UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ___________ to __________
Commission
file number 1-8142
|
ENGELHARD CORPORATION
(Exact
name of registrant as specified in its charter) |
| |
|
|
DELAWARE
(State
or other jurisdiction of incorporation or organization) |
22-1586002
(I.R.S.
Employer Identification No.) |
| |
|
|
101 WOOD AVENUE, ISELIN, NEW JERSEY
(Address
of principal executive offices) |
08830
(Zip
Code) |
| |
|
|
Registrant’s
telephone number, including area code |
(732)
205-5000 |
| |
|
|
Securities
registered pursuant to Section 12(b) of the Act: |
|
|
Title of each class
Common
Stock, par value $1 per share |
Name of each exchange on which registered
New
York Stock Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None
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
o.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes x.
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yesx Noo .
The
aggregate market value of the registrant’s voting common stock held by
non-affiliates of the registrant, based on the closing price on the New York
Stock Exchange on June 30, 2004 was approximately $4,015,762,662.
As of
March 1, 2005, 122,183,986 shares of common stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates certain information by reference to the Proxy Statement for the
2005 Annual Meeting of Shareholders, which will be filed by May 5,
2005.
TABLE
OF CONTENTS
|
Item
|
|
Page
|
| |
|
|
|
|
|
|
| |
(a)
General development of business |
3 |
| |
(b)
Available information of Engelhard |
3 |
| |
(c)
Segment and geographic area data |
3-5,
68-71 |
| |
(d)
Description of business |
3-5,
68-71 |
| |
(e)
Environmental matters
|
6-7
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
9
|
| |
|
|
|
|
|
10
|
|
|
|
11-12,
77 |
|
|
|
13-33
|
|
|
|
34-35
|
|
|
|
36-74
|
|
|
|
78
|
|
|
|
78
|
|
|
|
79
|
| |
|
|
|
|
|
9,
80
|
|
|
|
80
|
|
|
|
80-81
|
|
|
|
82
|
|
|
|
82
|
| |
|
|
|
|
|
83-153 |
Engelhard
Corporation (which, together with its subsidiaries, is collectively referred to
as the Company) was formed under the laws of Delaware in 1938 and became a
public company in 1981. The Company’s principal executive offices are located at
101 Wood Avenue, Iselin, NJ 08830 (telephone number (732)
205-5000).
The
Company maintains a website, free of charge, at www.Engelhard.com, which
contains information about the Company, including links to the Company’s annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and related amendments, which are available as soon as reasonably
practicable after such reports are filed or furnished electronically with the
SEC. The Company’s website and the information contained in it shall not be
deemed incorporated by reference in this Form 10-K.
The
Company develops, manufactures and markets value-adding technologies based on
surface and materials science for a wide spectrum of industrial customers. The
Company also provides its technology segments, their customers and others with
precious and base metals and related services.
The
Company employed approximately 6,500 people as of January 1, 2005 and operates
on a worldwide basis with corporate headquarters in the United States, and
manufacturing facilities, mineral reserves and other operations in Asia, the
European community, North America, the Russian Federation, South Africa and
Brazil.
The
Company’s businesses are organized into four reportable segments — Environmental
Technologies, Process Technologies, Appearance and Performance Technologies and
Materials Services.
Within
the “All Other” category, sales to external customers and operating earnings
(losses) are derived primarily from the Ventures business. The sale of precious
metals accounted for under the LIFO method, royalty income, results from the
Strategic Technologies group and other miscellaneous income and expense items
not related to the reportable segments are included in the “All Other”
category.
The
following information on the Company is included by segment in Note 19,
“Business Segment and Geographic Area Data,” of the Notes to Consolidated
Financial Statements: net sales to external customers; operating earnings
(loss); special charge (credit), net; depreciation, depletion and amortization;
equity in earnings of affiliates; total assets; equity investments and capital
expenditures. Interest income, interest expense and income taxes are included in
total.
Environmental
Technologies
The
Environmental Technologies segment markets cost-effective compliance with
environmental regulations, enabled by sophisticated emission-control
technologies and systems. The segment also provides high-value material products
made principally from platinum group metals, as well as thermal spray and
coating technologies.
Environmental
catalysts are used in applications such as the abatement of carbon monoxide,
oxides of nitrogen and hydrocarbon emissions from gasoline and diesel vehicles.
These catalysts also are used to remove odors, fumes and pollutants associated
with a variety of process industries, co-generation and gas-turbine power
generation, household appliances and lawn and garden power tools.
The
products of the Environmental Technologies segment compete in the marketplace on
the basis of value, performance and cost. No single competitor is dominant in
the markets in which this segment operates.
The
manufacturing operations of the Environmental Technologies segment are carried
out in the United States, Italy, Germany, India, South Africa, Brazil, China,
Thailand, Sweden and the United Kingdom, with equity investments located in
South Korea and the United States. Although not included in this segment, the
Japanese mobile-source markets are served by the Company’s N.E. Chemcat equity
joint venture. The products are sold
principally
through the Company’s sales organizations or those of its equity investments,
supplemented by independent distributors and representatives.
Principal
raw materials used by the Environmental Technologies segment include precious
metals, procured by the Materials Services segment and/or supplied by customers,
and a variety of minerals and chemicals that are generally
available.
As of
January 1, 2005, the Environmental Technologies segment had approximately 1,970
employees worldwide. Most hourly employees are not covered by collective
bargaining agreements. Employee relations have generally been good.
Process
Technologies
The
Process Technologies segment enables customers to make their processes more
productive, efficient, environmentally sound and safer through the supply of
advanced chemical-process catalysts, additives and sorbents.
Process
Technologies’ chemical-process catalysts are used in the manufacture of a
variety of products and intermediates made by chemical, petrochemical,
pharmaceutical and agricultural chemical producers. In addition, they are used
in the production of polypropylene, which is used in a wide range of products,
including food packaging, carpets, toys and automobile bumpers. Sorbents are
used to purify and decolorize naturally occurring fats and oils for the
manufacture of shortenings, margarines and cooking oils. Petroleum catalysts and
additives are used by refiners to provide economies in petroleum processing and
to meet increasingly stringent fuel-quality requirements. The segment’s catalyst
products are based on the Company’s proprietary technology and often are
application-specific.
The
products of the Process Technologies segment compete in the marketplace on the
basis of value, performance and cost. No single competitor is dominant in the
markets in which this segment operates.
The
manufacturing operations of the segment are carried out in the United States,
Italy, The Netherlands and Spain. The products are sold principally through the
Company’s sales organizations supplemented by independent
representatives.
The
principal raw materials used by the segment include metals, procured by the
Materials Services segment and from third parties; kaolin-based intermediates
supplied by the Appearance and Performance Technologies segment; and a variety
of other minerals and chemicals that are generally readily available. The
segment also uses certain raw materials that are sourced primarily from
China.
As of
January 1, 2005, the Process Technologies segment had approximately 1,690
employees worldwide. Most hourly employees are covered by collective bargaining
agreements. Employee relations have generally been good.
Appearance
and Performance Technologies
The
Appearance and Performance Technologies segment provides pigments, effect
materials, personal care active ingredients and performance additives that
enable its customers to market enhanced image and functionality in their
products. This segment serves a broad array of end markets, including cosmetics,
personal care, coatings, plastic, automotive, construction and paper. The
segment’s products help customers improve the look, functionality, performance
and overall cost of their products. In addition, the segment is the internal
supply source of precursors for most of the Company’s advanced
petroleum-refining catalysts.
The
segment’s principal products include special-effect materials and films,
personal care actives, color pigments and dispersions, paper pigments and
extenders and specialty performance additives. The segment’s special-effect
pigments provide a range of aesthetic and functional effects in coatings,
personal care and cosmetic products, packaging, plastics, inks, glitter, gift
wrap, textiles and other applications. Personal care materials include materials
used for skin care delivery systems and active ingredients. Color pigments
include a broad range of organic and inorganic products, dispersions and
universal colorants. Paper pigments are used as coating and
extender
pigments to improve the opacity, brightness, gloss and printability of coated
and uncoated papers. Specialty performance additives are used to improve the
functionality, appearance and value of liquid and powder coatings, plastics,
rubber, adhesives, inks, concrete and cosmetics. Iridescent and specialty films
are used to visually enhance a variety of products in such applications as
product packaging, labels, glitter, gift wrap and textiles.
The
products of the Appearance and Performance Technologies segment compete in the
marketplace on the basis of value, performance and cost. No single competitor is
dominant in the markets in which this segment operates.
The
manufacturing operations of the segment are carried out in the United States,
South Korea, China and Finland. Subsidiary sales and distribution centers are
located in France, Hong Kong, Japan, Mexico and The Netherlands, in addition to
the manufacturing site locations noted above. Products are sold through the
Company’s sales organization supplemented by independent distributors and
representatives.
The
principal raw materials used by the Appearance and Performance Technologies
segment include naturally occurring minerals such as kaolin, attapulgite and
mica, which are mined from mineral reserves owned or leased by the Company, and
a variety of other minerals and chemicals that are readily
available.
As of
January 1, 2005, the Appearance and Performance Technologies segment had
approximately 2,120 employees worldwide. Most hourly employees are covered by
collective bargaining agreements. Employee relations have generally been
good.
Materials
Services
The
Materials Services segment serves the Company’s technology segments, their
customers and others with precious and base metals and related services. This is
a distribution and materials services business that purchases and sells precious
metals, base metals and related products and services. It does so under a
variety of pricing and delivery arrangements structured to meet the logistical,
financial and price-risk management requirements of the Company, its customers
and suppliers. Additionally, it offers the related services of precious-metal
refining and storage, and produces precious-metal salts and
solutions.
The
Materials Services segment is responsible for procuring precious and base metals
to meet the requirements of the Company’s operations and its customers. Supplies
of newly mined platinum group metals are obtained primarily from South Africa
and the Russian Federation and, to a lesser extent, from the United States and
Canada, the only four regions that are known significant sources. Most of these
platinum group metals are obtained pursuant to a number of contractual
arrangements with different durations and terms. This segment also refines
platinum group metals. Gold, silver and base metals are purchased from various
sources. In addition, in the normal course of business, certain customers and
suppliers deposit significant quantities of precious metals with the Company
under a variety of arrangements. Equivalent quantities of precious metals are
returnable as product or in other forms.
Operations
are located in the United States, Italy, Japan, the Russian Federation,
Switzerland and the United Kingdom. As of January 1, 2005, the Materials
Services segment had approximately 84 employees worldwide.
Equity
Investments
The
Company has equity investments in affiliates that are accounted for under the
equity method. These investments are N.E. Chemcat Corporation (N.E. Chemcat),
Heesung-Engelhard, H. Drijfhout & Zoon’s Edelmetaalbedrijen (HDZ), a former
subsidiary of the Engelhard-CLAL joint venture, and Prodrive-Engelhard. N.E.
Chemcat is a 38.8%-owned, publicly traded Japanese corporation and a leading
producer of automotive and chemical catalysts, electronic chemicals and other
precious-metal-based products. Heesung-Engelhard, a 49%-owned joint venture in
South Korea, manufactures and markets catalyst products for automobiles. HDZ is
a 45%-owned former subsidiary of Engelhard-CLAL, which manufactured and marketed
certain products containing precious metals. Prodrive-Engelhard, a 50%-owned
joint venture in the United States, specializes in the design, development and
testing of vehicle emission systems.
Major
Customers
No
customer accounted for more than 10% of the Company’s net sales for the year
ended December 31, 2004. In 2002, Ford Motor Company, a customer of the
Environmental Technologies and Materials Services segments, accounted for more
than 10% of the Company’s net sales. Sales of precious metal to this customer
were significantly lower in 2004 and 2003. Fluctuations in precious-metal prices
and the type and quantities of metal purchased
can result in material variations in sales reported, but do not necessarily have
a direct or significant effect on earnings.
At
December 31, 2004, the Company employed approximately 540 scientists,
technicians and auxiliary personnel engaged in research and development in the
fields of surface chemistry and materials science. These activities are
conducted in the United States and abroad. Research and development expenses
were $99.9 million in 2004, $93.1 million in 2003 and $88.2 million in
2002.
Research
facilities include fully staffed instrument analysis laboratories that the
Company maintains in order to achieve the high level of precision necessary for
its technology businesses and to assist customers in understanding how the
Company’s products and services add value to their businesses.
The
Company owns, or is licensed under, numerous patents secured over a period of
years. It is typically the policy of the Company to apply for patents whenever
it develops new products or processes considered to be commercially viable and,
in appropriate circumstances, to seek licenses when such products or processes
are developed by others. While the Company deems its various patents and
licenses to be important to certain aspects of its operations, it does not
consider any significant portion or its business as a whole to be materially
dependent on patent protection.
Environmental
Matters
With the
oversight of environmental agencies, the Company is currently preparing, has
under review, or is implementing environmental investigations and cleanup plans
at several currently or formerly owned and/or operated sites, including
Plainville, Massachusetts. The Company continues to investigate and remediate
contamination at Plainville under a 1993 agreement with the United States
Environmental Protection Agency (EPA). The Company continues to address
decommissioning issues at Plainville under authority delegated by the Nuclear
Regulatory Commission to the Commonwealth of Massachusetts.
In
addition, as of December 31, 2004, 13 sites have been identified at which the
Company believes liability as a potentially responsible party is probable under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or similar state laws (collectively referred to as Superfund)
for the cleanup of contamination and natural resource damages resulting from the
historic disposal of hazardous substances allegedly generated by the Company,
among others. Superfund imposes strict, joint and several liability under
certain circumstances. In many cases, the dollar amount of the claim is
unspecified and claims have been asserted against a number of other entities for
the same relief sought from the Company. Based on existing information, the
Company believes that it is a de-minimis contributor of hazardous substances at
a number of the sites referenced above. Subject to the reopening of existing
settlement agreements for extraordinary circumstances, discovery of new
information or natural resource damages, the Company has settled a number of
other cleanup proceedings. The Company has also responded to information
requests from EPA and state regulatory authorities in connection with other
Superfund sites.
The
accruals for environmental cleanup-related costs reported in the consolidated
balance sheets at December 31, 2004 and 2003 were $19.1 million and $19.3
million, respectively, including $0.1 million at December 31, 2004 and 2003 for
Superfund sites. These amounts represent those undiscounted costs that the
Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company’s accrual represents
approximately 37% of what it believes are the reasonably possible environmental
cleanup-related costs of a noncapital nature. The estimate of reasonably
possible costs is less certain than the probable estimate upon which the accrual
is based.
Cash
payments for environmental cleanup-related matters were $1.3 million in 2004 and
$1.8 million in each of 2003 and 2002. In 2003, the Company recognized a $2.0
million liability for a facility in France.
For the
past three-year period, environmental-related capital projects have averaged
less than 10% of the Company’s total capital expenditure programs, and the
expense of environmental compliance (e.g.,
environmental testing, permits, consultants and in-house staff) was not
material.
There can
be no assurances that environmental laws and regulations will not change or that
the Company will not incur significant costs in the future to comply with such
laws and regulations. Based on existing information and current environmental
laws and regulations, cash payments for environmental cleanup-related matters
are projected to be $1.4 million for 2005, which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, management believes
environmental cleanup-related reserves at December 31, 2004 are reasonable and
adequate, and environmental matters are not expected to have a material adverse
effect on financial condition. However, if these matters are resolved in a
manner different from the estimates, they could have a material adverse effect
on the Company’s operating results or cash flows.
The
Company leases a building on approximately seven acres of land with an area of
approximately 271,000 square feet in Iselin, NJ. This building serves as the
principal executive and administrative office of the Company and its operating
segments. The Company owns approximately eight acres of land and three buildings
with a combined area of approximately 150,000 square feet in Iselin, NJ. These
buildings serve as the major research and development facilities for the
Company’s operations. The Company also owns or leases research facilities in
Gordon, GA; Union, NJ; Buchanan, Ossining and Stony Brook, NY; Beachwood, OH;
Pasadena, TX; Hannover, Germany; and De Meern, The Netherlands.
The
Environmental Technologies segment operates company-owned plants in Huntsville,
AL; East Windsor, CT; Wilmington, MA; Duncan, SC; East Newark and Carteret, NJ;
Fremont, CA; Nienburg, Germany; Chennai, India; Port Elizabeth, South Africa;
Rome, Italy; Indiatuba, Brazil; Shanghai, China; Rayoung, Thailand; Solvesborg,
Sweden; and Cinderford in the United Kingdom.
The
Process Technologies segment operates company-owned plants in Attapulgus and
Savannah, GA; Elyria, OH; Erie, PA; Seneca, SC; Jackson, MS; Pasadena, TX; Rome,
Italy; De Meern, The Netherlands; and Tarragona, Spain.
The
Appearance and Performance Technologies segment operates company-owned
attapulgite processing plants in Quincy, FL near the area containing its
attapulgite reserves, plus mica mine and processing facilities in Hartwell, GA.
In addition, the segment operates three company-owned kaolin mines and three
milling facilities in Middle Georgia, which serve a 70-mile network of pipelines
to three processing plants. It also operates on company-owned land containing
kaolin and leases on a long-term basis kaolin mineral rights to additional
acreage. The segment also operates company-owned sales and manufacturing
facilities in Kotka and Rauma, Finland and Shanxi, China in addition to owning
and operating color, pearlescent pigment, personal care and film manufacturing
facilities in Sylmar, CA; Louisville, KY; Eastport, ME; Peekskill and Setauket,
NY; Elyria, OH; Charleston, SC; Haarlem, The Netherlands; and Inchon, South
Korea. Management believes the Company’s kaolin, attapulgite and mica reserves
will be sufficient to meet its needs for the foreseeable future.
