1, 1996. The average number of shares would have been 56,826,000 had the offer been assumed to have been completed on January 1, 1996.
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------- OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ------------------------------------------------ The following is management's discussion and analysis of certain significant factors affecting the results of operations of Albemarle Corporation's ("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, 1996. Some of the information presented in the following discussion constitutes 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 businesses and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors which 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 product, 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. On March 1, 1996, the Company sold its alpha olefins, poly alpha olefins and synthetic alcohol businesses ("Olefins Business") to Amoco Chemical Company ("Amoco"). After the sale, Albemarle was engaged in the Bromine Chemicals, the Specialty Chemicals and the Surfactants and Detergents businesses. Effective July 24, 1997, the businesses were realigned into Polymer Chemicals, Fine Chemicals and Potassium and Chlorine Chemicals. Results of Operations - --------------------- Third Quarter 1997 Compared with Third Quarter 1996 - --------------------------------------------------- NET SALES Net sales for the third quarter of 1997 amounted to $207.1 million, a 13% increase over third quarter 1996 net sales of $183.8 million. The higher net sales were primarily due to increased shipments of flame retardants, bromine fine chemicals, pharmaceuticals, agricultural chemicals and special intermediates, partly offset by price reductions in certain flame retardants. OPERATING COSTS AND EXPENSES Cost of goods sold for the third quarter of 1997 amounted to $144.2 million compared to $139.0 million in the 1996 period. The gross profit margin increased to 30.4% in 1997 from 24.4% for the corresponding period in 1996. The improvement in the gross margin over 1996 primarily reflects improved plant utilizations, the impact of the Company's cost reduction program, and lower start-up costs associated with naproxen in the 1997 period. Selling, general and administrative expenses, combined with research and development expenses, increased five percent in 1997 versus the 1996 quarter. The increase reflects the impact of higher non-recurring employee-related compensation costs as well as higher costs of experience-rated employee group life insurance in 1997 versus the 1996 period, offset in part by a decline in research and development expenses primarily related to new products as defined by the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 2. As a percentage of net sales, selling, general and administrative expenses, including research and development expenses, were 17.1% in 1997 versus 18.3% in the 1996 quarter.
14 OPERATING PROFIT Operating profit in the third quarter of 1997 increased 148% from the corresponding period in 1996, primarily due to increased shipments and improved costs in flame retardants, bromine fine chemicals, pharmaceuticals, agricultural chemicals and special intermediates, and improved costs in European potassium and chlorine chemicals. INCOME TAXES Income taxes for the third quarter of 1997 increased $5.9 million compared to the third quarter of 1996 due to a $16.6 million increase in pretax income and a higher effective tax rate (32.8% in the 1997 quarter versus 28.4% for the 1996 period). The higher effective income tax rate in the 1997 period reflects an increase in income from foreign subsidiaries, which are taxed at higher than U. S. statutory rates and for which no benefits are provided since amounts are not presently expected to be repratiated, while the effective tax rate for the 1996 period reflects the utilization of available foreign tax credits. Results of Operations - ---------------------- Nine Months 1997 Compared with Nine Months 1996 - ----------------------------------------------- NET SALES Net sales for the first nine months of 1997 amounted to $613.2 million, down from $650.0 million for the corresponding period of 1996. Excluding the first two months 1996 net sales (approximately $80 million) of the Olefins Business sold March 1, 1996, Albemarle's net sales for the first nine months of 1997 would have shown an increase of eight percent or approximately $43 million. The higher net sales were primarily due to increased shipments of flame retardants, bromine fine chemicals, organometallics, pharmaceuticals, and antioxidants offset in part, by price reductions in certain flame retardants. OPERATING COSTS AND EXPENSES Cost of goods sold decreased 12% or $58.3 million in 1997 from 1996 primarily reflecting the impact of two months cost of goods sold of the Olefins Business included in the 1996 period. The gross profit margin increased to 32.1% in 1997 from 29.3% in 1996 excluding from the 1996 period the two months results of the Olefins Business. The improvement in the gross margin reflects improved plant utilizations and the impact of the Company's cost reduction program.