The
Materials Services segment’s operations are conducted at leased facilities in
Iselin, NJ; Lincoln Park, MI; Tokyo, Japan; Moscow, Russia; Zug, Switzerland;
and London, the United Kingdom. In addition, the segment’s operations are
conducted at company-owned facilities in Seneca, SC; Carteret, NJ; and Rome,
Italy.
Management
believes that the Company’s processing and refining facilities, plants and mills
are suitable and have sufficient capacity to meet its normal operating
requirements for the foreseeable future.
The
Company is one of a number of defendants in numerous proceedings that allege
that the plaintiffs were injured from exposure to hazardous substances
purportedly supplied by the Company and other defendants or that existed on
Company premises. The Company is also subject to a number of environmental
contingencies (see Note 21, “Environmental Costs,” for further detail) and is a
defendant in a number of lawsuits covering a wide range of other matters. In
some of these matters, the remedies sought or damages claimed are substantial.
While it is not possible to predict with certainty the ultimate outcome of these
lawsuits or the resolution of the environmental contingencies, management
believes, after consultation with counsel, that resolution of these matters is
not expected to have a material adverse effect on financial condition. However,
if these matters are resolved in a manner different from
management’s current expectations, they could have a material adverse effect on
the Company’s operating results or cash flows.
The
Company is involved in a value-added tax dispute in Peru. Management believes
the Company was targeted by corrupt officials within a former Peruvian
government. On December 2, 1999, Engelhard Peru, S.A., a wholly owned
subsidiary, was denied refund claims of approximately $28 million. The Peruvian
tax authority also determined that Engelhard Peru, S.A. is liable for
approximately $63 million in refunds previously paid, fines and interest as of
December 31, 1999. Interest and fines continue to accrue at rates established by
Peruvian law. The Peruvian Tax Court ruled on February 11, 2003 that Engelhard
Peru, S.A. was liable for these amounts, overruling precedent to apply a “form
over substance” theory without any determination of fraudulent participation by
Engelhard Peru, S.A. As part of its efforts to vigorously contest this
determination, Engelhard Peru, S.A. filed a constitutional action against the
Peruvian Tax agency and Tax Court. On May 3, 2004, the judge in this action
ruled that none of the findings of the Peruvian tax authorities were properly
applicable to Engelhard Peru, S.A. based on several grounds, including improper
use of a presumption of guilt with no actual proof of irregularity in the
transactions of Engelhard Peru, S.A. The government of Peru has appealed this
decision. Management believes, based on consultation with counsel, that
Engelhard Peru, S.A. is entitled to all refunds claimed and is not liable for
any additional taxes, fines or interest. In late October 2000, a criminal
proceeding alleging tax fraud and forgery related to this value-added tax
dispute was initiated against two Lima-based officials of Engelhard Peru, S.A.
Although Engelhard Peru, S.A. is not a defendant, it may be civilly liable in
Peru if its representatives are found responsible for criminal conduct. In its
own investigation, and in detailed review of the materials presented in Peru,
management has not seen any evidence of tax fraud by these officials.
Accordingly, Engelhard Peru, S.A. is assisting in the vigorous defense of this
proceeding. Management believes the maximum economic exposure is limited to the
aggregate value of all assets of Engelhard Peru, S.A. That amount, which is
approximately $30 million, including unpaid refunds, has been fully provided for
in the accounts of the Company.
Not
applicable.
|
GAVIN
A. BELL
|
Age
43. Vice President, Investor Relations effective July 16, 2004. Director,
Investor Relations, American Standard Companies, Inc. (global, diversified
manufacturer) from 2002 to 2004. Director, Investor Relations, Becton,
Dickinson and Company (global medical technology company) from 2001 to
2002. Director, Investor Relations, Coca-Cola Beverages plc, a London, UK
subsidiary of The Coca-Cola Company (global beverage company) from prior
to 2000.
|
|
ARTHUR
A. DORNBUSCH, II
|
Age
61. Vice President, General Counsel and Secretary of the Company from
prior to 2000.
|
|
MARK
DRESNER
|
Age
53. Vice President of Corporate Communications from prior to 2000.
|
|
JOHN
C. HESS
|
Age
53. Vice President, Human Resources from prior to 2000.
|
|
MAC
C.P. MAK
|
Age
56. Treasurer, effective April 7, 2003. Senior Vice President, Strategic
Planning and Corporate Development, Coty Inc. (global cosmetics company)
from December 2001 to April 2003. Vice President, Strategic Planning and
Corporate Development, Coty Inc. from prior to 2000.
|
|
BARRY
W. PERRY *
|
Age
58. Chairman and Chief Executive Officer of the Company since January
2001. President and Chief Operating Officer from prior to 2000. Mr. Perry
is also a director of Arrow Electronics, Inc. and Cookson Group
plc.
|
|
ALAN
J. SHAW
|
Age
56. Controller of the Company effective January 1, 2003. Vice
President-Finance of Materials Services from prior to 2000 to December
2002.
|
|
MICHAEL
A. SPERDUTO
|
Age
47. Vice President and Chief Financial Officer of the Company effective
August 2, 2001. Controller of the Company from prior to 2000.
|
* Also a
director of the Company.
Officers
of the Company are elected at the meeting of the Board of Directors held in May
of each year after the annual meeting of shareholders and serve until their
successors shall be elected and qualified and shall serve as such at the
pleasure of the Board.
ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
(a) As of
March 1, 2005, there were 4,571 holders of record of the Company’s common stock,
which is traded on the New York Stock Exchange (ticker symbol “EC”), as well as
on the Swiss Stock Exchange.
The range
of market prices and cash dividends paid for each quarterly period were as
follows:
| |
|
NYSE
Market
Price |
|
Cash
dividends
paid |
|
| |
|
High |
|
Low |
|
per
share |
|
2004 |
|
|
|
|
|
|
|
|
|
|
First
quarter |
|
$ |
30.29 |
|
$ |
26.66 |
|
$ |
0.11 |
|
Second
quarter |
|
|
32.31 |
|
|
27.55 |
|
|
0.11 |
|
Third
quarter |
|
|
32.72 |
|
|
26.63 |
|
|
0.11 |
|
Fourth
quarter |
|
|
30.98 |
|
|
26.49 |
|
|
0.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
First
quarter |
|
$ |
23.11 |
|
$ |
19.02 |
|
$ |
0.10 |
|
Second
quarter |
|
|
26.61 |
|
|
21.26 |
|
|
0.10 |
|
Third
quarter |
|
|
29.15 |
|
|
24.08 |
|
|
0.10 |
|
Fourth
quarter |
|
|
30.58 |
|
|
27.18 |
|
|
0.11 |
|
(c) The
Company has Board authorized plans or programs for the repurchase of the
Company’s stock. The following table represents repurchases under these plans or
programs for each of the three months of the quarter ended December 31,
2004:
ISSUER
PURCHASES OF EQUITY SECURITIES:
|
Period |
|
Total
Number of Shares Purchased |
|
Average
Price Paid per Share |
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs |
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or Programs
(a) |
|
|
10/1/04
- 10/31/04 |
|
183,900 |
(b) |
|
$ |
27.04 |
|
183,900 |
|
|
2,890,132 |
|
|
|
11/1/04
- 11/30/04 |
|
15,600 |
|
|
$ |
29.72 |
|
15,600 |
|
|
2,874,532 |
|
|
|
12/1/04
- 12/31/04 |
|
— |
(c) |
|
|
— |
|
— |
|
|
2,874,532 |
|
|
| |
|
199,500 |
|
|
$ |
27.25 |
|
199,500 |
|
|
|
|
|
| (a) |
Share
repurchase program of 6 million shares authorized in October
2003. |
| (b) |
Excludes
380 shares obtained by The Rabbi Trust under The Deferred Compensation
Plan for Key Employees of Engelhard
Corporation. |
| (c) |
Excludes
2,460 shares acquired at market value as a result of a stock swap option
exercise pursuant to The Stock Option Plan of
1991. |
Selected
Financial Data
($
in millions, except per-share amounts)
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
Net
sales |
|
$ |
4,166.4 |
|
$ |
3,714.5 |
|
$ |
3,753.6 |
|
$ |
5,096.9 |
|
$ |
5,542.6 |
|
Net
earnings (1) |
|
|
235.5 |
|
|
234.2 |
|
|
171.4 |
|
|
225.6 |
|
|
168.3 |
|
Basic
earnings per share (1) |
|
|
1.91 |
|
|
1.87 |
|
|
1.34 |
|
|
1.73 |
|
|
1.33 |
|
Diluted
earnings per share (1) |
|
|
1.88 |
|
|
1.84 |
|
|
1.31 |
|
|
1.71 |
|
|
1.31 |
|
Total
assets |
|
|
3,178.6 |
|
|
2,933.0 |
|
|
3,020.7 |
|
|
2,995.5 |
|
|
3,166.8 |
|
Long-term
debt |
|
|
513.7 |
|
|
390.6 |
|
|
247.8 |
|
|
237.9 |
|
|
248.6 |
|
Shareholders’
equity |
|
|
1,414.3 |
|
|
1,285.4 |
|
|
1,077.2 |
|
|
1,003.5 |
|
|
874.6 |
|
Cash
dividends paid per share |
|
|
0.44 |
|
|
0.41 |
|
|
0.40 |
|
|
0.40 |
|
|
0.40 |
|
Return
on average shareholders’ equity (1) |
|
|
17.4 |
% |
|
19.8 |
% |
|
16.5 |
% |
|
24.0 |
% |
|
20.5 |
% |
(1)
Net
earnings in 2004 include the following: a tax provision benefit of $8.0 million
resulting from an agreement reached with the Internal Revenue Service with
respect to the Company’s tax returns for 1998 through 2000, a charge of $4.1
million resulting from the consolidation of certain manufacturing operations to
improve efficiency and a credit of $0.8 million related to the reversal of prior
year special charge accruals (see Note 6, “Special Charges and Credits,” for
further detail).
Net
earnings in 2003 include the following: a royalty settlement gain of $17.6
million, a charge of $4.8 million for the fair value of the remaining lease
costs of certain minerals-storage facilities that the Company ceased to use and
restructuring charges of $5.6 million (see Note 6, “Special Charges and
Credits,” for further detail). In addition, a transition charge of $2.3 million
was recorded on January 1, 2003 as the cumulative effect of an accounting change
(see Note 4, “Accounting for Asset Retirement Obligations,” for further detail).
Net
earnings in 2002 include the following: an impairment charge of $57.7 million
associated with the Engelhard-CLAL joint venture (see Note 10, “Investments,”
for further detail), an impairment charge of $4.1 million associated with an
investment in fuel-cell developer Plug Power Inc. (see Note 10, “Investments,”
for further detail), a charge of $1.9 million related to a manufacturing
consolidation plan and a $6.8 million insurance settlement gain (see Note 6,
“Special Charges and Credits,” for further detail).
Net
earnings in 2000 include special and other charges of $92.0 million for a
variety of events, including the write-down of goodwill and fixed assets of the
Company’s HexCore business unit and net gains of $12.9 million on sales of
investments and land.
The
following tables provide information related to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement
Obligations” (see Note 4, “Accounting for Asset Retirement Obligations,” for
further detail):
Selected
Financial Data
($
in millions, except per-share amounts)
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
Net
earnings before cumulative effect of a change in accounting
principle |
|
$ |
235.5 |
|
$ |
236.5 |
|
$ |
171.4 |
|
$ |
225.6 |
|
$ |
168.3 |
|
|
Cumulative
effect of a change in accounting principle, net of tax of $1,390
|
|
|
— |
|
|
(2.3 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Net
earnings |
|
$ |
235.5 |
|
$ |
234.2 |
|
$ |
171.4 |
|
$ |
225.6 |
|
$ |
168.3 |
|
Earnings
per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of a change in accounting
principle |
|
$ |
1.91 |
|
$ |
1.89 |
|
$ |
1.34 |
|
$ |
1.73 |
|
$ |
1.33 |
|
|
Cumulative
effect of a change in accounting principle, net of tax |
|
|
— |
|
|
(0.02 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Earnings
per share - basic |
|
$ |
1.91 |
|
$ |
1.87 |
|
$ |
1.34 |
|
$ |
1.73 |
|
$ |
1.33 |
|
Earnings
per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of a change in accounting
principle |
|
$ |
1.88 |
|
$ |
1.86 |
|
$ |
1.31 |
|
$ |
1.71 |
|
$ |
1.31 |
|
|
Cumulative
effect of a change in accounting principle, net of tax |
|
|
— |
|
|
(0.02 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Earnings
per share - diluted |
|
$ |
1.88 |
|
$ |
1.84 |
|
$ |
1.31 |
|
$ |
1.71 |
|
$ |
1.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma amounts assuming the provisions of SFAS No. 143 were applied
retroactively: |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
Net
earnings before cumulative effect of a change in accounting
principle |
|
$ |
235.5 |
|
$ |
236.5 |
|
$ |
170.8 |
|
$ |
225.0 |
|
$ |
167.8 |
|
Basic
earnings per share before cumulative effect |
|
|
1.91 |
|
|
1.89 |
|
|
1.33 |
|
|
1.73 |
|
|
1.33 |
|
Diluted
earnings per share before cumulative effect |
|
|
1.88 |
|
|
1.86 |
|
|
1.31 |
|
|
1.70 |
|
|
1.31 |
|
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless
otherwise indicated, all per-share amounts are presented as diluted earnings per
share, as calculated under SFAS No. 128, “Earnings per Share.”
For a
discussion of the Company’s critical accounting policies and estimates, see page
26.
Overview
The
Company develops, manufactures and markets value-adding technologies based on
surface and materials science for a wide spectrum of served markets. The Company
also provides its technology segments, their customers and others with precious
and base metals and related services. The Company’s businesses are organized
into four reportable segments that are discussed individually below. Additional
detailed descriptive material is included in “ITEM 1. BUSINESS” and NOTE 19,
“BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA.”
One of
the strengths of the Company is that its segments serve diverse markets, which
is important for assessing the variability of future cash flows. The following
economic comments also provide a useful context for evaluating the Company’s
performance: (1) worldwide auto builds continue to be relatively flat, albeit at
fairly high levels - industry growth for auto-emission catalysts will benefit
from tougher environmental regulation throughout the world over the next 5-10
years as well as developing economies, especially new Asian production; (2) more
stringent diesel-emission regulations are being phased in, affording the Company
additional opportunities for catalyst solutions; (3) worldwide petroleum
refineries are operating close to capacity generating demand for the extra
yields provided by Engelhard’s advanced fluid cracking catalysts and performance
additives; (4) markets for effect pigments, colors and active ingredients in
cosmetics, personal care, auto finishes and coatings have remained positive
during the recent economic downturns and tend to be less cyclical; (5) although
there are signs of recovery, there has been little change in chemical industry
customers’ continued ability to delay large replacement catalyst orders and the
related demand for platinum-group-metal refining services; (6) the coated,
free-sheet paper market is strengthening, but pricing and related market share
loss continue to negatively impact the Company; and (7) margins related to the
supply of metal to industrial customers are lower because of changes in pricing
and supply arrangements.
Results
of Operations
Net
earnings in 2004 included a restructuring charge of $4.1 million related to the
consolidation of certain manufacturing facilities and a net tax provision
benefit of $8.0 million resulting from an agreement reached with the Internal
Revenue Service with respect to the Company’s tax returns for 1998 through 2000.
Net earnings in 2003 include a royalty settlement gain of $17.6 million, a
charge of $4.8 million for the fair value of the remaining lease costs of
certain minerals-storage facilities that the Company ceased to use and
restructuring charges of $5.6 million. In addition, a transition charge of $2.3
million was recorded on January 1, 2003 as the cumulative effect of an
accounting change. Net earnings in 2002 include an impairment charge of $57.7
million associated with the Engelhard-CLAL joint venture, an impairment charge
of $4.1 million associated with an investment in fuel-cell developer Plug Power
Inc., a charge of $1.9 million related to a manufacturing consolidation plan and
a $6.8 million insurance settlement gain.
The
information in the discussion of each segment’s results discussed below is
derived directly from the internal financial reporting system used for
management purposes. Items allocated to each segment’s results include the
majority of corporate operating charges. Unallocated items include interest
expense, interest income, royalty income, sale of precious metals accounted for
under the last-in, first-out (LIFO) method, certain special charges and credits,
income taxes, certain information technology development costs and other
miscellaneous corporate items.
Environmental
Technologies
The
majority of this segment’s sales is derived from technologies to control
pollution from mobile sources, including gasoline- and diesel-powered passenger
cars, sport-utility vehicles, trucks, buses and motorcycles.
This
segment’s
customers generally are driven by increasingly stringent environmental
regulations, for which the Company provides sophisticated emission-control
technologies. The remainder of this segment’s sales is derived from
products sold into a variety of industrial markets, including aerospace, power
generation, process industries and utility engines. The Company supplies these
industrial markets with sophisticated emission-control technologies, high-value
material products made primarily from platinum group metals and thermal spray
and coating technologies.
2004
Performance
Results
of Operations (in
millions)
| |
|
2004 |
|
2003 |
|
2002 |
|
%
change 2003 to 2004 |
|
%
change 2002 to 2003 |
|
Sales |
|
$ |
899.2 |
|
$ |
831.4 |
|
$ |
680.4 |
|
|
8.2% |
|
|
22.2% |
|
Operating
earnings before special items |
|
|
136.4 |
|
|
124.5 |
|
|
112.3 |
|
|
9.6% |
|
|
10.9% |
|
Special
charge (credit) |
|
|
(0.2 |
) |
|
5.2 |
|
|
3.1 |
|
|
|
|
|
|
|
Operating
earnings |
|
|
136.6 |
|
|
119.3 |
|
|
109.2 |
|
|
14.5% |
|
|
9.2% |
|
Discussion
Results
from this segment were strong, as operating earnings improved from
mobile-source
markets and from industrial products markets.
Sales to
mobile-source markets increased 10% in 2004 compared with 2003. Approximately
half this increase related to higher substrate costs. These substrates are
manufactured by third-party suppliers who often set prices directly with the
Company’s customers. These costs do not impact the Company’s profits, but, as
substrate costs rise, the Company’s operating margins decrease due to
dollar-for-dollar increases in selling prices. Substrate costs rose in 2004 due
to an increase in demand for emission-control systems for diesel engines.
Translation of sales of the Company’s foreign operations accounted for 40% of
the sales increase to mobile-source markets in 2004 compared with 2003. The
Company serves a wide customer base, and changes in the mix of sales to these
markets are common. Notably in 2004 compared with 2003, increased sales to
diesel engine OEMs were largely offset by decreased sales to the diesel retrofit
market, which, in 2003, included low-margin sales from a canning facility the
Company closed in 2003.
Operating
earnings from mobile-source markets increased 9% in 2004 compared with 2003. The
largest reason for this increase was absence of a $4.6 million restructuring
charge recorded in 2003. Favorable impacts from foreign currency translation of
$4.7 million and reversal of warranty reserves of $1.5 million were mostly
offset by higher information technology expenses of $4.0 million and higher
diesel R&D expense of $1.4 million. The Company serves a wide base of
customers within these markets. As changes in the mix of customers and vehicles
occur, operating earnings may be affected. For example, catalytic technologies
vary depending on vehicle, engine type and engine size. Profitability is
impacted by the mix of vehicle platforms and by the sales of particular vehicles
for which the Company provides catalyst. In 2004, profits from mobile-source
diesel markets increased while profits from other mobile-source markets
decreased compared with 2003. The diesel OEM market remains one of this
segment’s primary growth areas, and 2004 represents the first year sales to this
market significantly contributed to earnings. These improvements were partially
offset by a decline in earnings from diesel retrofit markets. In 2003, the
Company experienced strong profitability from a diesel retrofit project in Hong
Kong, which was completed early in 2004.
Operating
earnings from traditional light-duty vehicle markets declined in 2004. Although
light-duty automobile builds in North America and Europe were flat in 2004
compared with 2003, operating earnings declined due to the mix of vehicle
platforms for which the Company provided catalyst. It is important to note the
Company currently serves the large Asian markets of Japan and Korea through
joint ventures accounted for under the equity method. Accordingly, results of
those operations are not included in the operating earnings of this segment.
Automobile builds in Asia were higher in 2004 than 2003, and the Company’s Asian
joint ventures experienced increased profits (see
section titled “Equity Earnings”).
Sales to
industrial product markets decreased 4% as a decline in sales to
power-generation customers more than offset improved sales to the aerospace,
temperature-sensing and refining markets. The decline in demand from the
power-generation market was expected, and costs were reduced
accordingly.
Earnings
from industrial product markets improved significantly in 2004 compared with
2003 primarily due to productivity initiatives. Earnings from the aerospace
market improved versus the prior year, but have not returned to levels
experienced prior to 2001. The temperature-sensing market, while relatively
small, represents a niche growth area in which the Company increased investment
in 2004 through acquisition and research and development. Profits were flat in
2004 versus 2003 as the Company expanded into this market globally. While cash
flows from other served markets remain sufficient to support existing assets,
certain operations are being evaluated from a strategic standpoint. It is
possible that some of these assets may be sold or shut down. Long-lived assets
associated with these operations, which are currently recoverable, are
approximately $10 million, and the majority of the employees are covered by a
collective bargaining agreement that contains severance provisions.
Outlook
Near-term
demand for the Company’s products sold to mobile-source markets is expected to
remain at or near current levels. Worldwide automobile builds for 2005 are
forecast to be flat to modestly higher than in 2004. As more stringent emission
regulations phase in for 2006-model-year gasoline automobiles, it will have a
positive effect on the U.S. market. Demand for diesel-emission technologies is
expected to increase as more of these vehicles are sold and regulations become
more stringent. Heavy-duty diesel-emission standards worldwide are forecast to
tighten, with step-changes occurring in 2007 and 2010. Demand for the Company’s
technology to these markets is subject to changes in mix, the level of worldwide
auto builds and competitive pressures resulting from current excess capacity in
the industry. The Company maintains a strong technology position in these
markets and continues to invest significantly in research and development.
In
stationary-source markets, demand is expected to remain soft for technologies
related to peak-power generation due to the current lack of funding for these
projects. The overall power-generation industry has experienced difficulty in
recent years due to deregulation and financial instability associated with high
levels of capital spending. The Company has right-sized this business and has
maintained the technical ability and capacity to serve this market when demand
returns.
The
Company’s thermal spray operation, which serves the power-generation and
aerospace markets, has seen a modest improvement in demand. The Company expects
this trend to continue, but does not expect these markets to return to pre-2001
levels. In response, this operation has been expanding applications of its
technology to previously unserved components within the aerospace market, and it
is experiencing some initial commercial success.
Other
industrial markets served include temperature-sensing and industrial products. A
recent foreign acquisition positions the Company globally to participate in the
projected worldwide growth of the temperature-sensing market. Certain industrial
products operations are not considered core to the Company, and it is possible
that some of these may be sold or shut down.
This
segment continues to work to reduce its reliance on traditional mobile-source
markets by developing technologies for an array of applications, including
motorcycles; small engines, such as lawn and garden power equipment;
charbroilers; mining and construction; heavy-duty diesel engines; and ozone
management.
2003
compared with 2002
Sales
increased primarily from the addition of higher pass-through substrate costs and
the favorable impact of foreign exchange, which collectively accounted for
approximately two-thirds of the sales increase. Sales were also favorably
impacted from increased volumes to the mobile-source markets. These sales
increases were partially offset by $16.3 million decreased sales to the
power-generation market and by $12.1 million decreased sales of thermal spray
applications to the aerospace and power-generation markets.
Operating earnings were higher
from increased volumes to the mobile-source markets. Operating earnings were
also favorably impacted by absence of costs in the year-ago period related to
rework for power-generation applications of $11.4 million; the favorable impact
of foreign exchange of $6.7 million; and a manufacturing consolidation charge of
$3.1 million recorded in 2002. The increase was partially offset by lower
volumes of emission-control systems to the power-generation markets and lower
volumes of thermal spray applications. Earnings were also decreased by a
management consolidation and productivity initiative that resulted in a charge
of $5.3 million recorded in 2003; the reversal of a warranty accrual of $4.9
million in 2002; the recognition of expenses of $5.0
million due to customer-related financial issues; higher depreciation costs of
$4.3 million and higher energy costs of $2.7 million.
Process
Technologies
The
Process Technologies segment enables customers to make their processes more
productive, efficient, environmentally sound and safer through the supply of
advanced chemical-process catalysts, additives and sorbents.
2004
Performance
Results
of Operations (in
millions)
| |
|
2004 |
|
2003 |
|
2002 |
|
%
change 2003 to 2004 |
|
%
change 2002 to 2003 |
|
Sales |
|
$ |
615.2 |
|
$ |
569.2 |
|
$ |
538.8 |
|
|
8.1% |
|
|
5.6% |
|
Operating
earnings before special items |
|
|
87.3 |
|
|
98.5 |
|
|
93.0 |
|
|
-11.4% |
|
|
5.9% |
|
Special
charge |
|
|
— |
|
|
2.6 |
|
|
— |
|
|
|
|
|
|
|
Operating
earnings |
|
|
87.3 |
|
|
95.9 |
|
|
93.0 |
|
|
-9.0% |
|
|
3.1% |
|
Discussion
This
segment experienced a difficult year, as improved earnings from the
petroleum-refining
markets were more than offset by decreased earnings from chemical-process
markets.
Sales of
catalyst and additives to the petroleum-refining market increased in 2004
compared with 2003. The increase was driven by strong demand for products
derived from the Company’s Distributed Matrix Structure (DMS) technology
platform, which sold at premium prices. DMS technology allows refiners to
increase yields. Higher volumes of petroleum-refining additives also positively
impacted sales. These improvements were modestly offset by decreased demand for
older product offerings displaced by DMS technology.
Operating
earnings from products sold to petroleum-refining markets increased in 2004
compared with 2003. Profits from increased demand for DMS technologies and other
additives were partially offset by higher information technology costs of
approximately $2 million, higher raw material costs of approximately $3 million
and the impact of a particularly severe hurricane season. During 2004, strong
demand for DMS technology began to exceed existing capacity at the operating
facility that produces these products. As a result, other assets were utilized
to meet the additional demand, resulting in higher transportation,
production-scheduling and asset-utilization costs. In 2004, the Company launched
a series of projects designed to increase both capacity and the productivity of
assets that serve this market. Operating earnings for 2004 also were negatively
impacted by $1.1 million compared with 2003 due to the timing of customer orders
for certain older technologies.
Sales of
catalysts to the chemical-process markets increased modestly in 2004 compared
with 2003. The increase resulted from a currency-exchange impact of
approximately $8 million and a change in product mix, which was partially offset
by $7.5 million of price reductions in older custom catalyst technologies. Sales
to chemical-process customers continued to be depressed, as customer capacity
remained at levels that did not require catalyst change-outs. Volumes of
Lynx
polypropylene catalysts increased in 2004 compared with 2003 as market
acceptance continued and expanded capacity at the Company’s facility in
Tarragona, Spain came on-line.
Operating
earnings from products sold to chemical-process markets decreased significantly,
driven primarily by the above-mentioned price reduction of $7.5 million, higher
raw material costs of approximately $6
million,
a change in product mix and higher information technology costs of approximately
$3 million. These factors were partially offset by a favorable impact from
currency exchange of approximately $3 million and absence of restructuring
expenses included in the special charge referenced in the table above.
Outlook
The
outlook for operations serving the petroleum-refining markets is strong for 2005
and beyond. Demand for premium-priced catalysts and additives is expected to
remain high due to external factors, including high crude-oil
prices, absence of additional worldwide refining capacity, increased demand for
gasoline and environmental-fuel compliance. The Company also expects to realize
price increases on certain products in early 2005. The Company’s cost position
is expected to improve in 2005 compared with 2004 as debottlenecking and other
productivity initiatives launched in 2004 begin to produce favorable results.
The Company continues to invest in research and development to maintain the
competitive advantage derived from its unique DMS technology platform.
The
outlook for operations serving chemical-process markets is mixed for 2005. Sales
to polypropylene customers are expected to improve as market acceptance of
Lynx products continues. The Company is expanding into the polyethylene
catalyst market. Although the Company expects to sell these catalysts at a
faster growth rate than the market itself, it does not anticipate these sales to
contribute significantly to 2005 earnings.
The
outlook for operations serving other chemical-process markets is not expected to
change in 2005 as catalyst customers continue to delay large, replacement
orders. Although industry consolidation has created global customers who are
attempting to leverage their buying power, the Company does expect to implement
price increases. The Company continues to invest in development of proprietary
technologies that can command premium prices. These technologies include
catalysts for gas-to-liquid, custom zeolite and dehydrogenation
applications.
2003
compared with 2002
Sales
grew primarily from increased demand for new technologies offered to the
petroleum-refining (DMS technology platform products) and chemical-process
markets (Lynx platform and gas-to-liquids), which aggregated $33.0
million, and the favorable impact of foreign exchange of $13.0 million. Sales
were reduced by $10.3 million due to lower precious-metal prices, which are
passed through to chemical-process catalyst customers in Europe and lower sales
to certain chemical-process markets.
Operating
earnings rose primarily due to increased demand for new technologies offered to
the petroleum-refining and chemical-process markets; lower raw material costs of
$4.5 million (excluding nickel); the favorable impact of foreign exchange of
$5.4 million; and benefits from productivity programs. These increases were
partially offset by a productivity initiative that resulted in a charge of $2.6
million recorded in the first quarter of 2003, higher energy costs of $5.7
million and higher nickel costs of $3.5 million.
Appearance
and Performance Technologies
The
Appearance and Performance Technologies segment provides pigments, effect
materials, personal care active ingredients and performance additives that
enable its customers to market enhanced image and functionality in their
products. This segment serves a broad array of end markets, including cosmetics,
personal care, coatings, plastics, automotive, construction and paper. The
segment’s products help customers improve the look, functionality, performance
and overall cost of their products. In addition, the segment is the internal
supply source of precursors for most of the Company’s advanced
petroleum-refining catalysts.
2004
Performance
Results
of Operations (in
millions)
| |
|
2004 |
|
2003 |
|
2002 |
|
%
change 2003 to 2004 |
|
%
change 2002 to 2003 |
|
Sales |
|
$ |
690.2 |
|
$ |
653.8 |
|
$ |
650.8 |
|
|
5.6% |
|
|
0.5% |
|
Operating
earnings before special items |
|
|
75.1 |
|
|
77.3 |
|
|
87.1 |
|
|
-2.8% |
|
|
-11.3% |
|
Special
charge |
|
|
6.6 |
|
|
7.8 |
|
|
— |
|
|
|
|
|
|
|
Operating
earnings |
|
|
68.5 |
|
|
69.5 |
|
|
87.1 |
|
|
-1.4% |
|
|
-20.2% |
|
Discussion
Results
from this segment were mixed, as decreased earnings from sales to the paper
market were partially offset by improved earnings from other markets.
Sales of
kaolin- and attapulgite-based products decreased 1% in 2004 compared with 2003
as decreased volumes to the paper market were mostly offset by significant sales
growth of non-paper kaolin applications. Worldwide demand for coated-paper
increased in 2004, but not to levels sufficient to impact current overcapacity
in the kaolin industry. That overcapacity is a result of Brazilian kaolin
producers having brought more than 1.5 million tons of annual capacity on line
since 1997 and not-in-kind competition from calcium carbonate. In late 2003, the
Company attempted to maintain pricing and implement an energy surcharge. Certain
paper customers responded by contracting with other kaolin providers, and the
Company’s market share decreased in 2004. During 2004, the Company rationalized
certain products for the paper market and aggressively pursued other specialty,
kaolin-based applications. Sales of kaolin-based products to markets other than
paper increased significantly in 2004 compared with 2003. These markets include
plastics, construction, automotive, agriculture and coatings.
Operating
earnings from kaolin- and attapulgite-based products decreased 26% in 2004
compared with 2003. Included in the 2004 results is a restructuring charge of
$6.6 million related to consolidation of certain manufacturing facilities that
included asset impairment charges of $5.3 million and severance charges of $1.3
million. Results for 2003 include a charge of $7.8 million for the fair value of
remaining lease costs of certain minerals-storage facilities the Company ceased
to use. These businesses incurred higher information technology costs of
approximately $3 million in 2004 compared with 2003. Decreased earnings from
mineral-based products to the paper market were partially offset by earnings
from mineral-based products to other markets as discussed above. Natural gas
costs remained at historically high levels in 2004, and the Company had little
success implementing gas surcharges to paper customers. Cash flows from
kaolin-based operations remain substantial, and the assets have been reviewed
with respect to SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Currently, these assets are not impaired.
Sales of
effect materials, colors and personal care actives increased 13% in 2004
compared with 2003. In July of 2004, the Company strengthened its position in
the personal care market by acquiring The Collaborative Group, Ltd., including
its wholly owned subsidiary Collaborative Laboratories, Inc. This accounted for
approximately 25% of the increase in sales of effect materials, colors and
personal care actives. Sales of effect materials and colors were strong to other
served markets including cosmetics, automotive, coatings, plastics and
construction.
Operating
earnings from effect materials, colors and personal care actives increased
approximately 4% in 2004 compared with 2003, due primarily to the
above-mentioned acquisition, which was accretive to earnings. The impact of
higher volumes mentioned above was offset by increased information technology
costs of
approximately $3 million and higher costs associated with product development
and commercialization.
Outlook
Earnings
from the sale of kaolin- and attapulgite-based products are expected to improve
in 2005 in spite of the expectation of continued weak sales to the paper market.
This growth is expected to come from productivity
improvements,
price increases and sales increases to non-paper markets. Late in 2004, the
Company implemented a plan to consolidate certain manufacturing facilities in
Georgia. This plan is expected to reduce costs and improve productivity. The
Company has hedged more than half its expected 2005 natural gas consumption at
rates approximately one dollar higher per MMBTU than experienced in 2004. The
Company expects these operations to remain profitable, but changes in volumes,
pricing or energy costs could cause this situation to change.
Earnings
from effect materials, colors and personal care actives are expected to grow at
modest levels for the foreseeable future. Recent investment in assets serving
the personal care market are expected to improve earnings, as the Company
continues to further develop its position in this market. The Company recently
announced an offer that translates into a purchase price of €65.9
million to acquire 100% of Coletica, S.A., a French publicly traded company
serving the personal care markets. This segment is investing in information
technology to support its overall efforts to improve productivity, reduce
operating costs and improve customer service. Competition, notably from Asian
producers, continues to pressure certain markets served by these operations. The
Company expects to mitigate this impact by leveraging its technology to expand
its portfolio of applications and served markets.