15 Selling, general and administrative expenses, combined with research and development expenses, decreased 5.2% in 1997 versus the 1996 period. The 1997 period reflects the elimination of two-months expenses associated with the operations of the Olefins Business and a reduction in expenses associated with the exercise of stock appreciation rights versus the 1996 period. Additionally, the 1997 period benefited from lower employee-related expenses resulting from the Company's workforce reduction program implemented in conjunction with the sale of the Olefins Business. As a percentage of net sales, selling, general and administrative expenses, including research and development expenses, were 17.1% in the nine months of 1997 versus 17.0% in the 1996 period. Excluding the first two months 1996 selling, general and administrative expenses and research and development expenses of the Olefins Business sold, the percentage of net sales for the 1996 period would have been 18.5%. OPERATING PROFIT Operating profit in the first nine months of 1997 increased approximately 42% from the corresponding period in 1996. Excluding the first two months of 1996 operating profits of the Olefins Business sold, the nine months of 1997 operating profits would have shown an increase of 49% over the 1996 period. The 1997 period benefited from product mix in agricultural chemicals, increased shipments and improved costs in pharmaceuticals and bromine fine chemicals, higher shipments in organometallics, and improved costs in zeolites and European potassium and chlorine chemicals. INTEREST AND FINANCING EXPENSES AND OTHER INCOME Interest and financing expenses in the nine months of 1997 decreased to $0.6 million from $2.4 million in the nine months of 1996 due to lower average outstanding debt. Other income decreased $3.0 million due to lower interest income in the 1997 period. GAIN ON SALE OF BUSINESS The Company's 1996 first nine month's earnings included a gain of $158.2 million ($94.4 million after income taxes) on the sale of the Olefins Business. INCOME TAXES Income taxes in the first nine months of 1997 decreased $53.1 million from the 1996 period, reflecting a $132.1 million decrease in pretax income and a lower effective income tax rate (36.0% in 1997 versus 38.5% in 1996). Excluding the effect of the gain on the sale of the Olefins Business, the effective income tax rate would have been 34% in the 1996 period. The higher effective income tax rate in the 1997 period reflects an increase in income from foreign subsidiaries, which are taxed at higher than U. S. statutory rates and for which no benefits are provided since amounts are not presently expected to be repatriated, while the effective tax rate for the 1996 period reflects the utilization of available foreign tax credits. Financial Condition and Liquidity - --------------------------------- Cash and cash equivalents at September 30, 1997, were $10.3 million, representing a decrease of $3.9 million from $14.2 million at year-end 1996.
16 Cash flows from operating activities during the first nine months of 1997 together with $3.9 million of existing cash, and proceeds from additional borrowings of $17.9 million and $4.8 million from the exercise of stock options, were used to cover capital expenditures and cost of business acquired, payment of dividends and repayment of debt. 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 Company's foreign currency translation adjustments, net of related deferred taxes, at September 30, 1997, decreased substantially from December 31, 1996, primarily due to the strengthening of the U.S. dollar. The noncurrent portion of the Company's long-term debt amounted to $38.1 million at September 30, 1997, compared to $24.4 million at the end of 1996. The Company's long-term debt, including the current portion, as a percentage of total capitalization amounted to 6.6% at September 30, 1997. The Company's capital expenditures combined with cost of business acquired in the first nine months of 1997 were higher than in the same period of 1996 resulting primarily from to the timing of payments . For the year, capital expenditures are forecasted to be slightly above the 1996 level. Capital spending will be financed primarily with cash flow from operations with any additional cash provided from additional debt. The amount and timing of any additional borrowing 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 best of the Company's knowledge, it currently is complying with 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 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.
17 ADDITIONAL INFORMATION - ---------------------- The Company reported in the second quarter of 1997 that two of its new flame retardants were sampled by various customers, and it has received orders for Saytex HP 7010 flame retardant, a new product for use in engineered plastics that has demonstrated good color, flowability and heat stability characteristics. In the third quarter, the Company started up a market development unit plant in its Baton Rouge research and development facility to make this product and is beginning to fill orders, but the Company does not expect this product to contribute to profits in the near term. If the Company obtains substantial customer acceptance, it would move to full commercial plant operations. In that event, the Company would expect HP 7010 to be an important contributor to the flame retardant business. In the third quarter, the Company initiated sales of naproxen, an analgesic product, to US customers. The Company continues to be significantly delayed in reaching its sales goals for naproxen due to the timing of the U.S. Food and Drug Administration's approvals of the Company's customers' applications.
18 Part II - OTHER INFORMATION - ---------------------------- ITEM 1. Legal Proceedings ----------------- As previously reported in the Company's 1997 second quarter Form 10-Q, the U. S. Environmental Protection Agency (EPA), through the Department of Justice (DOJ), has threatened suit under the Clean Air Act ("the Act") alleging that the Company failed to respond adequately or in a timely manner to certain requests for information under section 114 of the Act regarding volatile organic compound (VOC) emissions at the Company's Orangeburg, South Carolina plant and the plant's compliance with Prevention of Significant Deterioration (PSD) of air quality requirements. The DOJ notice demanded a penalty of $530,000 and the submission of certain information by a date certain. The Company denies that it failed to respond in any material respect or that there was a violation of PSD requirements. The Company retained an independent consultant with experience in the field to review the available data and prepare and submit a tabulation of that data in the format demanded by the EPA. This information has been furnished. The Company continues in settlement negotiations with the DOJ. ITEM 6. Exhibits and Reports on Form 8-K --------------------------------- (a) Exhibits - Current By-Laws as amended - Financial Data Schedule (b) No reports on Form 8-K have been filed during the quarter for which this report is filed.
19 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 12, 1997 By: Dirk Betlem ----------------- Dirk Betlem President (Chief Operating Officer) Date: November 12, 1997 By: Thomas G. Avant ----------------- Thomas G. Avant Senior Vice President (Principal Accounting Officer)
20 EXHIBIT INDEX ------------- Page Number and Name of Exhibit Number - -------------------------- ------ 28.1 Current By-Laws As Amended 21-35 27 Financial Data Schedule 36-37