2003
compared with 2002
Sales
increased slightly in 2003 as sales increases to the coatings, cosmetics and
automotive markets, and the net favorable impact of foreign exchange of $5.8
million were partially offset by lower volumes of kaolin-based products to the
paper and industrial end markets. Lower volumes of kaolin-based products
were attributed to continued weak demand in the paper market and the loss of
some volume to competition due to pricing.
Operating earnings were lower
primarily from a charge of $7.8 million recorded in 2003 for the fair value of
the remaining lease costs of certain minerals-storage facilities that the
Company ceased to use, lower volumes to the paper market, higher energy costs of
$11.3 million and higher costs related to the start-up of a new manufacturing
plant in China. This decrease was partially offset by continued strong growth in
the colorant and effect-pigment markets.
Materials
Services
The
Materials Services segment serves the Company’s technology segments, their
customers and others with precious and base metals and related services. This is
a distribution and materials services business that purchases and sells precious
metals, base metals, other commodities and related products and services. It
does so under a variety of pricing and delivery arrangements structured to meet
the logistical, financial and price-risk management requirements of the Company,
its customers and suppliers. Additionally, it offers the related services of
precious-metal refining and storage, and produces precious-metal salts and
solutions.
2004
Performance
Results
of Operations (in
millions)
| |
|
2004 |
|
2003 |
|
2002 |
|
%
change 2003 to 2004 |
|
%
change 2002 to 2003 |
|
Sales |
|
$ |
1,909.4 |
|
$ |
1,608.3 |
|
$ |
1,836.0 |
|
|
18.7% |
|
|
-12.4% |
|
Operating
earnings before special items |
|
|
15.8 |
|
|
10.1 |
|
|
41.7 |
|
|
56.4% |
|
|
-75.8% |
|
Special
credit |
|
|
— |
|
|
— |
|
|
(11.0 |
) |
|
|
|
|
|
|
Operating
earnings |
|
|
15.8 |
|
|
10.1 |
|
|
52.7 |
|
|
56.4% |
|
|
-80.8% |
|
Discussion
Sales for
this segment include substantially all the Company’s sales of metals to
industrial customers of all segments. Sales also include fees invoiced for
services rendered (e.g.,
refining and handling charges). Because of the logistical and hedging nature of
much of this business and the significant precious metal values included in both
sales and cost of sales, gross margins tend to be low in relation to the
Company’s technology segments, as does
capital
employed. This effect also dampens the gross margin percentages of the Company
as a whole, but improves the return on investment.
While
many customers for the Company’s platinum-group-metal catalysts purchase the
metal from Materials Services, some choose to deliver metal from other sources
prior to manufacture. In such cases, precious metal values are not included in
sales. The mix of such arrangements and extent of market price fluctuations can
significantly affect the reported level of sales and cost of sales.
Consequently, there is no necessary direct correlation between year-to-year
changes in reported sales and operating earnings. Sales in 2004 increased due to
higher platinum-group-metal (PGM) prices.
Operating
earnings in 2004 include $3.6 million of legal provisions related to pending
litigation. Operating earnings in 2003 benefited from a contract settlement of
$9.3 million and reversal of a $2.8 million accrual that is no longer necessary.
Earnings from metal sourcing operations improved in 2004 compared with 2003.
Refining and related service operations also improved in 2004 compared with 2003
as the Company’s U.S. refinery resolved certain performance difficulties. These
refining operations, which are strategically important to the operations of the
Company’s Environmental Technologies and Process Technologies segments, returned
to profitability.
Outlook
The
results of this segment are likely to approximate operating earnings levels
between $8 million and $12 million rather than the modestly higher levels of
2004. Continued overall weakness projected in the chemical markets should
continue to adversely impact the recycling and refining of platinum group
metals. In addition, the results
of this segment continue to reflect ongoing changes in these markets, which
involve different pricing formulas that have reduced historical margins on the
sourcing and distribution of platinum group metals.
2003
compared with 2002
Operating
earnings were lower primarily from the timing of certain items discussed below,
changes in pricing formulas that reduce margins and lower results from the
recycling (refining) of platinum group metals of $9.3 million. Recycling
earnings were down primarily from higher costs associated with performance
issues at a domestic refinery and a less favorable mix of metals.
Operating
earnings in 2003 benefited from a contract settlement of $9.3 million and the
reversal of an accrual that is no longer necessary of $2.8 million. In 2002,
operating earnings were favorably affected by $22.0 million of income related to
platinum-group-metal transactions realized previously but deferred pending the
resolution of certain contractual provisions, an insurance settlement gain of
$11.0 million included as a special credit, $5.5 million of income related to a
previously unrecognized contractual benefit and $3.0 million of income related
to cash received from the settlement of litigation. Sales decreased from lower
platinum-group-metal prices and lower volumes.
Acquisitions
|
Counter
party |
|
Business
arrangement |
|
Transaction
date |
|
Business
opportunity |
| |
|
|
|
|
|
|
|
The
Collaborative Group, Ltd.
|
|
Acquired
manufacturing and R&D facilities for $62.0 million
|
|
July
2004
|
|
Expand
personal care business to include active ingredients
|
|
Platinum
Sensors, SrL
|
|
Acquired
manufacturing and distribution facilities for $6.6 million
|
|
April
2004
|
|
Expand
temperature-sensing business globally
|
|
Shuozhou
Anpeak Kaolin Co., Ltd.
|
|
Acquired
certain operating assets of a China-based producer of calcined kaolin
products for $12.1 million |
|
November
2002
|
|
Enhances
the Company’s ability to provide specialty mineral technologies to the
Asian market
|
Consolidated
Gross Profit
Gross
profit as a percentage of sales was 16.1% in 2004, compared with 17.1% in 2003
and 17.4% in 2002. The following table represents gross margin percentages of
the Materials Services segment and the Company’s technology segments
(Environmental, Process and Appearance and Performance Technologies) and the
“All Other” category for the years ended December 31, 2004, 2003 and
2002.
| |
|
2004 |
|
2003 |
|
2002 |
|
Materials
Services |
|
|
2.4% |
|
|
2.3% |
|
|
3.8% |
|
Technology
segments and the “All Other” category |
|
|
27.7% |
|
|
28.3% |
|
|
30.4% |
|
Total
Company |
|
|
16.1% |
|
|
17.1% |
|
|
17.4% |
|
The
overall decrease in 2004 compared to 2003 was primarily due to lower margins in
the Process Technologies segment. Margins in the Environmental Technologies and
Appearance and Performance Technologies segments were flat (see Management’s
Discussion and Analysis section on Environmental Technologies, Process
Technologies, and Appearance and Performance Technologies for further
discussion). The overall decrease in 2003 compared to 2002 was primarily due to
lower margins earned in the Materials Services segment and in the Environmental
Technologies segment (see Management’s Discussion and Analysis section on
Environmental Technologies and Materials Services for further discussion). As
described earlier, the lower margins on Materials Services sales are driven by
the inclusion of the value of precious metals in both sales and cost of sales.
Gross
profit as a percentage of sales is expected to be comparable in 2005. Lower
margins in the Environmental Technologies segment are primarily due to higher
pass-through substrate costs and will be offset by higher margins in the Process
Technologies and Appearance and Performance Technologies segments primarily due
to the completion of productivity initiatives taken in 2004 and price increases.
Selling,
Administrative and Other Expenses
Selling,
administrative and other expenses were $391.0 million in 2004 compared with
$364.5 million in 2003 and $350.1 million in 2002. The increase in 2004 was
primarily due to increased benefit and pension expenses of $8.7 million,
increased research and development expenses of $6.8 million, incremental
Sarbanes-Oxley compliance related expenses of approximately $5 million, $3.0
million in incremental operating expenses from the Collaborative acquisition,
increased freight, shipping, and railcar related expenses of $2.9 million,
increased legal fees of $2.5 million and the impact of foreign currency
translation on selling, administrative and other expenses of approximately $2
million partially offset by higher royalty income of $4.8 million and lower bad
debt expense of $3.6 million. The increase in 2003 was primarily due to
increased professional and legal fees of $6.9 million, increased research and
development expenses of $4.9 million and increased information technology
expenses of $3.9 million.
The
Company expects selling, administrative and other expenses to increase in 2005
comparable with prior year increases. Key drivers will be new SFAS No. 123(R)
requirements regarding stock option expense, information technology expenses,
employee medical and pension expenses, lower royalty income, full-year operating
expenses from the Collaborative acquisition and other expenses.
Equity
Earnings
Equity in
earnings of affiliates was $37.6 million in 2004 compared to $39.4 million in
2003, and $16.2 million in 2002.
The
Company currently owns HDZ, a 45% -owned former subsidiary of Engelhard-CLAL.
The Company recognized earnings from this joint venture and related holdings of
$7.9 million in 2004 and $19.6 million in 2003. These earnings resulted
primarily from the sale of platinum inventories at favorable prices, realized
gains on the sale of an inactive facility, and the strengthening of the Euro
versus the U.S. dollar. As the Company has substantially liquidated this joint
venture and related holdings, earnings will greatly decrease in 2005.
The
Company recognized earnings from its Asian joint ventures (N.E. Chemcat and
Heesung-Engelhard) of $27.8 million in 2004, $18.2 million in 2003 and $14.1
million in 2002. The Company participates in these joint ventures primarily to
serve the Japanese and Korean mobile-source environmental markets. The strong
improvements from 2002 through 2004 are primarily due to improved sales to these
mobile-source markets. The Company maintains active alliances with these joint
ventures to improve its overall position in these markets. In March 2005, the
Company acquired an additional 3.4%-ownership of N.E. Chemcat in exchange for a
7.5% interest in the Company’s Chinese operation serving the mobile-source
environmental markets. The Company expects equity earnings from these joint
ventures to remain at or above their current high levels, due to anticipated
growth in the Asian mobile-source markets.
Loss
on Investment
In 2004
and 2002, the Company recorded a loss on its Plug Power investment of $0.7
million and $6.7 million, respectively (see Note 10, “Investments,” for further
detail).
Interest
Interest
expense was $23.7 million in 2004, compared with $24.3 million in 2003 and $27.4
million in 2002. Interest expense in 2004 decreased due to the Company’s use of
interest rate swap agreements that effectively change fixed rate debt
obligations to floating rate debt obligations, partially offset by higher
foreign short-term interest rates. Interest expense in 2003 decreased as a
result of decreased borrowings and lower short-term interest rates.
Interest
income was $5.2 million in 2004, $4.0 million in 2003 and $2.0 million in 2002.
The Company capitalized interest of $2.4 million in 2004 and $3.0 million in
2003 and 2002.
In 2004,
the Company opportunistically issued yen denominated debt with a coupon rate of
1.1%. This issuance lowered the average borrowing rate. The percentage of
variable rate debt to total debt was 76% at December 31, 2004 compared to 69% at
December 31, 2003.
The
Company expects interest expense to increase in 2005, due to higher interest
rates. As discussed above, 76% of the Company’s borrowings is exposed to changes
in short-term interest rates, and a significant increase in short-term rates
would negatively impact the Company’s interest expense. The Company could also
experience increased borrowing levels due to acquisitions or other investment
activity.
Taxes
The
worldwide income tax expense was $56.4 million in 2004, compared with $64.2
million in 2003 and $66.5 million in 2002. The effective tax rate was 19.3% in
2004, 21.3% in 2003 and 22.5% in 2002 (excluding the equity investment
impairment charge of $57.7 million). The
decrease in the overall effective tax rate in 2004 compared to 2003 was
primarily due to the conclusion of an IRS audit of the Company's 1998-2000 tax
returns in the second quarter, which resulted in an $8.0 million tax benefit.
The
Company believes that its effective tax rate on recurring business operations
will be in the 22-24% range through 2007 with a potential increase of one
percentage point in years after 2007 due to the impact of the enactment of the
American Jobs Creation Act of 2004. In connection with the recent tax law
changes, the Company is assessing the new tax rules relating to the repatriation
of offshore earnings from its foreign subsidiaries and it will take appropriate
measures in 2005. In this regard, it is too early to reasonably predict what
steps the Company will take and the corresponding impact to the Company's
financial statements in 2005.
Liquidity
and Capital Resources
Liquidity
Working
capital was $659.8 million at December 31, 2004, compared with $445.5 million at
December 31, 2003. The current ratio was 1.7 and 1.5 at December 31, 2004 and
2003, respectively. The working capital of the
Company’s
technology segments (Environmental Technologies, Process Technologies and
Appearance and Performance Technologies) is not subject to significant
fluctuations from period to period. While these businesses experience some
modest seasonality, it is not enough to have a significant impact on their
overall working capital requirements. The working capital of the Materials
Services segment may vary due to the timing of metal contracts, but is monitored
closely by senior management. While long-term working capital requirements
cannot be readily predicted, it is expected that they will grow proportionally
with the revenues and earnings of the technology segments.
Cash
balances were $126.2 million and $87.9 million at December 31, 2004 and 2003,
respectively. The majority of this cash is held by foreign subsidiaries. Where
economically feasible, the Company finances its foreign subsidiaries locally.
The Company maintains cash pooling systems among certain foreign operations,
most notably in Europe, that allow for effective inter-subsidiary financing. It
is not economically practical to pay down the Company’s debt due to its
long-term nature, therefore the Company currently maintains a relatively high
cash balance.
As
of December 31, 2004, the Company had two committed revolving credit facilities,
a short-term $450 million, 364-day facility, expiring May 5, 2005, and a
long-term $400 million, five-year committed credit facility expiring in May
2006. On March 7, 2005, the Company replaced the above-mentioned committed
credit facilities with a new $800 million, five-year committed credit
facility. This facility is to be used for general corporate purposes,
including, without limitation, to provide liquidity support for the issuance of
commercial paper and acquisition financing.
The
Company’s total debt increased to $525.7 million at December 31, 2004 from
$458.8 million at December 31, 2003. The percentage of total debt to total
capitalization increased to 27% at December 31, 2004 from 26% at December 31,
2003. The increase in debt levels is primarily due to the 2004 issuance of
Japanese yen 11 billion notes bearing a coupon of 1.1% in the private placement
market. In addition to the low coupon rate, these notes serve as an effective
net investment hedge of a portion of the Company’s yen-denominated
investments. Through a
public debt offering in May 2003, the Company issued $150 million of 10-year
notes. These notes mature on May 15, 2013 and bear an interest rate of 4.25%. As
discussed in Note 2, “Derivative Instruments and Hedging,” these notes were
effectively changed from a fixed rate debt obligation to a floating rate debt
obligation through the use of interest rate swap agreements.
In 2004,
the Company increased its existing $150 million shelf registration to $450
million in order to increase the Company’s ability to raise cash for general
corporate purposes. The Company maintains investment-grade credit ratings that
it considers important for cost-effective and ready access to the capital
markets. Should the Company’s rating drop below investment grade, the Company
would experience higher capital costs and may incur difficulty in procuring
metals.
The
Company’s available cash and unused committed credit lines represent a measure
of the Company’s short-term liquidity position. The Company believes that its
short-term liquidity position is sufficient to meet the cash requirements of the
Company. In addition to the short-term liquidity, the Company’s investment grade
rating, $450 million shelf registration and access to debt and equity markets
are sufficient to meet the long-term liquidity requirements of the
Company.
Capital
Resources
The
Company’s technology segments represent the most significant internal capital
resource of the Company. The Company’s technology segments contain businesses
that currently generate cash approximating earnings. This is evidenced by the
comparison of depreciation and amortization to capital spending for these
segments. Cash flows from the Materials Services segment tend to fluctuate from
period to period due to the timing of metal contracts. In 2004, this segment was
a user of cash, while in 2003, this segment was a provider of cash. The “All
Other” category includes certain small manufacturing operations, the Strategic
Technologies group and other corporate functions, which collectively use cash.
The Strategic Technologies group develops technologies to commercial levels to
generate future sources of cash.
The
variance in cash flows from operating activities primarily occurred in the
Materials Services segment and reflects changes in metal positions used to
facilitate requirements of the Company, its metal customers and suppliers (see
Note 24, “Supplemental Information,” for Materials Services variances). Current
levels of hedged metal obligations and committed metal positions are expected to
prevail for at least the next year. Materials Services routinely enters into a
variety of arrangements for the sourcing of metals. Generally, transactions are
hedged on a daily basis (see Note 1, “Summary of Significant Accounting
Policies,” for further detail). Hedging is accomplished primarily through
forward, future and option contracts. However, in closely monitored situations
for which exposure levels have been set by senior management, the Company, from
time to time, holds large unhedged industrial commodity positions that are
subject to future market price fluctuations. These positions are included in
committed metal positions, along with hedged metal holdings. The bulk of hedged
metal obligations represent spot short positions. Other than in closely
monitored situations, these positions are hedged through forward purchases.
Unless a forward counterparty fails to perform, there is no price risk. In
addition, the aggregate fair value of derivatives in a loss position is reported
in hedged metal obligations (derivatives in a gain position are included in
committed metal positions). Materials Services works to ensure that the Company
and its customers have an uninterrupted source of metals, primarily platinum
group metals, utilizing supply contracts and commodities markets around the
world. Committed metal positions may include significant advances made for the
purchase of precious metals that have been delivered to the Company but for
which the final purchase price has not yet been determined. As of December 31,
2004, the aggregate market value of the metals purchased under a contract for
which a provisional price had been paid was in excess of the amounts advanced by
a total of $49.9 million. As a result, this amount was recorded in committed
metal positions and accounts payable at December 31, 2004.
The
Company’s joint ventures operate independently of additional Company financing.
These joint ventures returned $21.5 million of cash to the Company in 2004. This
included a net $7.9 million of liquidating proceeds from the former
Engelhard-CLAL joint venture. Proceeds from this joint venture are not expected
to be significant in 2005. Proceeds from the Asian joint ventures are expected
to decrease to approximately $5-10 million in 2005.
The
Company also depends upon access to debt and equity markets, as discussed in the
liquidity section, as a source of cash.
The
Company continues to invest currently to develop future sources of cash through
self-investment, alliances, licensing agreements and acquisition. Notably, in
2004, the Company invested $99.9 million in research and development, $123.1
million in capital projects and $68.6 million in acquisitions. Key capital
projects for 2004 include the expansion of an automotive catalyst facility in
China, an expansion of polyolefin catalyst capacity in Spain, a process
improvement project for the petroleum refining catalyst business and a global
information technology project. Capital expenditures for 2005 are expected to be
approximately $130 million to $140 million. Acquisitions in 2004 included $6.6
million for an operation that expanded the capacity and global customer base of
the Company’s temperature-sensing business and $62.0 million for the acquisition
of The Collaborative Group, Ltd., including its wholly owned subsidiary
Collaborative Laboratories, Inc., which strengthens the Company’s position in
the personal care market. The Company actively pursues investment opportunities
that meet risk and return criteria set by senior management. The Company expects
to find opportunities in the future and will act upon these opportunities
accordingly. The Company has no significant investment commitments as of
December 31, 2004, however, the Company recently announced an offer that
translates into a purchase price of €65.9
million to acquire 100% of Coletica, S.A., a French publicly traded company
serving the personal care markets.
If
sources of cash exceed opportunities for investment, the Company will return
value to the shareholders. This is done through share buy-back programs,
dividends and debt repayment. In 2004 the Company purchased approximately 2.7
million outstanding shares of common stock net of stock options exercised.
Additionally, in early 2005, the Company’s Board of Directors approved an
increase in the quarterly dividend from $0.11 per share to $0.12 per share. The
Company expects to find future investment opportunities, and will be able to
reduce the future amount of shares purchased when this occurs.
The
following table is a representation of the Company’s contractual obligations as
of December 31, 2004 (the notes below provide further detail with regard to the
Company’s contractual obligations):
PAYMENTS
DUE BY PERIOD
|
CONTRACTUAL
OBLIGATIONS |
|
Total |
|
Less
than
1
year |
|
2-3
years |
|
4-5
years |
|
More
than
5
years |
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings |
|
$ |
12.0 |
|
$ |
12.0 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Accounts
payable |
|
|
375.9 |
|
|
375.9 |
|
|
— |
|
|
— |
|
|
— |
|
Other
current liabilities |
|
|
248.9 |
|
|
248.9 |
|
|
— |
|
|
— |
|
|
— |
|
Hedged
metal obligations |
|
|
292.9 |
|
|
292.9 |
|
|
— |
|
|
— |
|
|
— |
|
Long-term
debt, including interest payments (a) |
|
|
680.0 |
|
|
18.1 |
|
|
153.2 |
|
|
133.6 |
|
|
375.1 |
|
Operating
leases (b) |
|
|
139.4 |
|
|
22.4 |
|
|
32.0 |
|
|
26.0 |
|
|
59.0 |
|
Purchase
obligations - metal supply contracts (c) |
|
|
2,532.0 |
|
|
594.0 |
|
|
956.0 |
|
|
730.0 |
|
|
252.0 |
|
Other
purchase obligations (d) |
|
|
61.0 |
|
|
56.6
|
|
|
2.2 |
|
|
2.2
|
|
|
— |
|
|
Other
long-term liabilities reflected on the balance sheet under GAAP (e)
|
|
|
320.9 |
|
|
— |
|
|
37.1 |
|
|
31.0 |
|
|
252.8 |
|
|
Total
contractual obligations |
|
$ |
4,663.0 |
|
$ |
1,620.8 |
|
$ |
1,180.5 |
|
$ |
922.8 |
|
$ |
938.9 |
|
(a) -
Future interest payments calculated using the December 31, 2004 LIBOR rate and
foreign exchange rates as of December 31, 2004.
(b) - In
January 2005, the Company renewed its existing five-year operating lease for
machinery and equipment used in the Process Technologies segment that was to
mature in 2005. The term of this lease is seven years. Lease payments of
approximately $3.5 million per year are not included in these
amounts.
(c) -
These amounts reflect minimum purchase obligations for the purchase of platinum
group metals assuming the December 31, 2004 prices for the various metals
continue into the specified future periods. However, these are not fixed price
arrangements; the prices are based on future market prices. As a result, the
Company will be able to hedge the purchases with sales at those future
prices.
(d) -
Amounts primarily relate to purchase orders for raw material purchases and
warehousing- and transportation-related costs.
(e) -
Amounts primarily relate to postretirement/postemployment obligations (see Note
16, “Benefits,” for further detail), with the remainder consisting of executive
deferred compensation, SFAS No. 143 asset retirement obligations
(see Note 4, “Accounting for Asset Retirement Obligations,” for further detail)
and the long-term portion of the environmental reserve (see Note 21,
“Environmental Costs,” for further detail). The ‘More than 5 years’ category
includes $84.8 million related to the Company’s minimum pension liability (see
Note 16, “Benefits”), as well as $54.8 million of other noncurrent liabilities
for which the timing of payment is not readily determinable.
In the
normal course of business, the Company incurs obligations with regard to
contract completion, regulatory compliance and product performance. Under
certain circumstances, these obligations are supported through the issuance of
letters of credit. At December 31, 2004, the aggregate outstanding amount of
letters of credit supporting such obligations amounted to $112.4 million, of
which $105.3 million will expire in less than one year, $7.0 million will expire
in two to three years and $0.1 million will expire after five years. In the
opinion of management, such obligations will not significantly affect the
Company’s financial position or results of operations as the Company anticipates
fulfilling its performance obligations.
The
Company has not engaged in any transaction within the past 12 months, and has no
agreement or other contractual arrangement, to which an entity unconsolidated
with the Company is a party that would constitute an off-balance sheet
arrangement, as such term is defined in Item 303(a)(4)(ii) of Regulation
S-K.
Credit
Risk
The
Company believes that its financial instruments do not represent a concentration
of credit risk because the Company deals with a variety of major banks worldwide
and its accounts receivable are spread among a number of major industries,
customers and geographic areas. A centralized credit committee reviews
significant credit transactions and risk-management issues before granting
credit, and an appropriate level of reserves is maintained. In addition, the
Company, through its credit committee and credit department, monitors the status
of worldwide accounts receivable and the financial condition of its customers to
help ensure collections and to minimize losses.
The
Company may enter into transactions in which it advances funds after receipt of
metal as provisional payment for the metal which is to be finally priced under
market-based pricing formulae that will result in a determination of that price.
If the final price is less than the provisional price paid, the supplier will be
obligated to return the difference to the Company. Therefore, if the market
price (and the anticipated final price) falls below the provisional price, the
Company is exposed to the potential credit risk associated with the possibility
of non-payment by the supplier, although no payment is due until after the final
price is determined. As of December 31, 2004, the aggregate market value of
metals purchased under a contract for which a provisional price had been paid
was in excess of the amounts advanced by a total of $49.9 million. As a result,
this amount was recorded in committed metal positions and accounts payable at
December 31, 2004, and no current credit risk exists.
Commitments
and Contingencies
For
information about commitments and contingencies, see Note 21, “Environmental
Costs” and Note 22, “Litigation and Contingencies.”
Dividends
and Capital Stock
Common
stock dividends paid were $0.44 per share in 2004, $0.41 per share in 2003 and
$0.40 per share in 2002.
Peru
Update
See Note
22, “Litigation and Contingencies,” for a discussion of Peru.
Special
Charges and Credits
See Note
6, “Special Charges and Credits,” for a discussion of the Company’s special
charges and credits.
Other
Matters
See Note
1, “Summary of Significant Accounting Policies,” for a discussion of new
accounting pronouncements.
Related
Party Transactions
See Note
15, “Related Party Transactions,” for a discussion of related party
transactions.
Critical
Accounting Policies and Estimates
Certain
key policies are explained below to assist in understanding the Company’s
consolidated financial statements. More detailed explanations may be found
elsewhere in Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) section and in the Notes to Consolidated
Financial Statements.
Sales
A
significant portion of consolidated net sales represent the sale of platinum
group metals to industrial customers who buy the metals from Materials Services
in connection with products manufactured by the Environmental and Process
Technologies segments. Accordingly, almost all of these sales are reported in
the Materials Services segment, with a limited amount included in Environmental
and Process Technologies’ reported sales. Because metal price levels may vary
widely, there is no consistent relationship between consolidated sales and gross
profit.
Because
the timing of the purchase of spot metals often does not coincide with the
timing of the subsequent sales to industrial users, Materials Services needs to
hedge price risk, usually by selling forward (i.e., for
future delivery) to investment-grade trading entities, industrial companies or
on futures exchanges. If a surplus of physical metal develops, Materials
Services may also sell spot and buy forward to balance the risk position. Other
than hedges entered into with industrial customers, sales related to these
hedging transactions are not included in reported sales, as they are not
meaningful in an industrial context.
Customers
of the Environmental and Process Technologies segments who purchase products
that improve efficiency and yields are often unable to precisely predict the
dates that catalysts will be required. Accordingly, they may request that
product that has already been ordered, manufactured and prepared for shipment at
the agreed upon date be temporarily held by the Company until that customer’s
manufacturing facility is prepared to accept the new charge of catalyst. In
cases where the customer requests the Company to hold the goods, agrees to be
invoiced and to pay the invoices on normal terms, as well as to accept title to
the goods, the Company will recognize the sale prior to shipment. Great care is
exercised to make sure that these sales are only recognized in accordance with
the applicable revenue recognition guidance.
Mark-to-market
Materials
Services procures physical metal from third parties for resale and enters into
forward contracts and other relatively straight-forward hedging derivatives that
are recorded as either assets or liabilities at their fair value. By acting in
its capacity as a distributor and materials service provider to the Company’s
technology businesses and their customers and by taking closely monitored
unhedged positions as described below, Materials Services takes on the
attributes of a dealer in metals. Both spot metal and derivative instruments
used in hedging (i.e.,
forwards, futures, swaps and options) are stated at fair value. The Company
values platinum, palladium, gold and silver based on the daily closing New York
Mercantile Exchange (NYMEX) settlement prices. There are no so-called “terminal”
markets for rhodium, so the Company’s own published Industrial Bullion (EIB)
prices are used. However, these are compared to other reference prices published
in “Metals Week,” an independent trade journal. Values for base metals come from
the closing prices of the London Metals Exchange (LME).
In
closely monitored situations, for which exposure levels and transaction size
limits have been set by senior management, the Company holds unhedged metal
positions that are subject to future market fluctuations. Such positions may
include varying levels of derivative instruments. At times, these positions can
be significant. All unhedged metal transactions are monitored and
marked-to-market daily. This metal that has not been hedged is therefore subject
to price risk and is disclosed in Note 11, “Committed Metal Positions and Hedged
Metal Obligations.”
The fair
values of Materials Services’ various spot and derivative positions are included
in committed metal positions on the asset side of the consolidated balance sheet
and hedged metal obligations on the liability side. The credit
(performance) risk associated with the fair value of derivatives in a gain
position is greatly mitigated through the selection of investment-grade
counterparties.
Precious
metals
Most of
the platinum group metals used by Environmental and Process Technologies to
manufacture products are provided in advance by the customers. The customers
often purchase these metals from Materials Services, but they may also be
shipped in from other sources.
Certain
quantities of precious metals are carried at historical cost using the LIFO
method. Because most of the metal was acquired some time ago, the market value
of this metal, while fluctuating from year to year, has generally been
substantially above cost. While this excess of market over cost is useful in
evaluating the consolidated balance sheet from a credit perspective, the annual
changes are not reflected in the income statement except to the extent that
periodic liquidations of LIFO layers produce book profits. LIFO liquidation
profits are separately disclosed and not included in the operating earnings of
the technology or Materials Services segments.
Provision
for environmental
remediation
As
addressed in Note 21, “Environmental Costs,” the Company is currently preparing,
has under review, or is implementing environmental investigations and cleanup
plans at several currently or formerly owned and/or operated sites. In addition,
13 sites have been identified at which the Company believes liability as a
potentially responsible party is probable for the cleanup of contamination and
natural resource damages resulting from historic disposal of hazardous
substances allegedly generated by the Company, among others.
The
Company conducts studies, as well as site surveys, to determine the extent of
environmental damage and to determine the necessary requirements to remediate
this damage. These studies incorporate the analysis of our internal
environmental staff and consultation with legal counsel. From these studies and
surveys, a range of estimates of the costs involved is derived and a liability
and related expenses for environmental remediation is recorded within this
range. The Company’s recorded liabilities for these issues represent its best
estimates of remediation and restoration costs that may be required to comply
with present laws and regulations. These estimates are based on forecasts of
future direct costs related to environmental remediation. These estimates change
periodically as additional or better information becomes available as to the
extent of site remediation required, if any. Certain changes could occur that
would materially affect the Company’s estimates and environmental remediation
costs at known sites. If the Company discovers additional contamination,
discovers previously unknown sites, or becomes subject to related personal or
property damage, the Company could incur material additional costs in connection
with its environmental remediation.
The
accrual for environmental cleanup-related costs reported in the consolidated
balance sheet at December 31, 2004 was $19.1 million, including $0.1 million for
Superfund sites. These amounts represent those undiscounted costs that the
Company believes are probable and reasonably estimable. For the year ended
December 31, 2004, cash payments for environmental cleanup-related matters were
$1.3 million. Based on currently available information and analysis, the
Company’s accrual represents approximately 37% of what it believes are the
reasonably possible environmental cleanup-related costs of a noncapital nature.
The estimate of reasonably possible costs is less certain than the probable
estimate upon which the accrual is based. If the highest estimate from the range
(based upon information presently available) were recorded, the total estimated
liability would have increased by $32.7 million at December 31, 2004. Based on
existing information and currently enacted environmental laws and regulations,
cash payments for environmental cleanup-related matters are projected to be $1.4
million for 2005, which has already been accrued. Further, the Company
anticipates that the amounts of capitalized environmental projects and the
expense of environmental compliance will approximate current
levels.
Goodwill
As of
December 31, 2004, the Company had $330.8 million of goodwill that, based on
impairment testing in 2004, is not impaired. In accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets,” the Company completes an impairment test
of goodwill annually, or more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of its reporting
units below their carrying value. The impairment test requires the Company to
estimate the fair values of its reporting units, which is done by using a
discounted cash flow model. Significant estimates used in the Company’s
discounted cash flow model include future cash flows and long-term rates of
growth of its reporting units and a discount rate based on the Company’s
weighted-average cost of capital. Assumptions used in determining future cash
flows include current and expected market conditions and future sales forecasts.
Approximately
93% of the Company’s goodwill is attributable to reporting units with fair
values that exceed the carrying values of the reporting units by a substantial
margin. The use of different estimates and assumptions, within the range of
predictable possibilities, employed in the discounted cash flow model
that
measures
the fair value of these reporting units, would not be expected to result in an
impairment of goodwill. The remaining 7% of the goodwill resides in reporting
units with fair values that modestly exceed the carrying values of the reporting
units. The use of different estimates and assumptions employed in the discounted
cash flow model that measures the fair value of these reporting units could
result in an impairment of goodwill. However, the maximum value exposed to
changes in estimates and assumptions, based upon the current range of
predictable possibilities, is $22.0 million. Included in this amount is $18.0
million of goodwill acquired with the industrial products business within the
Environmental Technologies segment and $4.0 million of goodwill related to two
acquisitions that provide minerals-based products within the Appearance and
Performance Technologies segment.
Certain
long-lived assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company reviews its property, plant and equipment for
impairment whenever events or circumstances indicate that their carrying amount
may not be recoverable. Impairment reviews require a comparison of the estimated
future undiscounted cash flows to the carrying value of the asset. If the total
of the undiscounted cash flows is less than the carrying value, an impairment
charge is recorded for the difference between the estimated fair value and the
carrying value of the asset. Significant assumptions used in the Company’s
undiscounted cash flow model include future cash flows attributed to the group
of assets, the group of assets subject to the impairment and the time period for
which the assets will be held and used. Assumptions used in determining future
cash flows include current and expected market conditions and future sales
forecasts. The use of different estimates or assumptions within the Company’s
undiscounted cash flow model could result in undiscounted cash flows lower than
the current value of the Company’s assets, thereby requiring the need to compare
the carrying values to their fair values. The use of different estimates or
assumptions when determining the fair value of the Company’s property, plant and
equipment may result in different values for our property, plant and equipment,
and any related impairment charges (also, see Environmental Technologies
MD&A outlook section on page 15 and Appearance and Performance Technologies
MD&A outlook section on page 18).
In order
to provide kaolin-based products to the Company’s customers and the Process
Technologies segment, the Company engages in kaolin mining operations that are
integrated into the manufacturing processes. The Company owns and leases land
containing kaolin deposits on a long-term basis. The Company does not own any
mining reserves or conduct any mining operations with respect to platinum,
palladium or other metals. The kaolin mining process includes exploration,
topsoil and overburden removal, extraction of kaolin and the subsequent
reclamation of mined areas. Certain mining process costs are capitalized and
expensed by the Company over the life of the related estimated mineable
reserves. The
quality and quantity of these mineable reserves are estimated by use of mapping,
drilling, sampling and assaying that are standard evaluation methods generally
accepted by the minerals industry. Other estimates considered in the evaluation
of the estimated mineable reserves include long-term demand forecasts and the
impact of future regulatory changes. A reduction in the estimated quantity of
kaolin deposits of 10% would result in an increase of annual amortization
expense of less than $1million.
Provision
for income taxes
As of
December 31, 2004, net deferred tax assets are approximately $102.4 million. The
Company determines its current and deferred taxes in accordance with SFAS No.
109, “Accounting for Income Taxes.” The tax
effect of the reversal of tax differences is recorded at rates currently enacted
for each jurisdiction in which it operates. To the extent that temporary
differences will result in future tax benefit, the Company must estimate the
timing of their reversal, and whether taxable operating income in future periods
will be sufficient to fully recognize any deferred tax assets of the Company.
The future impact on earnings from using different assumptions and/or estimates
cannot be reasonably quantified due to the number of scenarios and variables
that are present.
As of
December 31, 2004, the Company had approximately $315.3 million of state net
operating loss carryforwards that expire at various intervals between 2006 and
2023. The probability of not being able to utilize these operating loss
carryforwards is low under a wide range of scenarios.
It is the
Company’s policy to establish reserves for taxes that may become payable in
future years as a result of tax examinations. The Company establishes reserves
for taxes based upon management’s assessment of tax exposures under applicable
accounting principles and pronouncements. The tax reserves are analyzed on a
quarterly
basis and
adjustments are recorded as events occur that warrant changes to individual
exposure items and to the overall tax reserve balance. The Company is regularly
audited by the Internal Revenue Service (IRS) and the various foreign and state
tax authorities in the jurisdictions in which the Company does business. The IRS
has examined the Company’s tax returns through 2000. As of December 31, 2004,
the Company has recorded an appropriate reserve for exposures it has determined
are probable.
Pensions
and other postretirement/postemployment costs
The
Company’s employee pension and other postretirement/postemployment benefit costs
and obligations are dependent on its assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates, salary
growth, expected returns on plan assets, retirement rates, mortality rates and
other factors. The discount rate assumption reflects the rate that the
liabilities could be settled on the measurement date of September 30th. The
Company based this discount rate on investment yields available on AA-rated
corporate long-term bond yields. The duration of the AA bonds closely matches
the duration of the Company’s pension liability. The salary growth assumptions
reflect the Company’s long-term actual experience, the near-term outlook and
assumed inflation. The health care cost trend assumptions are developed based on
historical cost data, the near-term outlook and an assessment of likely
long-term trends. Retirement rates are based primarily on actual plan
experience. Mortality rates are based on published data. Actual results that
differ from the Company’s assumptions are accumulated and amortized over future
periods and, therefore, generally affect recognized expense and recorded
obligations in such future periods. While the Company believes that the
assumptions used are appropriate, significant differences in actual experience
or significant changes in assumptions would affect pension and other
postretirement/postemployment benefit costs and obligations.
The
Company has determined that its net pension cost is projected to be
approximately $32 million in 2005, compared to $26 million in 2004 and $21
million in 2003. Based on a review of the current environment, the Company has
lowered its domestic and foreign long-term rate of return assumptions used in
determining net periodic pension expense from 10% and 8.43%, respectively, in
2002 to 9% and 7%, respectively, in 2004 and 2003. The Company has further
lowered the domestic return assumption to 8.90% for 2005. A 1% change in the
long-term rate of return assumption would increase or decrease net periodic
pension expense by approximately $6 million in 2005. The Company lowered its
domestic and foreign discount rates for determining net periodic pension expense
from 6.75% and 5.77%, respectively, in 2003 to 6.25% and 5.50%, respectively, in
2004. Further adjustments are being made in 2005 to lower the domestic rate to
6.00%. This adjustment reflects industry trends and the current interest rate
environment. A 25 basis-point increase in the discount rate would decrease
pension expense by approximately $2 million in 2005 and decrease the 2004
projected benefit obligation (PBO) by approximately $25 million. A 25
basis-point decrease in the discount rate would increase pension expense by
approximately $2 million in 2005 and increase the 2004 PBO by approximately $25
million. The Company used September 30, 2004 as the measurement date for its
assets and liabilities. Assets on this date were $567 million. The value of the
assets increased to $597 million at December 31, 2004. Had December 31, 2004
assets been used to determine 2005 net periodic pension expense, 2005 pension
expense would have decreased by approximately $1 million. The Company expects
its postretirement/postemployment benefit costs to be $11 million in
2005.
Forward-Looking
Statements
This
document contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to analyses
and other information that are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also relate to
future prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“predict,” “project,” “will” and similar terms and phrases, including references
to assumptions. These forward-looking statements involve risks and
uncertainties, internal and external, that may cause the Company’s actual future
activities and results of operations to be materially different from those
suggested or described in this document.
Internal
risks and uncertainties that could cause actual results to differ materially and
negatively impact the Company include:
| · |
The
Company’s ability to achieve and execute internal business
plans.
The Company is currently engaged in formal productivity improvement plans
in its Appearance and Performance Technologies and Environmental
Technologies segments that are expected to have a positive impact on
earnings. Failure to achieve certain milestones would negatively impact
the Company. The Company is also engaged in growth initiatives in all
technology segments, led by the Strategic Technologies group. Failure to
commercialize proprietary and other technologies or to acquire businesses
or licensing agreements to serve targeted markets would negatively impact
the Company. |
| · |
Future
divestitures and restructurings.
The Company may experience changes in market conditions that cause the
Company to consider divesting or restructuring operations, which could
impact future earnings. |
| · |
The
success of research and development activities and the speed with which
regulatory authorizations and product launches may be achieved.
The
Company’s future cash flows depend upon the creation, acquisition and
commercialization of new technologies. |
| · |
Manufacturing
difficulties, property loss, or casualty loss.
Although the Company maintains business interruption insurance, the
Company is dependent upon the operating success of its manufacturing
facilities, and does not maintain redundant capacity. Failure of these
manufacturing facilities would cause short-term profitability losses and
could damage customer relations in the long-term.
|
| · |
Product
quality deficiencies. The
Company’s products are generally sold based upon specifications agreed
upon with our customers. Failure to meet these specifications could
negatively impact the Company. |
| · |
The
impact of physical inventory losses, particularly with regard to precious
and base metals.
Although the Company maintains property and casualty insurance, the
Company holds large physical quantities of precious and base metals, often
for the account of third parties. These quantities are subject to loss by
theft and manufacturing inefficiency. |
| · |
Litigation
and legal claims. The
Company is currently engaged in various legal disputes. Unfavorable
resolution of these disputes would negatively impact the Company. Still
unidentified future legal claims could also negatively impact the
Company. |
| · |
Contingencies
related to actual or alleged environmental contamination to which the
Company may be a party (see
Note 21, “Environmental Costs,” as well as the section
above). |
| · |
Exposure
to product liability lawsuits. |
External
risks, uncertainties and changes in market conditions that could cause actual
results to differ materially and negatively impact the Company
include:
| · |
Competitive
pricing or product development activities affecting demand for our
products.
The Company operates in a number of markets where overcapacity, low priced
foreign competitors, and other factors create a situation where
competitors compete for business by reducing their prices, notably the
kaolin to paper market, some effect pigments markets, the colorant market,
certain chemical process markets and certain components of the
mobile-source environmental markets. |
| · |
Overall
demand for the Company’s products, which is dependent on the demand for
our customers’ products. As
a supplier of materials to other manufacturers, the Company is dependent
upon the markets for its customers’ products. Additionally, technological
advances by direct and not-in-kind competitors could render the Company’s
current products obsolete. |
| · |
Changes
in the solvency and liquidity of our customers.
Although the Company believes it has adequate credit policies, the
creditworthiness of customers could change. |
| · |
Fluctuations
in the supply and prices of precious and base metals and fluctuations in
the relationships between forward prices to spot prices.
The Company depends upon a reliable source of precious metals, used in the
manufacture of its products, for itself and its customers. These precious
metals are sourced from a limited number of suppliers. Decrease in the
availability of these precious metals could impact the profitability of
the Company. |
| · |
A
decrease in the availability or an increase in the cost of energy, notably
natural gas. The
Company consumes more than 10 million MMBTUs of natural gas annually.
Compared to other sources of energy, natural gas is subject to volatility
in availability and price, due to transportation, processing and storage
requirements. |
| · |
The
availability and price of rare earth compounds.
The Company uses certain rare earth compounds, produced in limited
locations worldwide. |
| · |
The
availability and price of other raw materials.
The Company’s products contain a broad array of raw materials for which
increases in price or decreases in availability could negatively impact
the Company. |
| · |
The
impact of increased employee benefit costs and/or the resultant impact on
employee relations and human resources.
The Company employs over 6,000 employees worldwide and is subject to
recent trends in benefit costs, notably medical
benefits. |
| · |
Higher
interest rates.
The majority of the Company’s debt is exposed to short-term interest rate
fluctuations. An increase in long-term debt rates would impact the Company
when the current long-term debt instruments mature, or if the Company
requires additional long-term debt. |
| · |
Changes
in foreign currency exchange rates.
The Company regularly enters into transactions denominated in foreign
currencies, and accordingly is exposed to changes in foreign currency
exchange rates. The Company’s policy is to hedge the risks associated with
monetary assets and liabilities resulting from these transactions.
Additionally, the Company has significant foreign currency investments and
earnings, which are subject to changes in foreign currency exchange rates
upon translation into U.S. dollars. |
| · |
Geographic
expansions not developing as anticipated.
The Company expects markets in Asia to fuel growth for many served
markets. China’s expected growth exceeds that of most developed countries,
and failure of that growth to materialize would negatively impact the
Company. |
| · |
Economic
downturns and inflation.
The diversity of the Company’s markets has substantially insulated the
Company’s profitability from economic downturns in recent years. The
Company is exposed to overall economic
condtions. |
| · |
Increased
levels of worldwide political instability, as the Company operates
primarily in the United States, the European community, Asia, the Russian
Federation, South Africa and Brazil. Much
of the Company’s identified growth prospects are foreign markets. As such,
the Company expects continued foreign investment and, therefore, increased
exposure to foreign political instability. Additionally, the worldwide
threat of terrorism can directly and indirectly impact the Company’s
foreign and domestic profitability. |
| · |
The
impact of the repeal of the U.S. export sales tax incentive and the
enactment of the American
Jobs Creation Act of 2004.
The Company is in the process of assessing the impact of these
actions. |
| · |
Government
legislation and/or regulation particularly on environmental and taxation
matters.
The Company maintains manufacturing facilities and, as a result, is
subject to environmental laws. The Company will be impacted by changes in
these laws. The Company operates in tax jurisdictions throughout the
world, and, as a result, is subject to changes in tax laws, notably in the
United States, the United Kingdom, Germany, the Netherlands, Italy,
Switzerland, France, Spain, South Africa, Brazil, Mexico, China, Korea,
Japan, India and Thailand. |
| · |
A
slowdown in the expected rate of environmental
requirements.
The Company’s Environmental Technologies segment’s customers, and to a
lesser extent, the Process Technologies segment’s customers, are generally
driven by increasingly stringent environmental regulations. A slowdown or
repeal of regulations could negatively impact the
Company. |
Investors
are cautioned not to place undue reliance upon these forward-looking statements,
which speak only as of their dates. The Company disclaims any obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
Risk Sensitive Transactions
The
Company is exposed to market risks arising from adverse changes in interest
rates, foreign currency exchange rates and commodity prices. In the normal
course of business, the Company uses a variety of techniques and instruments,
including derivatives, as part of its overall risk-management strategy. The
Company enters into derivative agreements with a diverse group of major
financial and other institutions with individually determined credit limits to
reduce exposure to the risk of nonperformance by counterparties.
Interest
rate risk
The
Company uses a sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined here
as the potential change in the fair value of debt resulting from an adverse
movement in interest rates. The fair value of the Company’s total debt was
$520.8 million at December 31, 2004 and $482.2 million at December 31, 2003,
based on prevailing interest rates at those dates. A 100 basis-point increase in
interest rates could result in a reduction in the fair value of total debt of
$13.6 million at December 31, 2004, compared with $14.7 million at December 31,
2003.
The
Company also uses interest rate derivatives to help achieve its fixed and
floating rate debt objectives. The Company currently has two interest rate swap
agreements with a total notional value of $100 million maturing in August 2006,
three interest rate swap agreements with a total notional value of $150 million
maturing in May 2013 and two interest rate swap agreements with a total notional
value of $120 million maturing in June 2028. These agreements effectively change
fixed rate debt obligations into floating rate obligations. The total notional
values and maturity dates of these agreements are equal to the face values and
the maturity dates of the related debt instruments.
In March
2004, the Company entered into an additional interest rate derivative contract.
This derivative, referred to as a Forward Rate Agreement (FRA), economically
hedged the Company’s interest rate exposure for the May 15, 2004 LIBOR rate
reset under a pre-existing interest rate swap agreement. This FRA is
marked-to-market with the gain/loss being reflected in earnings.
In June
2004, the Company entered into two additional FRA contracts, which economically
hedged its interest rate exposure for the December 1, 2004 LIBOR rate reset
under a pre-existing interest rate swap agreement. This FRA is marked-to-market
with the gain/loss being reflected in earnings.
In
January 2005, the Company entered into two additional FRA contracts, which
economically hedged its interest rate exposure for the May 16, 2005 and the June
1, 2005 LIBOR rate reset under two pre-existing interest rate swap agreements.
These FRAs are marked-to-market with the gain/loss being reflected in
earnings.
Approximately
76% and 69% of the Company’s borrowings had variable interest rates as of
December 31, 2004 and 2003, respectively.
Foreign
currency exchange rate risk
The
Company uses a variety of strategies, including foreign currency derivative
contracts, to minimize or eliminate foreign currency exchange rate risk
associated with its foreign currency transactions, including metal-related
transactions denominated in other than U.S. dollars.
The
Company uses a sensitivity analysis to assess the market risk associated with
its foreign currency transactions. Market risk is defined here as the potential
change in fair value resulting from an adverse movement in foreign currency
exchange rates. A 10% adverse movement in foreign currency rates could result in
a net loss of $19.5 million at December 31, 2004, compared with $14.7 million at
December 31, 2003, on the Company’s foreign currency derivative contracts.
However, since the Company limits the use of foreign currency derivatives to the
hedging of contractual and anticipated foreign currency payables and
receivables, this loss in fair value for those instruments generally would be
offset by a gain in the value of the underlying payable or
receivable.
A 10%
adverse movement in foreign currency rates could result in an unrealized loss of
$69.8 million at December 31, 2004, compared with $63.3 million at December 31,
2003, on the Company’s net investment in foreign subsidiaries and affiliates.
However, since the Company views these investments as long term, the Company
would not expect such a gain or loss to be realized in the near
term.
Commodity
price risk
In
closely monitored situations, for which exposure levels and transaction size
limits have been set by senior management, the Company, from time to time, holds
large, unhedged industrial commodity positions that are subject to market price
fluctuations. Such positions may include varying levels of derivative commodity
instruments. All unhedged industrial commodity transactions are monitored and
marked-to-market daily. All other industrial commodity transactions are hedged
on a daily basis, using forward, future, option or swap contracts to
substantially eliminate the exposure to price risk. These positions are also
marked-to-market daily.
The
Company performed a “value-at-risk” analysis on all of its metal-related
commodity assets and liabilities. The “value-at-risk” calculation is a
statistical model that uses historical price and volatility data to predict
market risk on a one-day interval with a 95% confidence level. While the
“value-at-risk” models are relatively sophisticated, the quantitative
information generated is limited by the historical information used in the
calculation. For example, the volatility in the platinum and palladium markets
in 2001 and 2000 was much greater than historical norms. Therefore, the Company
uses this model only as a supplement to other risk management tools and not as a
substitute for the experience and judgment of senior management and dealers who
have extensive knowledge of the markets and adjust positions and revise
strategies as the markets change. Based on the “value-at-risk” analysis in the
context of a 95% confidence level, the maximum potential one-day loss in fair
value was approximately $2.3 million at December 31, 2004, compared with $3.3
million as of December 31, 2003. The actual one-day changes in fair value of the
Company’s metal-related commodity assets and liabilities never exceeded the
average of the “value-at-risk” amounts as of the yearly open and close for each
of the Company’s 2004 and 2003 fiscal years.
The
Company is also exposed to commodity price risk on the unhedged portion of its
natural gas purchases related to its purchase of natural gas that is used in the
manufacture of its products. As of December 31, 2004, the Company has hedged
approximately 30% of its expected natural gas purchases for 2005. At December
31, 2004, a uniform one-dollar increase in the price of natural gas would result
in a decrease in operating earnings of approximately $7.7 million for the year
ending December 31, 2005 based upon the Company’s unhedged portion of its
expected natural gas purchases for 2005.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
ENGELHARD
CORPORATION
CONSOLIDATED
STATEMENTS OF EARNINGS
|
Year
ended December 31 (in thousands, except per-share amounts) |
|
2004 |
|
2003 |
|
2002 |
|
Net
sales |
|
$ |
4,166,420 |
|
$ |
3,714,493 |
|
$ |
3,753,571 |
|
|
Cost
of sales |
|
|
3,496,606 |
|
|
3,080,408 |
|
|
3,099,806 |
|
Gross
profit |
|
|
669,814 |
|
|
634,085 |
|
|
653,765 |
|
Selling,
administrative and other expenses |
|
|
391,031 |
|
|
364,490 |
|
|
350,137 |
|
|
Special
charge (credit), net |
|
|
5,304 |
|
|
(11,978 |
) |
|
(7,862 |
) |
Operating
earnings |
|
|
273,479 |
|
|
281,573 |
|
|
311,490 |
|
Equity
in earnings of affiliates |
|
|
37,582 |
|
|
39,368 |
|
|
16,207 |
|
Equity
investment impairment |
|
|
— |
|
|
— |
|
|
(57,704 |
) |
Loss
on investment |
|
|
(663 |
) |
|
— |
|
|
(6,659 |
) |
Interest
income |
|
|
5,205 |
|
|
4,035 |
|
|
1,968 |
|
|
Interest
expense |
|
|
(23,704 |
) |
|
(24,330 |
) |
|
(27,378 |
) |
Earnings
before income taxes |
|
|
291,899 |
|
|
300,646 |
|
|
237,924 |
|
|
Income
tax expense |
|
|
56,371 |
|
|
64,154 |
|
|
66,516 |
|
Net
earnings before cumulative effect of a change in accounting
principle |
|
|
235,528 |
|
|
236,492 |
|
|
171,408 |
|
|
Cumulative
effect of a change in accounting principle, net of tax of
$1,390 |
|
|
— |
|
|
(2,269 |
) |
|
—
|
|
|
Net
earnings |
|
$ |
235,528 |
|
$ |
234,223 |
|
$ |
171,408 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic: |
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of a change in accounting
principle |
|
$ |
1.91 |
|
$ |
1.89 |
|
$ |
1.34 |
|
|
Cumulative
effect of a change in accounting principle, net of tax |
|
|
— |
|
|
(0.02 |
) |
|
—
|
|
|
Earnings
per share - basic |
|
$ |
1.91 |
|
$ |
1.87 |
|
$ |
1.34 |
|
Earnings
per share - diluted: |
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of a change in accounting principle |
|
$ |
1.88 |
|
$ |
1.86 |
|
$ |
1.31 |
|
|
Cumulative
effect of a change in accounting principle, net of tax |
|
|
— |
|
|
(0.02 |
) |
|
—
|
|
|
Earnings
per share - diluted |
|
$ |
1.88 |
|
$ |
1.84 |
|
$ |
1.31 |
|
|
Average
number of shares outstanding - basic |
|
|
123,155 |
|
|
125,359 |
|
|
128,089 |
|
|
Average
number of shares outstanding - diluted |
|
|
125,350 |
|
|
127,267 |
|
|
130,450 |
|
See
accompanying Notes to Consolidated Financial Statements.
ENGELHARD
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
December
31 (in thousands) |
|
2004 |
|
2003 |
|
Assets |
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
126,229 |
|
$ |
87,889 |
|
Receivables,
net of allowances of $12,411 and $11,566, respectively |
|
|
410,382 |
|
|
400,043 |
|
Committed
metal positions |
|
|
457,570 |
|
|
350,163 |
|
Inventories |
|
|
459,637 |
|
|
442,787 |
|
|
Other
current assets |
|
|
135,631 |
|
|
112,678 |
|
Total
current assets |
|
|
1,589,449 |
|
|
1,393,560 |
|
Investments |
|
|
179,160 |
|
|
158,664 |
|
Property,
plant and equipment, net |
|
|
911,029 |
|
|
880,822 |
|
Goodwill |
|
|
330,798 |
|
|
275,121 |
|
|
Other
intangible assets, net and other noncurrent assets |
|
|
168,156 |
|
|
224,836 |
|
|
Total
assets |
|
$ |
3,178,592 |
|
$ |
2,933,003 |
|
Liabilities
and shareholders’ equity |
|
|
|
|
|
|
|
Short-term
borrowings |
|
$ |
12,025 |
|
$ |
68,275 |
|
Accounts
payable |
|
|
375,890 |
|
|
296,979 |
|
Hedged
metal obligations |
|
|
292,880 |
|
|
295,821 |
|
|
Other
current liabilities |
|
|
248,872 |
|
|
286,940 |
|
Total
current liabilities |
|
|
929,667 |
|
|
948,015 |
|
Long-term
debt |
|
|
513,680 |
|
|
390,565 |
|
|
Other
noncurrent liabilities |
|
|
320,933 |
|
|
309,024 |
|
|
Total
liabilities |
|
|
1,764,280 |
|
|
1,647,604 |
|
Shareholders’
equity |
|
|
|
|
|
|
|
Preferred
stock, no par value, 5,000 shares authorized but unissued |
|
|
— |
|
|
— |
|
Common
stock, $1 par value, 350,000 shares authorized and 147,295 shares
issued |
|
|
147,295 |
|
|
147,295 |
|
Additional
paid-in capital |
|
|
34,334 |
|
|
26,756 |
|
Retained
earnings |
|
|
1,800,531 |
|
|
1,619,284 |
|
Treasury
stock, at cost, 25,393 and 22,885 shares, respectively |
|
|
(572,815 |
) |
|
(492,057 |
) |
|
Accumulated
other comprehensive income (loss) |
|
|
4,967 |
|
|
(15,879 |
) |
|
Total
shareholders’ equity |
|
|
1,414,312 |
|
|
1,285,399 |
|
|
Total
liabilities and shareholders’ equity |
|
$ |
3,178,592 |
|
$ |
2,933,003 |
|
See
accompanying Notes to Consolidated Financial Statements.
ENGELHARD
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
ended December 31 (in thousands) |
|
2004 |
|
2003 |
|
2002 |
|
Cash
flows from operating activities |
|
|
|
|
|
|
|
|
|
|
Net
earnings |
|
$ |
235,528 |
|
$ |
234,223 |
|
$ |
171,408 |
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation
and depletion |
|
|
124,951 |
|
|
124,315 |
|
|
110,676 |
|
Amortization
of intangible assets |
|
|
3,736 |
|
|
3,357 |
|
|
2,886 |
|
Loss
on investment |
|
|
663 |
|
|
— |
|
|
6,659 |
|
Equity
results, net of dividends |
|
|
(16,038 |
) |
|
(14,805 |
) |
|
(12,279 |
) |
Equity
investment impairment |
|
|
— |
|
|
— |
|
|
57,704 |
|
Net
change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Materials
Services related |
|
|
(31,566 |
) |
|
107,590 |
|
|
(26,269 |
) |
|
All
other |
|
|
6,107 |
|
|
(48,696 |
) |
|
(4,732 |
) |
|
Net
cash provided by operating activities |
|
|
323,381 |
|
|
405,984 |
|
|
306,053 |
|
Cash
flows from investing activities |
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
(123,168 |
) |
|
(113,557 |
) |
|
(113,309 |
) |
Proceeds
from sale of investments |
|
|
1,988 |
|
|
6,651 |
|
|
— |
|
|
Acquisitions
and other investments |
|
|
(68,640 |
) |
|
(1,000 |
) |
|
(7,606 |
) |
|
Net
cash used in investing activities |
|
|
(189,820 |
) |
|
(107,906 |
) |
|
(120,915 |
) |
Cash
flows from financing activities |
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowings |
|
|
— |
|
|
— |
|
|
264,155 |
|
Repayment
of short-term borrowings |
|
|
(56,250 |
) |
|
(284,283 |
) |
|
(304,457 |
) |
Repayment
of long-term debt |
|
|
(73 |
) |
|
(184 |
) |
|
(148 |
) |
Proceeds
from issuance of long-term debt |
|
|
108,669 |
|
|
150,224 |
|
|
— |
|
Purchase
of treasury stock |
|
|
(113,027 |
) |
|
(119,568 |
) |
|
(133,543 |
) |
Cash
from exercise of stock options |
|
|
24,420 |
|
|
32,880 |
|
|
48,781 |
|
|
Dividends
paid |
|
|
(54,281 |
) |
|
(51,576 |
) |
|
(51,492 |
) |
|
Net
cash used in financing activities |
|
|
(90,542 |
) |
|
(272,507 |
) |
|
(176,704 |
) |
|
Effect
of exchange rate changes on cash |
|
|
(4,679 |
) |
|
14,072 |
|
|
6,778 |
|
Net
increase in cash |
|
|
38,340 |
|
|
39,643 |
|
|
15,212 |
|
|
Cash
and cash equivalents at beginning of year |
|
|
87,889 |
|
|
48,246 |
|
|
33,034 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
126,229 |
|
$ |
87,889 |
|
$ |
48,246 |
|
See
accompanying Notes to Consolidated Financial Statements.
ENGELHARD
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
(in
thousands, except per-share amounts) |
|
Common
stock |
|
Additional
paid-in capital |
|
Retained
earnings |
|
Treasury
stock |
|
Comprehensive
income(loss) |
|
Accumulated
other comprehensive income(loss) |
|
Total
shareholders’ equity |
|
Balance
at December 31, 2001 |
|
$ |
147,295 |
|
$ |
7,378 |
|
$ |
1,316,721 |
|
$ |
(335,879 |
) |
|
|
|
$ |
(132,009 |
) |
$ |
1,003,506 |
|
Comprehensive
income(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings |
|
|
|
|
|
|
|
|
171,408 |
|
|
|
|
$ |
171,408 |
|
|
|
|
|
171,408 |
|
Other
comprehensive income(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow derivative adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,424 |
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,284 |
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,689 |
) |
|
|
|
|
|
|
|
Investment
adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
Other
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,819 |
|
|
16,819 |
|
|
16,819 |
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
188,227 |
|
|
|
|
|
|
|
Dividends
($0.40 per share) |
|
|
|
|
|
|
|
|
(51,492 |
) |
|
|
|
|
|
|
|
|
|
|
(51,492 |
) |
Treasury
stock acquired |
|
|
|
|
|
|
|
|
|
|
|
(133,543 |
) |
|
|
|
|
|
|
|
(133,543 |
) |
|
Stock
bonus and option plan transactions |
|
|
|
|
|
13,498 |
|
|
|
|
|
56,971 |
|
|
|
|
|
|
|
|
70,469 |
|
Balance
at December 31, 2002 |
|
|
147,295 |
|
|
20,876 |
|
|
1,436,637 |
|
|
(412,451 |
) |
|
|
|
|
(115,190 |
) |
|
1,077,167 |
|
Comprehensive
income(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings |
|
|
|
|
|
|
|
|
234,223 |
|
|
|
|
$ |
234,223 |
|
|
|
|
|
234,223 |
|
Other
comprehensive income(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow derivative adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123 |
) |
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,787 |
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,120 |
|
|
|
|
|
|
|
|
Investment
adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527 |
|
|
|
|
|
|
|
|
Other
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,311 |
|
|
99,311 |
|
|
99,311 |
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
333,534 |
|
|
|
|
|
|
|
Dividends
($0.41 per share) |
|
|
|
|
|
|
|
|
(51,576 |
) |
|
|
|
|
|
|
|
|
|
|
(51,576 |
) |
Treasury
stock acquired |
|
|
|
|
|
|
|
|
|
|
|
(119,568 |
) |
|
|
|
|
|
|
|
(119,568 |
) |
|
Stock
bonus and option plan transactions |
|
|
|
|
|
5,880 |
|
|
|
|
|
39,962 |
|
|
|
|
|
|
|
|
45,842 |
|
Balance
at December 31, 2003 |
|
|
147,295 |
|
|
26,756 |
|
|
1,619,284 |
|
|
(492,057 |
) |
|
|
|
|
(15,879 |
) |
|
1,285,399 |
|
Comprehensive
income(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings |
|
|
|
|
|
|
|
|
235,528 |
|
|
|
|
$ |
235,528 |
|
|
|
|
|
235,528 |
|
Other
comprehensive income(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow derivative adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,569 |
) |
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,748 |
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,008 |
) |
|
|
|
|
|
|
|
Investment
adjustment, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325 |
) |
|
|
|
|
|
|
|
Other
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,846 |
|
|
20,846 |
|
|
20,846 |
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
256,374 |
|
|
|
|
|
|
|
Dividends
($0.44 per share) |
|
|
|
|
|
|
|
|
(54,281 |
) |
|
|
|
|
|
|
|
|
|
|
(54,281 |
) |
Treasury
stock acquired |
|
|
|
|
|
|
|
|
|
|
|
(113,027 |
) |
|
|
|
|
|
|
|
(113,027 |
) |
|
Stock
bonus and option plan transactions |
|
|
|
|
|
7,578 |
|
|
|
|
|
32,269 |
|
|
|
|
|
|
|
|
39,847 |
|
|
Balance
at December 31, 2004 |
|
$ |
147,295 |
|
$ |
34,334 |
|
$ |
1,800,531 |
|
$ |
(572,815 |
) |
|
|
|
$ |
4,967 |
|
$ |
1,414,312 |
|
See
accompanying Notes to Consolidated Financial Statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Engelhard
Corporation and its majority-owned subsidiaries (collectively referred to as
Engelhard or the Company). All significant intercompany transactions and
balances have been eliminated in consolidation.
Reclassifications
The prior
year presentation of the “Consolidated Statements of Cash Flows” has been
changed to conform to the current year presentation. Specifically,
“(Decrease)/increase in hedged metal obligations” has been reclassified from
“Net cash used in financing activities” to “Net cash provided by operating
activities,” and is included in the “Materials Services related” line. The
effect of this reclassification to “Net cash provided by operating activities”
is a decrease of $225 million and an increase of $3.8 million for the years
ended December 31, 2003 and 2002, respectively. The effect of this
reclassification to “Net cash used in financing activities” is a decrease in
2003 and an increase in 2002 by equivalent amounts.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
equivalents include all investments purchased with an original maturity of three
months or less.
Inventories
Inventories
are stated at the lower of cost or market. The elements of inventory cost
include direct labor and materials, variable overhead and fixed manufacturing
overhead. The majority of the Company’s physical metal is carried in committed
metal positions at fair value with the remainder carried in inventory at
historical cost. The cost of owned precious metals included in inventory is
determined using the last-in, first-out (LIFO) method of inventory valuation.
The cost of other inventories is principally determined using the first-in,
first-out (FIFO) method.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. Depreciation of buildings and equipment
is provided primarily on a straight-line basis over the estimated useful lives
of the assets. Buildings and building improvements are depreciated over 20
years, while machinery and equipment is depreciated based on lives varying from
3 to 10 years. Depletion of mineral deposits and deferred mine development costs
is provided under the units-of-production method. When assets are sold or
retired, the cost and related accumulated depreciation is removed from the
accounts, and any gain or loss is included in earnings. The Company continually
evaluates the reasonableness of the carrying value of its fixed assets. If the
expected future undiscounted cash flows associated with these assets are less
than their carrying value, the assets are written down to their fair
value. Repair and maintenance costs are expensed as incurred.
Intangible
Assets
Identifiable
intangible assets, such as patents and trademarks, are amortized using the
straight-line method over their estimated useful lives, which range from 4 to 15
years. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”
goodwill and other intangible assets that have indefinite useful lives are not
amortized, but are tested for impairment at least annually.
The
Company continually evaluates the reasonableness of the carrying value of its
intangible assets. For its identifiable intangible assets, an impairment would
be recognized if expected future undiscounted cash flows are less than their
carrying amounts. For goodwill and other intangible assets that have indefinite
useful lives, an impairment would be recognized if the carrying amount of a
respective reporting unit exceeded the fair value of that reporting
unit.
Committed
Metal Positions and Hedged Metal Obligations
Committed
metal positions reflect the fair value of the long spot metal positions (other
than LIFO inventory) held by the Company plus the fair value of contracts that
are in a gain position undertaken to economically hedge price exposures. Because
most of the spot metal has been hedged through forward/future sales or other
derivative arrangements (e.g., swaps),
it is referred to as being “committed,” although the physical metal can be used
by the Company until such time as the sales are settled. The portion of this
metal that has not been hedged and, therefore, is subject to price risk is
discussed below and disclosed in Note 11, “Committed Metal Positions and Hedged
Metal Obligations.”
The bulk
of hedged metal obligations represent spot short positions. Other than in the
closely monitored situations noted below, these positions are hedged through
forward purchases with investment grade counterparties. Unless a forward
counterparty fails to perform, there is no price risk. In addition, the
aggregate fair value of derivatives in a loss position is reported in hedged
metal obligations (derivatives in a gain position are included in committed
metal positions).
For the
purpose of determining whether the Company is in a net spot long or short
position with respect to a metal, purchased quantities received for which the
Company is not exposed to market price risk (because of provisional rather than
final pricing) are considered a component of its spot positions.
To the
extent metal prices increase subsequent to a spot purchase that has been hedged,
the Company will recognize a gain as a result of marking the spot metal to
market while at the same time recognizing a loss related to the fair value of
the derivative instrument. As noted above, the aggregate fair value of
derivatives in a loss position is classified as part of hedged metal obligations
at the balance sheet date because the Company has incurred a liability to the
counterparty. Should the reverse occur and metal prices decrease, the resultant
gain on the derivative will be offset against the spot loss within committed
metal positions.
Both spot
metal and derivative instruments used in hedging (i.e.,
forwards, futures, swaps and options) are stated at fair value. If relevant
listed market prices are not available, fair value is determined based on other
relevant factors, including dealer price quotations and price quotations in
different markets, including markets located in different geographic areas. Any
change in value, whether realized or unrealized, is recognized as an adjustment
to cost of sales in the period of the change.
In
closely monitored situations, for which exposure levels and transaction size
limits have been set by senior management, the Company holds unhedged metal
positions that are subject to future market fluctuations. Such positions may
include varying levels of derivative instruments. At times, these positions can
be significant. All unhedged metal transactions are monitored and
marked-to-market daily. The metal that has not been hedged and is therefore
subject to price risk is disclosed in Note 11, “Committed Metal Positions and
Hedged Metal Obligations.”
Environmental
Costs
In the
ordinary course of business, like most other industrial companies, the Company
is subject to extensive and changing federal, state, local and foreign
environmental laws and regulations and has made provisions for the estimated
financial impact of environmental cleanup-related costs. The Company’s policy is
to accrue for environmental cleanup-related costs of a noncapital nature when
those costs are believed to be probable and can be reasonably estimated.
Environmental cleanup costs are deemed probable when litigation has commenced or
a claim or an assessment has been asserted, or, based on available information,
commencement of litigation or assertion of a claim or an assessment is probable,
and, based on available information, it is probable that the outcome of such
litigation, claim or assessment will be unfavorable. The quantification of
environmental exposures requires an assessment of many factors, including
changing laws and regulations, advancements in environmental technologies, the
quality of information available related to specific sites, the assessment stage
of each site investigation, preliminary findings and the length of time involved
in remediation or settlement. For certain matters, the Company expects to share
costs with other parties. The Company does not include anticipated recoveries
from insurance carriers or other third parties in its accruals for environmental
liabilities.
Revenue
Recognition
Except
for bill-and-hold situations discussed below, revenues are not recognized on
sales of product unless the goods are shipped and title has passed to the
customer. Sales of product include sales of catalysts, pigments, performance
additives, sorbents and precious metal sold to industrial customers. Revenues
for refining services are recognized on the contractually agreed settlement
date. In limited situations, revenue is recognized on a bill-and-hold basis as
title passes to the customer before shipment of goods. These bill-and-hold sales
meet the criteria of Staff Accounting Bulletin No. 104, “Revenue
Recognition,” for revenue recognition. Sales
recognized on a bill-and-hold basis were approximately $15.3 million as of
December 31, 2004, $19.4 million as of December 31, 2003 and $31.0 million as of
December 31, 2002. With regard to the balance classified as bill-and-hold sales,
the Company has collected $10.6 million of the outstanding balance as of March
1, 2005.
The
Company accrues for warranty costs, sales returns and other allowances, based on
experience and other relevant factors, when sales are recognized.
In
accordance with Emerging Issues Task Force EITF 00-10, “Accounting for Shipping
and Handling Fees and Costs,” the Company reports amounts billed to customers
for shipping and handling fees as sales in the Company’s “Consolidated
Statements of Earnings.” Costs incurred by the Company for shipping and handling
fees are reported as cost of sales.
Sales
and Cost of Sales
Some of
the Company’s businesses use precious metals in their manufacturing processes.
Precious metals are included in sales and cost of sales if the metal has been
supplied by the Company. Often, customers supply the precious metals for the
manufactured product. In those cases, precious-metals values are not included in
sales or cost of sales. The mix of such arrangements, the extent of market-price
fluctuations and the general price level of platinum group and other metals can
significantly affect the reported level of sales and cost of sales.
Consequently, there is no direct correlation between year-to-year changes in
reported sales and operating earnings.
In
addition to the cost of precious metals recognized as revenues, cost of sales
includes all manufacturing costs (raw materials, direct labor and overhead).
Cost of sales also includes shipping and handling fees and
warranties.
For all
Materials Services activities, a gain or loss is recorded as an element of cost
of sales based on changes in the market value of the Company’s
positions.
Selling,
Administrative and Other Expenses
The
selling, administrative and other expenses line item in the “Consolidated
Statements of Earnings” includes management and administrative compensation,
research and development, professional fees, information technology expenses,
travel expenses, administrative rent expenses, sales commissions and insurance
expenses.
Income
Taxes
Deferred
income taxes reflect the differences between the assets and liabilities
recognized for financial reporting purposes and amounts recognized for tax
purposes. Deferred taxes are based on tax laws as currently
enacted.
Equity
Method of Accounting
The
Company’s investments in companies in which it has the ability to exercise
significant influence over operating and financial policies, generally 20% to
50% owned, are accounted for using the equity method. Accordingly, the Company’s
share of the earnings of these companies is included in consolidated net income.
Investments in nonsubsidiary companies in which the Company does not have
significant influence are carried at cost.
Foreign
Currency Translation
The
functional currency for the majority of the Company’s foreign operations is the
applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using an appropriate average exchange rate during the period. The
resulting translation adjustments are recorded as a component of shareholders’
equity. Gains or losses resulting from foreign currency transactions are
included in the Company’s “Consolidated Statements of Earnings.”
Stock
Option Plans
The
Company adopted the disclosure provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” in 1995 and adopted SFAS No. 148, “Accounting for
Stock-Based Compensation — Transition and Disclosure, an amendment of Financial
Accounting Standards Board (FASB) Statement No. 123,” in December 2002. The
Company has applied the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued
to Employees,” with pro forma disclosure of net income and earnings per share as
if the fair-value-based method prescribed by SFAS No. 123 had been applied. In
general, no compensation cost related to the Company’s stock option plans is
recognized in the Company’s “Consolidated Statements of Earnings” as options are
issued at market price on the date of grant. See “New Accounting Pronouncements”
below for information relating to SFAS No. 123(R), “Share-Based Payment,” which
was issued by the FASB in December 2004.
Had
compensation cost for the Company’s stock option plans been determined based on
the fair value at grant date consistent with the provisions of SFAS No. 123,
“Accounting for Stock Based Compensation,” the Company’s net earnings and
earnings per share would have been as follows:
PRO
FORMA INFORMATION
(in
millions, except per-share data)
| |
|
2004 |
|
2003 |
|
2002 |
|
Net
earnings — as reported |
|
$ |
235.5 |
|
$ |
234.2 |
|
$ |
171.4 |
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair-value- based method for all
awards, net of tax |
|
|
(6.8 |
) |
|
(5.8 |
) |
|
(6.3 |
) |
|
Net
earnings — pro forma |
|
$ |
228.7 |
|
$ |
228.4 |
|
$ |
165.1 |
|
Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share — as reported |
|
$ |
1.91 |
|
$ |
1.87 |
|
$ |
1.34 |
|
Basic
earnings per share — pro forma |
|
|
1.86 |
|
|
1.82 |
|
|
1.29 |
|
Diluted
earnings per share — as reported |
|
|
1.88 |
|
|
1.84 |
|
|
1.31 |
|
Diluted
earnings per share — pro forma |
|
|
1.82 |
|
|
1.79 |
|
|
1.27 |
|
Research
and Development Costs
Research
and development costs are charged to expense as incurred and were $99.9 million
in 2004, $93.1 million in 2003 and $88.2 million in 2002. These costs are
included within selling, administrative and other expenses in the Company’s
“Consolidated Statements of Earnings.”
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which
replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R)
requires compensation costs relating to share-based payment transactions,
including grants of employee stock options, be recognized in the financial
statements based on their fair values. The pro forma disclosure previously
permitted under SFAS No. 123 will no longer be an acceptable alternative to
recognition of expenses in the financial statements. SFAS No. 123(R) is
effective as of the beginning of the first reporting period that begins after
June 15, 2005. The Company currently measures compensation costs related to
share-based payments under APB No. 25, as allowed by SFAS No. 123, and provides
disclosure in the notes to financial statements as required by SFAS No. 123.
SFAS No. 123(R) provides for two transition alternatives: Modified-Prospective
transition and Modified-Retrospective transition. The Company is currently
evaluating the transition alternatives. Depending on the method chosen, the
Company expects the impact in 2005 to be approximately $0.03 to $0.06 per
share.
In
December 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an
amendment of APB Opinion No. 29.” This statement amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. This statement shall be effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Adoption of this statement is not expected to have a material impact on
the Company’s results of operations or financial condition.
In
December 2004, the FASB issued FASB Staff Position (FSP) No. 109-1 to provide
guidance on the application of SFAS No. 109, “Accounting for Income Taxes” to
the provision within the American Jobs Creation Act of 2004, enacted on October
22, 2004, that provides tax relief to U.S. domestic manufacturers. The FSP
states that the manufacturers’ deduction provided for under the Act should be
accounted for as a special deduction in accordance with SFAS No. 109 and not as
a tax rate reduction.
In
December 2004, FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004” was issued, providing guidance under SFAS No. 109,
“Accounting for Income Taxes” for recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004, enacted on
October 22, 2004. FSP No. 109-2 allows time beyond the financial reporting
period of enactment to evaluate the effects of the Act before applying the
requirements of FSP No. 109-2. Accordingly, the Company is assessing the new tax
rules relating to the repatriation of offshore earnings from its foreign
subsidiaries and it will take appropriate measures in 2005. It is too early to
reasonably predict what steps the Company will take in this regard and the
corresponding impact to the Company’s financial statements in 2005.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of
ARB No. 43, Chapter 4” to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material. SFAS No. 151
requires that these items be recognized as current-period charges regardless of
whether they meet the “so abnormal” criteria outlined in ARB No. 43. In
addition, this statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Adoption of this statement is not
expected to have a material impact on the Company’s results of operations or
financial condition.
In May
2004, the FASB issued FASB Staff Position (FSP) No. 106-2, “Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003.” This FSP
supersedes
FSP No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003.” The Company had
made a one-time election under FSP No. 106-1 to defer accounting for the effects
of the Act until specific authoritative guidance was issued on how to account
for the federal subsidy. FSP No. 106-2 provides guidance on the accounting for
the effects of the Act, and requires employers that sponsor postretirement
prescription drug benefits to make certain disclosures regarding the effect of
the federal subsidy provided by the Act. Based on a review of the Company's
current plan design and consultations with its actuaries, the Company believes
that its postretirement prescription drug benefits are actuarially equivalent to
Medicare Part D and that it will qualify for the federal subsidy. As a result,
the Company early adopted the provisions of FSP No. 106-2 as of the quarter
ended June 30, 2004 and has incorporated the required disclosure provisions into
these consolidated financial statements.
In
December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’
Disclosures about Pensions and Other Postretirement Benefits,” an amendment of
FASB Statements No. 87, 88 and 106. This statement revises employers’
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement and recognition of those plans required by FASB
Statements No. 87, 88 and 106. This statement retains the disclosure
requirements contained in the original Statement No. 132. It requires additional
disclosures about the assets, obligations, cash flows and net periodic benefit
cost of defined benefit plans and other defined benefit postretirement plans.
The Company has adopted this statement and has incorporated the required
disclosure provisions into these consolidated financial statements.
2. DERIVATIVE
INSTRUMENTS AND HEDGING
The
Company reports all derivative instruments on the balance sheet at their fair
value. Foreign exchange contracts, commodity contracts and interest rate
derivatives are recorded within the “Other current assets” and “Other current
liabilities” lines on the Company’s “Consolidated Balance Sheets.” Changes
in the fair value of derivatives designated as cash flow hedges are initially
recorded in accumulated other comprehensive income and are reclassified to
earnings in the period the hedged item is reflected in earnings. Changes
in the fair value of derivatives that are not designated as cash flow hedges are
reported immediately in earnings. Cash flows resulting from derivatives
accounted for as cash flow or fair value hedges are classified in the same
category as the cash flows from the underlying transactions.
In order
to manage in a manner consistent with historical processes, procedures and
systems and to achieve operating economies, certain economic hedge transactions
are not designated as hedges for accounting purposes. In those cases, which
primarily relate to precious and base metals, the Company will continue to
mark-to-market both the hedge instrument and the related position constituting
the risk hedged, recognizing the net effect in current earnings.
The
Company documents all relationships between derivative instruments designated as
hedging instruments and the hedged items at inception of the hedges, as well as
its risk-management strategies for the hedges. For the years ended December 31,
2004, 2003 and 2002, there was no gain or loss recognized in earnings resulting
from hedge ineffectiveness.
Foreign
Exchange Contracts
The
Company designates as cash flow hedges certain foreign currency derivative
contracts which hedge the exposure to the foreign exchange rate variability of
the functional-currency equivalent of foreign-currency denominated cash flows
associated with forecasted sales or forecasted purchases. The ultimate
maturities of the contracts are timed to coincide with the expected occurrence
of the underlying forecasted transaction.
For the
years ended December 31, 2004, 2003 and 2002, the Company reported after-tax
losses of $1.5 million, $1.7 million and $0.3 million, respectively, in
accumulated other comprehensive income relating to the change in the fair value
of derivatives designated as foreign exchange cash flow hedges. It is expected
that cumulative losses of $1.5 million as of December 31, 2004 will be
reclassified into earnings within the next 12 months. There was no gain or loss
reclassified from accumulated other comprehensive income into earnings as a
result of the discontinuance of cash flow hedges due to the probability of the
original forecasted transactions not
occurring.
As of December 31, 2004, the maximum length of time over which the Company has
hedged its exposure to movements in foreign exchange rates for forecasted
transactions is 12 months.
A second
group of forward contracts entered into to hedge the exposure to foreign
currency fluctuations associated with certain monetary assets and liabilities is
not designated as hedging instruments for accounting purposes. Changes in the
fair value of these items are recorded in earnings offsetting the foreign
exchange gains and losses arising from the effect of changes in exchange rates
used to measure related monetary assets and liabilities.
Commodity
Contracts
The
Company enters into contracts that are designated as cash flow hedges to protect
a portion of its exposure to movements in certain commodity prices. These
contracts primarily relate to derivatives designated as natural gas and nickel
cash flow hedges. The ultimate maturities of the contracts are timed to coincide
with the expected usage of these commodities.
For the
year ended December 31, 2004, the Company reported an after-tax loss of $0.3
million in accumulated other comprehensive income relating to the change in the
fair value of derivatives designated as cash flow commodity hedges. The Company
reported after-tax gains of $1.6 million and $4.7 million in accumulated other
comprehensive income for the years ended December 31, 2003 and 2002,
respectively. It is expected that the cumulative loss of $0.3 million as of
December 31, 2004 will be reclassified into earnings within the next 15 months.
There was no gain or loss reclassified from accumulated other comprehensive
income into earnings as a result of the discontinuance of cash flow commodity
hedges due to the probability of the original forecasted transactions not
occurring. As of December 31, 2004, the maximum length of time over which the
Company has hedged its exposure to movements in commodity prices for forecasted
transactions is 15 months.
The use
of derivative metal instruments is discussed in Note 1, “Summary of Significant
Accounting Policies,” under Committed Metal Positions and Hedged Metal
Obligations. To the extent that the maturities of these instruments are
mismatched, the Company may be exposed to market risk. This exposure is
mitigated through the use of Eurodollar futures that are marked-to-market daily
along with the underlying commodity instruments (see Note 11, “Committed Metal
Positions and Hedged Metal Obligations”).
Interest
Rate Derivatives
The
Company uses interest rate derivatives that are designated as fair value hedges
to help achieve its fixed and floating rate debt objectives. The Company
currently has two interest rate swap agreements with a total notional value of
$100 million maturing in August 2006, three interest rate swap agreements with a
total notional value of $150 million maturing in May 2013, and two additional
interest rate swap agreements with a total notional value of $120 million
maturing in June 2028. These agreements effectively change fixed rate debt
obligations into floating rate debt obligations. The total notional values and
maturity dates of these agreements are equal to the face values and the maturity
dates of the related debt instruments. For these fair value hedges, there was no
gain or loss recognized from hedged firm commitments no longer qualifying as
fair value hedges for the years ending December 31, 2004, 2003 and
2002.
In March
2004, the Company entered into an additional interest rate derivative contract.
This derivative, referred to as a Forward Rate Agreement (FRA), economically
hedged the Company's interest rate exposure for the May 15, 2004 LIBOR rate
reset under a pre-existing interest swap agreement. This FRA is marked-to-market
with the gain/loss being reflected in earnings.
In June
2004, the Company entered into two additional FRA contracts, which economically
hedged the Company's interest rate exposure for the December 1, 2004 LIBOR rate
reset under a pre-existing interest rate swap agreement. This FRA is
marked-to-market with the gain/loss being reflected in earnings.
Net
Investment Hedges
The
Company issued two tranches (one in April 2004 and one in August 2004) of
five-year term, 5.5 billion Japanese yen notes (approximately $50 million each)
with a coupon rate of 1.1%. These notes are designated as an effective net
investment hedge of a portion of the Company’s yen-denominated investments. As
such, any foreign currency gains and losses resulting from these notes are
accounted for as a component of accumulated other comprehensive income.
As
of December 31, 2004, a loss of $7.1 million, relating to the mark-to-market of
these notes, has been recorded in accumulated other comprehensive income.
3. GOODWILL
AND OTHER INTANGIBLE ASSESTS
Identifiable
intangible assets, such as patents and trademarks, are amortized using the
straight-line method over their estimated useful lives, which range from 4 to 15
years. Goodwill and other intangible assets that have indefinite useful lives
are not amortized, but are tested for impairment based on the specific guidance
of SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company did not
recognize an impairment loss as a result of the impairment testing that was
completed in 2004, 2003 and 2002.
The
following information relates to acquired amortizable intangible assets (in
millions):
| |
|
As
of December 31, 2004 |
|
As
of December 31, 2003 |
|
| |
|
Gross
carrying
amount |
|
Accumulated
amortization |
|
Gross
carrying
amount |
|
Accumulated
amortization |
|
Acquired
amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Usage
right |
|
$ |
22.2 |
|
$ |
6.3 |
|
$ |
20.7 |
|
$ |
4.5 |
|
Supply
agreements |
|
|
19.0 |
|
|
6.3 |
|
|
17.9 |
|
|
|